How much should I contribute to retirement?

Essential Tips for Retirement Contributions

When it comes to retiring many people have the same question. How much should I be setting aside for retirement? This is a complicated question because there is not an answer that fits everyone’s situation. In addition, throughout the years a person’s specific situation concerning what they should be setting aside for retirement changes. There are many factors in play when trying to figure out how to save for retirement. Knowing both your short term and long-term savings goals is important. Considering family needs, total availability of resources, and lifestyle is also important when planning for retirement savings. One thing for sure is that people should be saving as much as they can for retirement.

How much do I have to save for retirement?

The answer to how much a person should save for retirement is, as much as possible. As a rule of thumb saving around 10 – 15 percent for retirement is a good target amount. The 10% rate is the least that one should be saving, and 15% rate is the recommended rate if you can afford it. Saving at this rate should ensure that a person can maintain their normal lifestyle in retirement. This amount may vary based on the age at which a person starts saving for retirement and when a person plans to retire. If a person starts saving for retirement no later than their mid-20’s and wants to retire at current retirement age (67), then 15% should be a good rate. If a person begins saving for retirement later, then they may need to save at a higher percentage rate.

Then there are those who are employed and are having their retirement contributions matched. Their 15% portion is partially covered by their employer. For example, a 25-year-old employee who earns a yearly salary of $60,000 would need to save $9,000 towards retirement for the year at a 15% rate. Let’s now consider the same example with the employer matching retirement contributions at 5%. Now the employee would only need to set aside 10% for the year or $6,000 because the employer would contribute the other $3,000 or 5%. The most important thing to mention about employer matches is, MAKE SURE YOU TAKE ADVANTAGE OF IT. If your employer offers a match this is FREE MONEY for your retirement that you must take advantage of. So, whatever you have to do be sure to contribute as much as you can to maximize the value you receive through the employer match. The last thing I will say about the employer match is that it is so important that one should be willing to make great sacrifices to afford greater contributions.

What happens if I start saving too late?

As mentioned before, the recommended rate of 15% is contingent upon when you start saving for retirement. For someone who starts saving for retirement in your early 30’s, that 15% rate will need to be adjusted to more like 18% or 20%, if you still plan on retiring at age 67. The rate of saving continues to increase the longer you wait to start saving. If you wait until your mid 30’s, then you will need to be saving around 23% to 25%. So of course, it is better to start saving early because the sooner you start saving, the less income you must put back for retirement over the years.

The rate that one chooses to save is not just dependent on when they start saving, but also depends on when they want to retire. If someone wants to retire sooner than age 67 then they should try to begin as early as possible. They will want to save at a higher rate. On the other hand, many people are deciding to work past the age of retirement whether it be from necessity or just boredom. You may need to do this if you want or need to save for retirement at a lower rate.

Other forms of retirement income

Having other forms of retirement income also plays a role in how much a person should save for retirement. Many people receive income from sources like pensions, rentals, royalties, annuities, inheritance, and social security after retirement. These variable sources of income are hard to build a solid plan around. People usually do not know how much income these sources will produce as they contribute to their retirement throughout the years. The good thing is that if you have these post retirement sources of income, they will assist on financing your lifestyle in your later years.

When considering the rate at which you will save, you must also consider the contribution limitation for various retirement accounts. 401k contributions made by the employee are limited currently in the year 2020 to $19,500. If you are age 50 or above you have the option of contributing an additional $6,500. So, for someone under the age of 50 who is earning $100,000 per year, they would not be able to contribute more than 19.5% to their 401k for the year unless their employer did a match. If that person wanted to save more than 19.5% then they would need to contribute to another form of retirement account like a Traditional or Roth IRA. Fore more insight on the differences of a 401K and IRA you can check out our blog post here. Though the IRA accounts are good options, these accounts also have limits. Both Traditional and Roth IRA’s are limited to contributions of $6,000 with the option of contributing an additional $1,000 if you are age 50 or more for the year 2020.

Need additional assistance in figuring out your retirement options?

