Challenge

Day 24: Retirement Savings (30 Day Financial Wellness Challenge)

Retirement savings is a long-term financial goal that often has tax-advantaged benefits

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Day 24: Retirement Savings (30 Day Financial Wellness Challenge)Welcome to Day 24 of the 30-Day Financial Wellness Challenge.

Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time.

After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing. Review Day 23: Start Investing

On day 24, it’s all about your retirement savings.

A retirement savings plan is fundamental in creating a more secure and less stressful financial future.

We will all retire one day whether by choice (early retirement), by age, by circumstance, or by a physical condition. Retirement is simply a period when you’re no longer actively working to pay for living expenses.

But it never seems like there’s a perfect time to talk about retirement. Whether we’ve just started our first job or we’ve worked for the past 30 years, retiring from work will happen. And it’s important we think about how to fund that period of life.

What is retirement savings?

Retirement savings is a long-term financial goal that often has tax-advantaged benefits. If you have a 401(k) with your employer, then you have a retirement savings account. Money in these plans is purposefully saved and invested for retirement. Basically, this is the money you’ll spend when you’re no longer receiving a paycheck.

Retirement savings can come from employer-sponsored plans like 401(k)s, 403(b), and 457(b). But they also include Individual Retirement Accounts offered by financial institutions. You can set up IRAs with your bank or credit union (often only getting interest earnings) or through a brokerage to invest in the stock market.

Don’t confuse retirement savings with general investing that uses taxable brokerage accounts.

Retirement savings by age

Do you wonder how much retirement savings you should have at your age? An article from The Balance shared that by age:

  • 30: Have the equivalent of one times your salary saved
  • 35: Have two times your salary saved
  • 40: Have three times your salary saved
  • 45: Have four times your salary saved
  • 50: Have six times your salary saved
  • 55: Have seven times your salary saved
  • 60: Have eight times your salary saved
  • 67: Have 10 times your salary saved

Keep in mind these numbers are not written in stone. They simply set a benchmark that allows you a comparison based on an average retirement lifestyle.

Retirement Savings Basics

Start early. Take advantage of compounding growth.

From the New York Times:

“If two people put the same amount of money away each year ($5,000), earn the same return on their investments (6 percent annually) and stop saving upon retirement at the same age (67), one will end up with nearly twice as much money just by starting at 22 instead of 32. Put another way: The investor who started saving 10 years earlier would have about $500,000 more at retirement. It’s that simple.”

Retirement Savings Accounts

For most, retirement savings begins with an employer. This includes 401(k)’s, 403(b)’s, and 457s. And you may also have access to tax-advantaged retirement accounts like IRAs and Roth IRAs.

If you work for an employer that offers a retirement savings plan, then its most likely a 401(k) or the equivalent 403(b) and 457(b) for public service, government and nonprofits employees. Contributing to a retirement account is easy through an employer. You simply complete a form and a percentage of your paycheck is invested with a company like Fidelity or Vanguard.

Make the most with retirement savings

  • Automation is going to help you. You just have to enroll and allow the contributions to automatically be taken from your paycheck each payday.
  • Get the match. Many employers offer a match for your contribution. Do what you can to get all the additional money being offered to you.
  • Reach the cap. The federal government places a limit on how much of your income can be saved in a 401(k). You can find the latest numbers on the IRS website.
  • Taxes are paid later. With most employer-sponsored accounts, contributions are from pre-tax income. You only pay taxes when you start withdrawing money. In some instances, contributing to pre-tax retirement plans can lower your current tax liability by impacting your Adjusted Gross Income.

How to invest for retirement

You don’t have to be an investing genius for your retirement savings. There are many books and online experts that offer advice on how much to save and where to save your retirement. Now, here are a few things to keep in mind:

Don’t chase the latest stock tip

Just keep it simple and avoid highly speculative investing with your retirement savings.

Think cheap, stable, and boring

There are experts and others who might have the talent to pick high performing stocks and funds. But they are outliers and often spend their entire days analyzing the markets. Your goal is not to beat the experts or the market. It’s simply to ensure the long-term growth of your savings.

Index funds are your friends

These funds buy every stock or bond in a particular category or market. In fact, you can hold onto these funds all the way through retirement. The big advantage is having your savings invested in many companies in different industries. This lowers your risk and often can help ensure some part of your portfolio is performing well even in down markets.

Avoid irrationality of the markets

Index funds don’t have the energetic media coverage that’s often associated with a stock’s daily swings. They are quite boring but that’s helpful so you’re less tempted in making emotional charged knee-jerk investment decisions.

Choose target-date funds

Many employer sponsored plans offer target-date funds that is a basket of investments from diverse companies around the world. It’s based on how many years until your retirement. For example, if you 30 years from retirement choose a fund that reflects your retirement target. As you approach your target, the mix of investment changes to become less risky.

How much should you save for retirement

There’s a general rule often shared which is to aim to invest with 10-20% of your income each year until retirement. It may seem challenging to invest a sizeable amount if you’re living paycheck to paycheck. But do your best to at least contribute up to the matching benefit offered by your employer. Or start small and increase your contribution by 1% each year.

If your employer does offer a match, you can count that match as part of that recommended percentage goal. For example, you contribute 5% and your employer matches 3% which results in a total of 8% contribution.

In a previous challenge, you evaluated your earnings statement. Keep in mind contributing pre-tax income can have an effect on your Adjusted Gross Income. This can result in a lower tax burden and a change in your take-home pay amount.

Day 24 Assignment

Gather your 401(k) statements and answer the following questions:

  1. What percent of your income is contributed?
  2. Does your employer offer a match? What’s the matching?
  3. Do you have other 401(k) plans from previous employers?
  4. How is your retirement money invested? Target date funds?

Your Challenge

  1. Increase your retirement contribution by 1%.
  2. Get your free analysis of your retirement plan using Blooom.
Amount InvestedCurrent % ContributionTarget 10% Contribution
401(k) Plan      403(b), 457(b)$Increased contribution by at least 1%?              Yes [  ]   No [  ]
Employer Match        Yes [  ]   No [  ]Matching Amount:    __________Investment Fund:  Target-date [  ]            Other [  ]Did you get a free analysis of your retirement plan?        Yes [  ]   No [  ]

Retirement Savings Tips

Don’t leave money on the table. At least contribute the minimum to meet your employer-sponsored retirement matching benefit.

Rollover older retirement plans from previous employers. Find out if you can rollover your old plans into your current plan.

Max out your retirement savings contributions. A good target is 10% but feel free to increase to 15% or more. Mind the income limits and max contribution amount.

Bonus Challenge

Enter your Roth IRA contributions

Roth IRAsAmount SavedAccount with:
2018$What’s your total IRA balance as of 2018?
2019$How much have you contributed in 2019? You have up until July 15, 2020.
2020$Are you planning to contribute in 2020?

You can contribute to a Roth IRA and a 401(k) at the same time. You can contribute up to $19,500 in 2020 to a 401(k) plan. Additionally, you can contribute up to $6,000 to a Roth IRA in 2020. That jumps to $7,000 if you’re 50 or older. For more info visit the IRS website.

Additional Reading

  • Blooom is a free analysis tool to analyze your 401(k) and other plans no matter where you work or where your plan is held. No account minimum to signup and get an analysis.
  • Fidelity offers a retirement savings widget, you can obtain an adjusted savings factor based on your age, date of retirement, and desired lifestyle.

Next Daily Challenge: Day 25: Budget Better: Putting it all together

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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