As you near retirement, it’s important to have a good idea of what your retirement fund balance should be. This will help you make sound financial decisions in the years leading up to retirement. In this article, we’ll take a look at four different balance targets for ages 30, 40, 50 and 60 and what they mean for your future.
By age 30
Both Fidelity and Ally Bank advise that by the time you are 30 years old, you should have saved an amount for retirement equivalent to your annual wage. That means, you should have $75,000 saved up if your annual wage is $75,000.
But, how do you go about that?
You can set up automatic 20% yearly contributions to your 401(k) when you begin your first job. Jason Parker, author of “Sound Retirement Planning” and host of the “Sound Retirement Radio,” of Parker Financial in the Seattle region noted, “It will discipline you to live and give on the remaining 80%.”
Start planning for your 30s in your 20s
“An employer match on your 401(k) is free money, but roughly a quarter of employees are leaving free money on the table by not taking advantage of their match,” said Brian Walsh, a certified financial planner and financial planning manager at SoFi.
He added that in some cases, saving for retirement can take priority over paying off debt. “Many young people we work with don’t sign up for a 401(k) in their 20s. “That’s admirable, but there are times when it just doesn’t make sense to aggressively pay down debt instead of saving. While paying off debt is important, you also need to prioritize saving for the future.
We consider any debt with an interest rate below 7% to be good debt and suggest saving some of your money before aggressively paying that debt down.
By age 40
Both Fidelity and Ally Bank advise saving three times your yearly income for retirement by the time you are 40. Don’t wait any longer, a financial expert advised, if your total financial plan does not yet include a retirement savings strategy. According to Drew Parker, the designer of The Complete Retirement Planner, “every household owes it to itself to construct a thorough, individualized financial plan,” regardless of their net worth or stage of life.
Be strategic with salary bumps
“The most common mistake is that people let their spending increase commensurate with their new salary,” said Dr. Robert R. Johnson, a finance professor at Creighton University’s Heider College of Business. “For example, people move into a bigger apartment or buy a more expensive car or home to reward themselves for receiving the raise.”
People are wise to effectively invest any money from a raise as if you didn’t receive it. That is, continue to live the same lifestyle you led before receiving the raise and invest the difference.
An example will help illustrate how investing a raise can help build true long-term wealth. Suppose one receives a $5,000 annual raise early in one’s career. If one continues to live the same lifestyle as one did before receiving the raise, one will be able to improve their financial situation because they spend everything they make.
By age 50
Ally Bank advises people over 50 to save five times their annual income, whereas Fidelity is more assertive and suggests saving six times that amount. You can make a “catch-up contribution” if you discover that you have fallen behind on your retirement savings as a result of money being diverted to other expenses, such as paying for your children’s college tuition.
Once you turn 50, you are eligible to contribute an additional amount each year to a tax-advantaged retirement account. The sum, which will be $6,500 in 2021, is determined by the Internal Revenue Service. Given that it is a per-person amount, couples can contribute twice as much.
Cost reduction
Your children may be out of the house when you turn 50, or during the first few years of that decade, and you may not need that four-bedroom Colonial any longer. It might be time to scale back. If you’ve owned your house for a while, there’s a good possibility that you have equity that you may use to fund your retirement. Or, you may purchase a less expensive property and lower your monthly mortgage payment taking advantage of lower interest rates.
Walsh also suggested looking into the costs you pay to maintain your retirement account, if you haven’t already. Costs affect everyone at every age, but he added that as you age, your balance will start to grow and the fees will really pile up. “Let’s face it: costs are complicated, and many regular investors are unaware of the exact expenses they are paying.”
A cost of 1% or 2% might seem insignificant, but if you have $500,000 in savings, that amounts to $5,000 to $10,000 annually. Consider adopting an active investing product that enables you to buy and sell investments on your own without paying commissions or an automated investing product that invests your money for you while charging no advising costs as an alternative to paying hefty fees for your investments.
By age 60
By age 60, you should have seven times your annual earnings saved for retirement, Ally Bank recommends. Fidelity, once again, is more aggressive and recommends eight times the amount.This is also the time to make a push toward paying off debt to enter retirement owing the minimum amount possible. Live within your means and pay off bills, especially high-interest credit card debt.
If you don’t, those monthly payments will eat into your retirement savings later on. Doing so will also increase your credit score and lower your credit utilization rate, which will make it easier to refinance your home at a lower interest rate.
Risk reduction
Johnson said people within five years of retirement — so no later than their early 60s — should begin to minimize the risk to their retirement accounts.”A large downturn in the market immediately preceding retirement can have devastating effects on an individual’s standard of living in retirement. The exact time a person retires can have an enormous impact on the quality of their retirement if their assets are focused in the equity markets,” he said.
Take, for example, someone who retired at the end of 2008. If they were invested in the S&P 500, they would have seen their assets fall by 37% in one year. The five years prior to retirement can be considered the ‘retirement red zone.’
And, just as a football team can’t afford to turn the ball over and fail to score points when inside the opponent’s 20-yard line, the retirement investor can’t afford a big downturn in the retirement red zone.
Final thoughts
Now that you know what your retirement fund balance should be at different age ranges, it’s important to start planning for your future.
Figure out how much you’ll need to save each month in order to reach your target balance by the time you retire. If you’re not sure where to start, consult a financial advisor who can help create a plan tailored specifically for you.
Remember, the sooner you start saving for retirement, the more money you’ll have in the long run!
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