Retirement Savings by Age: How to Save and When
Calculating how much you need for retirement is just the first step toward securing your future. Creating a simple strategy can take the fear and guesswork out of retirement planning and get you on your way toward your goals. Once you know what you'll need, it's time to make a plan for retirement savings by age.
How much do you need for retirement?
First, estimate how much money you might need in your retirement savings by looking at your current income and expenditures. From these figures, you can estimate your future expenses.
Jot down all your current expenses, then cross off the ones that won't be applicable at your chosen retirement age. Will you be renting, or will you own a home? Are you going to be paying for your kids' college tuition? Do you plan to downsize your home? Will you own your cars or lease them? It might be difficult to visualize what your life will be like at retirement age, but a financial advisor can help.
Set yourself up for financial success in your 30s
Getting started on your retirement savings in your 30s is important because of the power of compounded interest. Simply put, compounded interest is interest you earn on your interest. Over the long term, the magic of compounded interest means that your investment builds on itself, without you having to do anything at all. The earlier you begin saving for retirement, the more you can yield by the time you retire. For a quick look at how compound interest works, use a compound interest calculator.
401(k) and IRA
It's recommended that you invest as much in your 30s as you can. If your company has a 401(k) or 403(b) plan, find out how much they'll match. These investments have two special advantages. First, what you contribute is pre-tax, which lowers your taxable income. Second, your employer will often match a percentage of your salary or your contribution—free bonus money for you.
To really maximize your retirement savings, consider opening an IRA in addition to your 401(k), which may allow you to contribute additional funds every year. A traditional IRA lowers your taxable income even further, and you pay no tax on a Roth IRA when you use it in retirement. Here's a pro tip: Every time you get a raise, increase the amount you're contributing to your 401(k) or IRA. Use our 401(k) calculator to help.
Build on your financial gains in your 40s
Your 40s are often your peak earning years. By this time, you may own a home or have other sources of equity you've been building as well. The combination of these factors may put your in your strongest financial position yet, giving you more power to make a big impact on your retirement savings.
Accordingly, it may be a good idea to reduce your debt at this point in your life—the less money you're putting toward paying down debt, the more you can save for retirement. Figure out which debts are positive, like a mortgage, and which debts you should pay off first, like credit cards.
You may also want to reduce the amount of investments you have in aggressive, high-risk stocks. Consider moving at least a percentage of your investment portfolio into bonds or more stable investments.
Long-term care insurance
Now is the time to buy long-term care insurance. Though it's not a direct contribution to retirement savings, long-term care insurance protects the assets you have spent so long saving. Buying long-term care insurance when you're in optimal health reduces premiums and ensures that your retirement savings stay intact.
Contribute as much as possible in your 50s
Saving for retirement in your 50s is usually about catching up, literally. You can take advantage of these catch-up contributions by adding $6,000 more to your 401(k) per year, and $1,000 more to your IRA. These contributions help you put more money toward retirement at a faster rate. Even if you can only contribute a few thousand more, use the catch-up to build on your savings.
Social Security—do it later
You can technically begin withdrawing retirement savings by age 62, but if you wait until age 70, you'll get a significant increase in benefits. If you retire at 65, that's only five years until you can begin withdrawing to get the maximum amount. Use your catch-up contributions to plan for the five-year differential.
The most important part of retirement planning is simply to begin, whatever age you are. Start by calculating what you'll need, and talk to a financial advisor if you need help on how to make the plan that works for you.
A few financial insights for your life
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.