By Andrew Wapneski, District Manager, Milwaukee
Many Americans do not know how much money they will need to save for retirement. There is also a large percentage of people who are not saving at all and are relying on social security. While there is no one-size-fits-all solution to retirement savings, there are some best practices that can set you up for a relaxing, fulfilling, and financially secure retirement. Here are some answers to common retirement questions, and a few quick tips for retirement savings:
- Start as Early as Possible. – The earlier you start, the better off you will be when retirement time rolls around. In retirement savings, planners often talk about the power of compound interest. Compound interest is literally the interest you earn on interest – so in retirement savings, the additional interest you earn over time on the base earnings of your retirement nest egg. Let compound interest work in your favor. Because compound interest is reinvested into that retirement savings account, rather than paying out when it is earned, it increases quickly.
- How Much to Save? – This is a tough question. Most experts recommend saving as much as you can over and above your daily living expenses. Some will say 10% or 15% or even 20% of your gross pay is what you should be putting away. But it all comes down to you, your budget, and your tolerance level. Save what you can comfortably, without straining your regular finances.
- Budget! – Yes, budget might be the most disliked word in the English language, but it’s essential to building up your retirement savings. Finding extra money to funnel toward your retirement each month starts with a good budget. Make one, and plan on sticking to it.
- Leverage the 401k Employer Match – Some employers match a certain percentage of what you save into a company-provided 401k. A 401k is a type of retirement savings account – named after the part of the tax code it appears in! – that allows employees to put their wages (called contributions) into retirement savings BEFORE the taxes are applied. Then, once the employee is eligible for retirement, they can draw those dollars out, usually at a lower tax rate since they’re no longer actively employed. If possible, you will want to make sure you are taking full advantage an employer’s match on a 401k, as it is free money your company is giving you to fund your retirement. For instance, some companies will match between 3-5% of your pre-tax pay as long as you are contributing at least that much yourself. Do your research, find out, and work to maximize your savings opportunities with the employer match.
- Which is right – Roth IRA vs. Traditional IRA? – Some employers do not offer 401ks. If your employer doesn’t, you will want to start either a Traditional or Roth IRA as your retirement savings account. The difference between the two when the taxes are applied. With a traditional IRA, you will pay taxes when you withdraw the funds (at retirement, in your retirement tax bracket). With a Roth, you will pay taxes upfront (while working, in your current tax bracket).
- Don’t Forget to Build an Emergency Fund – If you are ever strapped for cash or unexpected expenses occur, don’t tap your retirement accounts! Accessing retirement accounts before you’re retired can undo all of the compound interest your accounts have generated and result in financial penalties from the Internal Revenue Service (IRS). Instead of dipping into your retirement accounts to pay for new brakes for your car or an unexpected medical bill, build an emergency fund. An emergency fund will help you stay on track with your retirement goals while still providing you fast access to cash when you need it.
- Retirement Doesn’t Mean No Budgeting! – It’s not uncommon for people to hit retirement, tap into their retirement accounts, and spend like crazy. That’s not a sustainable way to retire! If you want your retirement savings to last your entire retirement (and you don’t want to have to get a part-time job in your 70s!), plan to create and stick to a retirement budget. It will help you live within your means even in retirement.
It is never too early to start saving for retirement, because time is on your side. It’s also never too late, because something is always preferable to nothing. When questions rise, it also is not a bad idea to consult a Certified Financial Planner (CFP), as they will help create a specific plan for you. This will help you stay on track and guide you to a successful retirement.