Whatever your age, you probably have a lot of questions and concerns about saving for retirement. How to save for it, what options are available, and most importantly, how much money should you spend?
One of the most common ways to start saving for retirement is through an employer-sponsored 401(k) plan. Many companies offer them, and for many employees, it is their only retirement savings account. But with so many options, unfamiliar terms, conditions, and regulations, 401(k)s can be mysterious even to financially savvy savers.
- The rule of thumb for retirement savings is 10% of gross pay for a start.
- If your company offers a similar contribution, make sure you get all of that.
- If you are 50 or older, you are allowed to make catch-up contributions.
First, it’s important to know that the Internal Revenue Service (IRS) sets annual limits on contributions. The optional deferred (contribution) limit for employees participating in a 401(k) (or 403(b), most 457 plans and the federal government’s Thrift Savings Plan) is $19,500 for tax years 2021 and $20,500 for 2022.
There is a catch-up contribution for employees age 50 and older who participate in any of these plans. It allows an additional $6,500 contribution in 2021 and 2022,
don’t forget the match
Of course, every person’s answer to this question depends on individual retirement goals, current resources, lifestyle and family decisions, but a general rule of thumb is to set aside at least 10% of your gross earnings as a start.
In any case, if your company offers matching 401(k) contributions, you must invest at least enough to get the maximum amount. A typical match might be 3% of salary or 50% of the first 6% of employee contributions.
It’s free money, so be sure to check if your plan matches and contribute at least enough to make it work. You can increase or decrease your contribution at any time later.
“There is no ideal contribution to a 401(k) plan unless there is a company match. You should always take full advantage of the company match because it is essentially free money that the company gives you,” says Ari Corving, a Notes Financial Advisor with Coving & Company in Suffolk, Va.
Many plans require a 6% deferment to get the full match, and many savers stop there. This may be enough for those who expect other resources, but for most, it probably won’t be.
If you start early enough, given the time your money has to grow, 10% can add up to a pretty good nest egg, especially as your salary grows over time.
Attention old savers
If you start saving later in life, especially when you’re in your 50s, you may need to increase your contribution amount to make up for lost time.
Fortunately, late savers are usually in their peak earning years. And, from the age of 50, they have more opportunity to save. As noted above, the 2021-2022 limit on catch-up contributions is $6,500 for individuals who are 50 years of age or older on any day of that calendar year.
For example, if you turn 50 on or before December 31, 2021, you can contribute an additional $6,500 over and above the $19,500 401(k) contribution limit, for a total of $6,000 for the year.
“As far as the ‘ideal’ contribution is concerned, it depends on many variables,” says Dave Rowan, a financial advisor at Rowan Financial in Bethlehem, Pa. “Probably the biggest is your age. If you start saving in your 20s, 10% is usually enough for a decent retirement. However, if you’re in your 50s and just starting out If so, you’ll need to save more than that.”
The amount that your employer matches is not included in your annual maximum contribution.
There are many variables to consider when thinking about that ideal amount for retirement. Are you married? Is your spouse employed? How much can you expect from Social Security benefits?
The retirement age demands a certain amount of relaxation, but that too varies from person to person. Would you rather spend your time gardening at home, traveling abroad, starting a new business, or riding a motorcycle cross-country?
And then there are the unknowns. Chief among them is the question: Will health problems lead to big, unexpected bills?
However, regardless of your age and expectations, most financial advisors agree that 10% to 20% of your salary is a good amount to contribute to your retirement corpus.
For those who want to go even further, there are several options, such as traditional IRAs and Roth IRAs. (The IRA contribution limit for tax years 2021 and 2022 is $6,000, with a catch-up contribution of $1,000 for those 50 or older).
“The ideal contribution rate for retirement depends on a few different factors,” says Mark Hebner of Index Fund Advisors in Irvine, Calif., “but a good sweet spot is 10% to 15% — toward 15% if you spend.” can do so. The minimum is 10%.”
“If you can, you should move closer to a 20% contribution to your retirement plan and keep that amount as your salary increases,” says Nicholas R., financial advisor to Halbert Hargrove in Long Beach, California. The strain is suggested. he adds:
Most financial planning studies show that the ideal contribution percentage for saving for retirement is between 15% and 20% of gross income. These contributions can be made to a 401(k) plan, 401(k) match received from an employer, IRA, Roth IRA, and/or taxable accounts. As your income grows, it’s important to continue saving 15% to 20% of it so that you can fund and grow your investments until you need to start taking distributions in retirement.