The earlier you start, the less you have to save! Also, this is where taking advantage of a company match is CRUCIAL. If your company offers to match ANY percentage of your 401(k) plan, please, please take it. That is free money and it makes a huge difference over time.
Another great benefit for savers is that your tax bill is reduced by the amount you choose to defer into your 401(k) or Traditional IRA. So, if you make $50,000 per year and decide to defer 7% of your salary—that’s $3,500—your taxable income is reduced to $46,500.
Also, my example doesn’t take any social security benefits into account. And that’s another thing I would stress when retirement planning: know what you own. It is extremely important to gain a true understanding of all of your assets as well as where your income will come from during your retirement years. The bottom line—you must know what you have. Take inventory of social security benefits, 401(k) plan assets, IRA assets, potential inheritance income, your home value, insurance policies, annuities and other savings and investments.
So what’s MY number?
I couldn’t tell you, but there are so many great retirement calculators online that could. I recommend the AARP online retirement calculator. It’s a simple tool that gives you a quick read on whether your savings will last through your retirement. If the result says you’ll run out of money, you can enter a later retirement age or cheaper retirement lifestyle to see how those changes could affect your financial security. Also, what I love about the AARP tool is that it doesn’t require you to come up with a lot of your own assumptions—it will even plug in your projected Social Security benefit for you—but it does allow you to view and change its default settings, including the rate of return on your savings, your tax rate and your life expectancy.
Let’s say I plug in my numbers and I haven’t saved enough. What do I do?
For baby boomers nearing retirement age, you should do your best to maximize contributions to your 401(k)and IRA and try to take advantage of catch-up provisions.
Specifically, in 2013, individuals age 50 and older may contribute an additional $1,000 to their IRA for a maximum annual contribution of $6,500. The catch-up provision for a 401(k) is even more meaningful—you can defer an additional $5,500 for a maximum annual contribution of $23,000. Between your 401(k) and IRA, these catch-up provisions can make a meaningful difference in the long run.
Finally, if you meet the income requirements, I would recommend a Roth IRA, which allows people 50 and older to save an additional $1,000 per year for retirement for a total of $6,500 in 2013. To participate in a Roth IRA, your adjusted gross income (AGI) cannot exceed $127,000 for single filers and $188,000 for joint filers. Unlike contributions to a 401(k) plan, contributions to a Roth IRA are made with after-tax dollars. It’s a “pay now, reap the rewards later” deal, because your contributions and earnings grow tax-free, so long as you maintain your account for at least five years and do not take distributions before age 59 ½. Additionally, your withdrawals are also tax-free. Lastly, unlike a Traditional IRA, you are not required to begin distributions when you are 70 ½. In fact, so long as you still have earned income, you can continue to make contributions.