As you can see there is no cookie cutter answer to this question. My advice would be to take into consideration your income, normal expenses, and lifestyle. Then I would try to come up with a ration of how you will split up the amount of your income to save for retirement vs spend on anything else (i.e. 85/15…spend vs save).

As usual Molen & Associates is here to discuss your concerns and advise accordingly on this topic. We offer family finance consultations and wealth management services. If you need us to help you create a budget for retirement savings, but also aide you on the investing side give us a call and we’d be happy to serve you.

Arthur Harrison, III
Tax Advisor, Accounting, EA

← Previous Next →

The Molen & Associates Difference

Request an Appointment Today

Recent Post

      EXCELLENT  
   Based on 194 reviews 
    
 
 
 
   
 
 
       Posted on Google  
   
   Bob Henricksn 
 
 
 
 Trustindex verifies that the original source of the review is Google. Very professional service.  Friendly, efficient. and very responsive.
  
 
      Posted on Google  
   
   Manolo 
 
 
 
 Trustindex verifies that the original source of the review is Google. Very Good experience with the team we have interacted with during the process, they are friendly, educated on the matters and prompt to respond. I would definitely recommend this company to friends and family.
  
 
      Posted on Google  
   
   Andrea Carlson 
 
 
 
 Trustindex verifies that the original source of the review is Google. We have been using Molen & Associates for years for tax preparation.  They are very professional and easy to work with. No notes! Give them a try!
  
 
      Posted on Google  
   
   B F 
 
 
 
 Trustindex verifies that the original source of the review is Google. My first time using Molen Tax Services. I was very pleased. Everyone I encountered was very friendly and professional. I will be using the company next year.
  
 
      Posted on Google  
   
   Homerman65 
 
 
 
 Trustindex verifies that the original source of the review is Google. If you are wanting honest and sincere tax preparation, this is where you need to go.  We have worked with other well know tax preparation companies and ended up at the bottom of their priority list because we chose not to get the Platinum advance or whatever it was called this year.

We had to file a previous year along with our current year.  Brittany was awesome.  She was able to calm the nerves associated with filing taxes and tax preparation as a whole.  She answered ALL of our questions and even asked questions that we would have never thought of.   She made us feel that there was nothing to worry about, She was looking out for us and not to get us.   We will be asking for her again this next year.

I'm definitely recommending Molen & Asociates to everyone I know.  The fact that they are booked solid during tax season only confirms the fact that they are good at what they do.
  
 
      Posted on Google  
   
   Monica Avalos 
 
 
 
 Trustindex verifies that the original source of the review is Google. Grateful to have found this place and its people. Grace and Kathy have been patient with me as a new business owner. They are supportive and attentive with their knowledge and time. I highly recommend any new business owner to use Molen for their bookeeping and tax services.
  
 
      Posted on Google  
   
   mario escobedo 
 
 
 
 Trustindex verifies that the original source of the review is Google. Every year we have done business with Molen for our tax return prep and business advice, we leave with a sense of confidence that we have chosen the most qualified people to take care of us in all of Houston. We would like to extend our gratitude to Brittany for being thorough, friendly, and superb at doing her job. Although we have the option of handling everything electronically, we choose to go in for the final signing just to have that person to person friendly interaction.
  
 
      Posted on Google  
   
   Jo Anna Green 
 
 
 
 Trustindex verifies that the original source of the review is Google. I have used Molen and Associates for at least 15 years or more for my tax preparation. They are very professional and very friendly in all aspects of the process. I'm on my second tax preparer and feel that shows you they must be a good company to work for. I'm very happy with how my tax return is completed each year and how honest they are, I have no worries the IRS won't accept my return. I highly recommend Molen & Associates if you are looking for someone to do your taxes.
  
 
      Posted on Google  
   
   Jacqueline Scroggins 
 
 
 
 Trustindex verifies that the original source of the review is Google. They have made filling our taxes less burdensome. It reassuring to know they are there every step of the way and they work hard to create lasting customer connections through accuracy and attention to detail.
  
 
      Posted on Google  
   
   Sofia Tineo-Gutierrez 
 
 
 
 Trustindex verifies that the original source of the review is Google. Professional, trustworthy, friendly; feels like family. Best team to work with.