When planning for retirement, many people are unsure where to begin and how to save enough money to sustain themselves. Adam Shell, Investors Business Daily author, recently wrote, “Two out of three Americans say they worry more about running out of money than death, according to the 2024 Annual Retirement Study from insurer Allianz Life. And two-thirds of workers (62%) say that preparing for retirement stresses them out, according to the 2024 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) and Greenwald Research.” Clearly, this issue is significant, and knowing some best practices and starting points can be extremely helpful for people of all ages. To begin, it is helpful to know the amount an individual should plan to have saved by the time they reach retirement age. The following chart, produced by J.P. Morgan Asset Management, shows how much an individual should have saved at various ages, depending on their household income.
This chart clearly lays out goals for individuals to aim for as they work toward retirement. You simply multiply your income by the multiple expected for that income level at a specific age. For example, if you make $100,000 and you’re age 45, you should ideally have $350,000 saved up for retirement. While this task may seem daunting, various investment vehicles can help someone reach their retirement goals. One of the most beneficial options is a 401(k) plan provided through an employer. The maximum contribution limits for 2024 are $23,000 for individuals under 50 and $30,500 for those 50 and older. Contributing the maximum amount can significantly boost your savings due to the power of compound interest.
Starting early is crucial. For example, if someone begins maxing out their 401(k) by contributing $23,000 annually at age 25 and continues until age 65, assuming an 8% annual return, they will retire with nearly $6,000,000. However, if they wait until age 35 to start these contributions, their retirement savings would be approximately $2,600,000. If they start at age 45, their nest egg would be reduced to about $1,050,000 by age 65. In addition to starting early, another crucial principle is to always get the match. Many companies will match employees' contributions to their 401(k) up to a certain amount. This is essentially free money for employees and should always be taken advantage of, even if they aren’t able to completely max out their contributions each year.
Investing in a 401(k) is great, but what if an individual doesn’t have access to a 401(k) through their employer? Don’t fret—you’re not alone. Adam Shell wrote, “Roughly 57 million Americans (or nearly 50% of private sector workers) lack access to a 401(k) or employer-sponsored retirement account, says BlackRock.” This may be the case for you, but many other investment vehicles can help you prepare for retirement. Two common vehicles that many are familiar with are both Roth and Traditional IRAs. For the 2024 tax year, the contribution limit for individual retirement accounts (IRAs) is $7,000 total between both Traditional and Roth. If you are 50 or older, you can contribute an additional $1,000, bringing the total to $8,000.
Traditional and Roth IRAs serve different purposes, and investors should consider these differences before deciding which one to use or whether to use a combination of both. Traditional and Roth IRAs both offer tax-advantaged retirement savings, but they differ in how and when you get the tax benefit. Traditional IRAs provide a tax deduction on contributions, with taxes paid upon withdrawal, making them beneficial if you expect to be in a lower tax bracket in retirement. Roth IRAs, on the other hand, are funded with after-tax dollars, allowing for tax-free withdrawals in retirement, which is advantageous if you anticipate being in a higher tax bracket later. Choosing between them depends on your current and expected future tax situations, with traditional IRAs offering immediate tax relief and Roth IRAs providing long-term tax-free growth.
Additionally, if an individual wants to save more than the $7,000 annual limit for retirement, they can consider using Health Savings Accounts (HSAs) as a supplemental retirement savings vehicle. Shell stated, “Health Savings Accounts, or HSAs, are increasingly used as retirement savings accounts. They are powerful investment tools because they are "triple-tax" free. Money goes into the account tax-free and grows tax-free. Withdrawals are also tax-free. Individuals who have high deductible health plans (HDHPs) and are eligible for HSAs can only contribute $3,850 in 2023 and $4,150 next year. But the dollars deposited avoid all taxes if used for eligible medical expenses.” These accounts may even be eligible for an employer match, depending on your employer’s benefits plan.
A key strategy for maximizing HSA benefits is to avoid using the funds for early medical expenses. Instead, cover out-of-pocket costs with other savings to allow your HSA balance to grow and compound over many years. This strategy enables individuals to accumulate a substantial amount in their HSA, which can be used to cover the higher medical expenses that are likely to arise later in retirement. Shell wrote, “The cost of health care is the No. 1 financial concern in retirement, according to a March survey by eHealth.com, an online private health insurance marketplace, and Retirable, a financial advisory firm. Two of three survey respondents (63%) cite health care costs as their top concern.” Some of these concerns can be addressed through the strategic use of HSAs, which can help make retirement more stress-free.
Additionally, fixed-rate annuities are another option for individuals looking to further diversify their retirement savings. Shell described this vehicle by stating, “A fixed-rate annuity, a product backed by an insurer that protects against loss and offers a guaranteed rate of return and income stream, is an alternative to bonds. "It's a pretty simple product: You give the insurance company money (typically a lump sum premium), and they send you a check back every month for the rest of your life," said lifetime income expert Benny Goodman, vice president at the TIAA Institute. Fixed annuities, experts say, shouldn't be 100% of your retirement portfolio. But they do merit their own slice in most people's asset mix pie charts.” Fixed annuities are similar to bank certificates of deposit and offer the reassurance of a guaranteed monthly income. This can help cover typical expenses such as mortgage or rent, HOA fees, utilities, and more. With this income, an individual might not need to start withdrawing from their 401(k) savings, which helps protect against the risk of outliving their retirement funds.
For those using IRAs, 401(k)s, HSAs, or fixed-rate annuities, working with a financial planner can be highly beneficial in avoiding common pitfalls when planning for retirement. One critical area where a financial planner's expertise is invaluable is understanding the impact of taxes. How taxes are managed can significantly affect the amount of retirement funds you ultimately accumulate. A financial planner can also assist in determining the right mix of investments—such as stocks, bonds, or cash—based on factors like age, risk tolerance, and how soon you'll need the money. This asset allocation may need to be adjusted over time as these factors change. While a financial planner can offer invaluable advice, investors should also consider the fees associated with their services. It's important to be aware of these fees and work to minimize them, as they can reduce future investment returns. Educating yourself about these various options and seeking professional guidance can help alleviate some of the stress associated with the daunting task of saving for retirement.
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