It’s no secret that the earlier you’re able to start saving for retirement, the better. Since private company pensions have virtually gone extinct and Social Security benefits are intended to only cover a portion of your working wages, the brunt of saving for retirement falls on your shoulders. With this in mind, you may wonder how much you should be saving as you progress through your career and how your current savings compare to others in your age range. Fortunately plenty of research has been conducted on these topics to help us all find clarity in the great feat that is saving for our later years!
We focus the discussion below on median retirement savings because it gives a more accurate representation as averages can be skewed by outliers: those with very low retirement savings or those with extremely high savings.
- Saving in your 20s
From a survey taken by the Transamerica Center for Retirement Studies, the total median retirement savings for an American during their twenties is $16,000. 67% have started saving for retirement either in an employer-sponsored plan or an account outside of work, and Fidelity found that most in this age range are contributing 7% of their income to savings. Experts recommend that you aim to save 1x your annual salary during your twenties in order to set yourself up for success.
Saving in a Roth IRA or Roth 401(k) may be your best bet because your contributions are made with after-tax dollars, so your distributions in retirement will be tax-free. This is a wise strategy because you are likely to be in a higher tax bracket later in life as your career (and, thus, income) grows, so paying taxes while your income is lower will benefit you greatly over the long-term. For 2021, you can contribute up to $19,500 to a 401(k) and $6,000 to an IRA or Roth IRA.
- Saving in your 30s
Americans in their thirties have median retirement savings of $45,000 with 76% saving for retirement through their work or outside retirement account and 3 in 10 individuals contributing more than 10% annually with an average of 8% (Transamerica). During this decade, aim to save 3x your salary by contributing 15-20% of your annual income to retirement accounts. For example, if your salary is $50,000, you should try to have $150,000 saved in retirement accounts before you turn forty. You may be tempted to use your retirement funds if you start experiencing major life changes like moving for work, getting married, buying a house, and taking care of kids or pets; however, it’s important to leave your retirement savings alone and let them grow if possible. The last thing you want to do is reverse the progress you’ve made towards retirement and incur a 10% early withdrawal penalty on top of any taxes! Unless it’s an emergency and you truly have no other option, consider money in your retirement accounts to be inaccessible.
In addition, don’t let your other expenses and major life transitions take priority over saving for retirement. It should never be a question of ‘either/or’ but an ‘and,’ meaning you continue to contribute to your retirement account but maybe make an adjustment to the amount while you have other large expenses. However, your goal should be to work towards maxing out your retirement contributions as your income grows.
- Saving in your 40s
Americans in their forties have median retirement savings of $63,000 with an average contribution rate of 7-8% of their annual salary. At this point in their careers, 80% are participating in their employer’s 401(k) or another retirement plan. You should aim to have 6x your salary saved by the end of this decade. Unfortunately, 61% of current workers surveyed in this age range either do not plan to retire or expect to work past age 65, and 24% have already taken a loan or early-withdrawal from their 401(k) or a similar plan. This could be due to entering what is referred to as the “sandwich-years” where people are caring for both their children and aging parents and 42% expect their standard of living to decrease in retirement.
In an effort to avoid this trend, keep the concept of lifestyle creep in mind as you grow in your career. Lifestyle creep is when you spend more as you earn more, aka your expenses rise with your income because you can now afford the more expensive car or mortgage for instance. It’s of course good to treat yourself, but don’t forget to consciously monitor your spending habits and how your expenses grow!
- Saving in your 50s
Americans in their fifties have median retirement savings of $117,000, and 3 in 10 are contributing more than 10% of their annual salary to a retirement account. Participation in employer-sponsored plans is increased, with up to 83% for this age range contributing and 61% also saving outside of work retirement plans. Once you turn 50, the annual contribution limits for retirement accounts increase to encourage additional savings ahead of retirement. For 2021, those 50 and older can contribute $26,000 to a 401(k) plan and $7,000 to an IRA. Save as much as you can now in order to ensure a comfortable retirement later and set a goal to have 8x your salary saved by your 60th birthday. Responses from those in their fifties indicate that 45% feel they are saving enough of a nest egg for the future, and 59% still do not plan to retire by age 65 or retire at all. It may be time to consider downsizing your living situation to decrease your expenses around this age.
- Saving in your 60s
Americans in their sixties have median retirement savings of $172,000 and 82% are already working past age 65 or plan to, with 52% planning to work in some way after retiring (usually for income and healthcare reasons). As much as 42% of people are anticipating a phased approach to retiring by going from full-time to part-time or changing their role. The goal is to have about 10x your salary saved across all retirement accounts before making the transition into retirement. This amount is what you should try to have in addition to the income you’ll receive from Social Security, as these benefits are intended to replace only 40% of your working wages.
- Retirement
You made it! Welcome to retirement, we hope you enjoyed the journey and were able to save plenty along the way. Now it’s time to enjoy your free time and the fruits of your labor! Keep in mind that you’ll need to maintain your investments, regularly review your cash flow, and update your budget so that you feel in control of how much you’ll be spending during retirement. If you have any questions or concerns, it’s prudent to speak with your financial advisor or start interviewing potential advisors to help guide you through this next phase. CERTIFIED FINANCIAL PLANNERS™, Certified Public Accountants, and other financial professionals can help you understand the state of your finances, manage your tax liability, invest appropriately for your lifestyle, and stay organized with your regular expenses and discretionary spending.
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