How much should I contribute to retirement?

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

 

 

 

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Should I Open an HSA?

Should I Open An HSA Account? Are you considering a Health Savings Account (HSA)? If so, it is vital to understand what exactly an HSA entails. With this guide, you'll learn all about it: the advantages of an HSA and how it can help you manage your medical expenses....

Personal Finance Tips for Young Adults

As someone who has been working for most of their life, I wish there was someone out there who had shown me the correct way to save money for my future. Now that I am in my 30s, I have been getting better at saving money, but there are some personal finance tips that...

How to Track Expenses

There are many different methodologies, tools, tips, and tricks for tracking expenses, and it ultimately depends on your lifestyle and how actively and accurately you want to track them. This is information I’ve pulled from other sources and compiled into a few...

How To Accurately Record Commuting Mileage and Increase Tax Deductions

Increase Tax Deductions With the Business-Mileage Rule Using the Business Mileage tax deduction can be tricky. There are lots of situations that count while others do not. We don’t like commuting mileage. You should dislike it, too. It’s personal. It’s not deductible....

Bookkeeping 101

As a new business owner, you will certainly have some responsibilities you won’t be able to avoid. One of those non-negotiable part of your business is producing financial statements. It can be overwhelming trying to master a topic such as bookkeeping but don’t worry...

Bankruptcy – Everything You Need to Know

Everything you need to know Filing for bankruptcy protection is considered a statement on your ability to repay your debt to your creditors. Filing for bankruptcy will also put a halt to foreclosure or legal actions against you, and it stops creditors from calling and...

Top Tax Tips for 2023

Tax Refunds May Be Smaller This Year Plan now to learn these 2023 tax tips avoid surprises in the future! If you’re expecting a tax refund in 2023, it may be smaller than last year, according to the IRS. Your annual balance is based on taxable income, calculated by...

What is an EA?

Have you ever seen the title EA next to a tax professional’s name and wonder what it means? Or maybe you’re familiar with the title and you’re curious about the differences between an EA and CPA? Either way, in this blog I will be answering these frequently asked...

History of Federal Income Tax Rates: 1913 – 2021

The United States federal government levies taxes on the income of its citizens and legal residents. The Internal Revenue Service (IRS) is the agency responsible for collecting these taxes.  Federal income tax rates have changed several times since 1913, when the...

Familiarize Yourself With Tax Terminology

Yes, I know, tax terminology feels like a whole new language. For most people all of tax forms can be even more confusing than a foreign language. What’s the difference between itemized deduction and standard deduction? What’s Income tax?  These words and more tax...

Request an Appointment Today

8 + 7 =

Call us at

Pin It on Pinterest

Share This