Our lives have improved greatly since the beginning of the last century. We live longer than ever after we retire. Our lives are comfortable and enjoyable most of the time.
But the things getting tougher with every year. Outside the public sector, pension plans for new hires become a rare benefit. Social Security replacement costs have been reduced with every year.
If you retired in 1980s, you would expect to get Social Security check to reimburse 50 percent of your salary. For those who are retiring now it would be only 40 percent.
If you expect to live the same lifestyle as you’re living now with your employer paycheck, you need to fund the rest of it with your own money.
Surveys show that half of us are worried about running out of money in retirement. And yet we are not prepared for the future years without a paycheck from work.
Surveys also show that most of us have not saved enough for our future life or don’t even know how much money we need for retirement.
For many years I was in denial myself. Even ten years ago I was still thinking that I will work forever. When I turned 50, I suddenly realized that I have limited time while I can still enjoy my life and live on my own schedule.
These thoughts popped up in my head more often than ever. I started to think about taking a closer look at how much money we have in all our retirement accounts and if it would be enough to support us in retirement.
Roman and I don’t have pension plans. So, the only source of retirement income will be a Social Security paycheck and whatever we have saved in our retirement plans and savings.
Retirement plan basics:
The most popular retirement plan is called the 401(k) or 403(b) for nonprofit companies. For many people 401(k) is their main retirement savings vehicle.
- Both 401(k) and 403(b) plans allow employees to put aside a percentage of their pretax salary. The money comes out of your salary directly and is sent to the retirement account set by your employer.
- The money contributed to these accounts are not taxed until you start to withdraw it.
- If you decide to withdraw money from 401(k) before you reach the age of 59 ½, you will be penalized 10 percent of your total withdrawal, unless you follow certain rules.
- You can withdraw money without penalty when you reach the age of 59 ½.
Your contributions to 401(k) accounts are not taxed. But you don’t escape taxes entirely. After you reach age of 59 ½ you can start making withdrawals, but they will be taxed as earned income.
Why is it a good deal for many retirees?
When you stop working, you’ll likely be in a lower tax bracket, so your 401(k) withdrawals will be taxed in a lower tax bracket as well.
How much should you put aside?
When you sign up for 401(k) plan, the first question is how much money should I put aside?
Many experts recommend starting to save between 10 to 15 percent of your gross income.
It is a good start for many people who are in their 20s, 30s and maybe 40s.
But if you’re a woman in your 50s or even 60s and the retirement within 10 to 15 years you need to put more money in your retirement savings.
Why? Because of the basic logic of compound interest.
What is compound interest?
When you put money aside in one of your retirement or investment accounts, your profits – capital gains, and/or dividends – will be reinvested. With years of reinvestment, these profits can really grow.
Money in your accounts will compound or simply put multiplied. In order to see the real grows in those accounts, we need time and good and reliable market returns.
- Let’s say you start early at age 25 and can only save $105 a month to finance your retirement. Let’s assume that you get predictable 6 percent annual return. By age 65 you’ll have saved about $200,000.
- If you need to accumulate the same $200,000 by age 65, but start saving at the age of 45, you’ll need to put aside $440 a month. Things get worse from there.
- If you begin at 50, you’ll need to save $700 a month.
This example is completely simplified to show, how time is not on our side if we start saving money later in our lives.
But there a silver lining. When we’re in our 50s, it might be much easier to catch on contributions to retirement plans and saving accounts.
We have less expenses raising our kids, because they might be already gone and living on their own. We might already pay off student loans, car loans, credit card debts or even mortgage. We are more in control of our spending and finances.
Hopefully we are still healthy and don’t have many out of pockets medical bills. All these reasons will help us to focus our efforts to put more money into 401(k) and other retirement accounts.
How much is enough to contribute?
How much money is enough to contribute to 401(k)? I would say as much as you can.
Once I read a recommendation from one of the personal finance bloggers:
“Save as much as you can. Save as much as its hurts”.
I will not go to that extreme. We are not in our 20s when you can save 50 percent of your salary, live with the roommates and eat ramen noodles 5 days a week.
We have an established lifestyle, we have kids, we have houses, mortgages and other expenses. With all that it’s not an easy task to save 50 percent of your household income.
But if you have not started your 401(k) contribution yet or put aside just a bare minimum like 3 or 6 percent, probably it’s time to start looking at the way to increase these contributions.
In 2019 you were able to save up to $19,000 in your 401(k), up from $18,500 in 2018. But if you’re 50 or older, your maximum contribution was $24,500.
In 2020 you will be able to save up to $19,500 in your 401(k). That is $500 more than the 401(k) limit for 2019. If you’re 50 or older, you can also make a catch-up contribution. For 2020, the catch-up contribution is $6,500. Overall, for people in their 50’s, the maximum contribution limit will be $26,000.
I have to admit that for many people it will be hard to contribute to the full amount.
After all, you have to put aside $1,625 per month. If you’re 50+, you can add a catch-up contribution of $6,500 to your plan. That will be extra $542 monthly.
Hopefully everyone who is reading this blog, already started their 401(k) plans and accumulated some money. The next step will be to look at your budget and to see if you can increase the contributions.
In our family I look at my contributions every year and see if I can increase that number. Currently Roman and I both contribute 17 percent each to our 401(k) plans.
We started with 10 percent each and increased our contributions by 1 percent every year. The process of baby steps helped us to adjust our monthly budget.
We are far away from maxing out our 401(k)s, because we cannot afford it. However, it’s the easiest way to save for retirement.
Whatever level of contribution you can afford, it’s better to start right now, so it will help you to reach your saving goals.
The employer match
Most of the companies who offer the employer- sponsored plan – e.g. 401(k) or 403(b) – include something called the employer match.
The employer match means that your employer agrees to match a certain portion of the salary you set aside in your retirement account. Usually the employer match is up to 3 to 6 percent of your annual contributions.
If you don’t put money into 401(k) plan, there is no match. It means there is no free money on the table.
If your company offers a retirement plan with a match, you should take this offer as the best shot, you’ll ever get an earning extra money for doing absolutely nothing. Don’t turn it down. At least contribute enough money to take a full advantage of the benefit.
I don’t know how to invest 401(k) money
The chances are as a woman you might not spend a lot of time polishing your investment skills and knowledge. In this case investing your money in 401(k) plan is relatively easy task.
The retirement account is easy to set up.
Most of the employer-sponsored plans offer a limited number of mutual funds to choose from. There are some companies who have the financial advisers to help employees picking the mutual funds for their 401(k) accounts.
I work for the company, where the employer arranged the agreement with the financial advisors to come every 6 months and update the employees on the current market situation. In addition to that we can set up face to face meeting with the advisor to analyze our individual 401(k) portfolios.
If you don’t have much investing knowledge, maybe it’s time to learn some basics of investing. Read some books, make online research. After all nobody cares more about your money than you do.
I started to put money into my 401(k) in 2003. The timing wasn’t great. The 2008-2009 market crash wiped out our family investments. That was a bummer. But I was lucky enough to stay employed. I kept putting money into retirement and saving accounts and tried to max out 401(k) contributions. Since than my portfolio has grown and greatly benefited from the stock market slow recovery and recent market boom.
Yes, there will be more bad years ahead of us. But there will probably be good years too. I believe that the power of compounding will continue to work for our benefit. If you don’t begin saving money today for retirement, you’ll certainly regret it tomorrow.
So don’t count on working forever and start planning for tomorrow.
Do you have a retirement plan account? How much is your contribution to the retirement plan?
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