You might be saving for retirement, but is it enough? How will you know?
Even when you’re in your 50s, retirement can seem like it is still far away. For young people just starting out in the work world, retirement is almost inconceivable. And for this reason, many young people put off saving for retirement. Also, it can be harder to save money when you’re younger because you don’t make as much, and you may have student loans to pay back.
An article in the Motley Fool says that only 14 percent of employers offer their workers a 401(k) plan, but 79 percent of the American workforce is eligible to opt into this plan. This is because it is mostly bigger companies that offer this benefit, and they have more employees.
Matching Fund Contributions
However, only 32 percent of working Americans put money into a 401(k). In many instances, the non-contributors lose out twice, because not only is their money not being invested, they are not getting the matching funds many companies offer.
If your employer offers a 401(k) — and especially if they match funds — you should make every effort to take advantage of this valuable benefit.
How much should you put in? Well first let’s narrow down the amount by talking about how much you’re allowed to put in.
What Are the Limits?
The IRS says this year you can put in $18,500 — $500 more than last year. This is the employee contribution — it doesn’t count the employer match. The maximum for individual retirement accounts is $5,500.
While saving nearly $20 grand a year toward retirement is not something most people can do, contributing anything is better than nothing.
Oftentimes an employer will match your contributions up to a certain percentage, sometimes dollar for dollar, sometimes less. So you should try to get as much of the match as you can. For instance, if your employer kicks in 50 cents for every dollar you put in up to 3 percent of your income, try to put in at least 3 percent so you don’t lose any of that money.
How Much to Save for Retirement
But what factors should you consider when figuring out how much you will need in retirement?
1. Your health.
Do you expect you will be in good health during your retirement? If you are still in your 20s, this can be hard to predict. But if there is a history of cancer, heart problems, diabetes or other serious medical conditions in your family, you have a greater risk of having higher health-care costs.It’s also hard to predict if Medicare will still be around when you retire. And even if it is, there’s a lot it doesn’t cover, which necessitates the purchase of supplemental insurance. Various companies offer different policies targeted to coverage in specific areas such as prescription drugs, ongoing medical treatments such as dialysis and home care.Your health also often dictates how long you will live. Paying living expenses for 20 years versus 35 makes a big difference.
2. Other sources of income.
Right now, many retired Americans collect Social Security benefits. U.S. News & World Report says the average monthly benefit today is $1,180.80. That’s nothing to sneeze at, but it isn’t enough to cover the living expenses for many retirees.If you own a home — or plan to buy one — the type of mortgage you get can depend on how much you’ll need in retirement. If you take out a 30-year mortgage when you’re 40, you will still have years of payments to make after you are retired. Many people go this route with the intention of selling and moving at retirement, which can work if you choose to live in an area where the cost of living is not prohibitive.But even if you have paid off your mortgage well before retirement, you will still need to pay yearly taxes on your home. USA Today says the average property tax amount for U.S. homeowners was $3,296 in 2016. That’s about $275 a month, and residents of some richer counties pay much more — around $7,000. What the rates will be in your retirement is hard to pinpoint.
Whether you save a little or a lot, the important thing is that you save money.
3. Go by the 15 percent rule.
Lots of sources quote nebulous “experts” who suggest saving 15 percent of your income to achieve a comfortable retirement. These experts are undoubtedly financial Wall Street types whose idea of investing for their retirement includes adding on to their vacation home in Costa Rica.While the number might be accurate, the truth is that saving this much money is not attainable for many. The average cost of a college education is between $80,000 and $200,000, according to the College Board, and this is just as unrealistic for many ordinary Americans.Try plugging some numbers into this AARP retirement calculator. The current median household income in America is about $60,000. If you are 30 years old and you start contributing 5 percent of your income now and get a 7 percent annual rate of return, you will have $810,206 to retire on.How much do you spend a year on living expenses now? Divide the $810,206 by this number, and you’ll see how many years you’re covered for. Variables to consider are taxes, housing costs, health care costs and the number of people in your household (presumably your kids will not still be living in your basement when you retire. If they are, charge them some rent.)
The upshot is that there’s no foolproof way to know exactly how much you’ll need to save for retirement, but that’s OK. Life is full of variables and unknowns. As long as you save some money, you’ll know you’re better off than if you save nothing.