No one needs to tell you that you need to save for your future. Afterall, you probably don’t want to work forever. No matter your age and how far away retirement is, hopefully you have already started saving so you can enjoy retirement and do the things you want without having to worry about resources.
Are you turning 65 and have questions with Medicare planning?
Amount: How much and how long
We believe that starting early and saving at least 15% of pre-tax income each year toward retirement helps ensure enough in savings to maintain your current lifestyle in retirement*. 15% may seem high, but it’s much easier than you think because that 15% includes any matching or profit profit sharing contributions from your employer to your 401(k) or other workplace savings account, like a 403(b) or governmental 457(b) plan. For example, you earn $50,000/year and your employer match is 100%, up to 6% of pay (your employer matches your contributions dollar for dollar, up to 6% of your salary). To save 15% of your pre-tax salary, or $7,500, you need only contribute 9%, or $4,500 because of the employer match of $3,000 (or 6%).
The longer you wait to save, however, the more important it is to take advantage of every opportunity to contribute the maximum to your 401(k)—which may be more than 15% of income. There are 401(k) contribution maximums and in 2020, it is $19,500. Luckily, if you are behind and age 50 or over, you can make catch-up contributions of up to $6,500, bringing the limit up to $26,000.
The important thing to remember is to make sure you contribute enough to get the entire employer match in a workplace account even if you can’t contribute 15% of your income right now. It is effectively “free” money, and then try to increase your savings as soon as possible.**
If your employer does not offer a 401(k), you should set up an IRA. The maximum IRA contribution in 2020 is $6,000 with catch-up contratious of up to $1,000 if you’re over age 50.
Health savings accounts (HSAs) are another type of tax-advantaged account. You generally need to be enrolled in an HSA-eligible high deductible health plan (HDHP) to set up an HSA. You can contribute $3,550 individually or $7,100 for family coverage to an HSA for 2020. Catch-up contributions of $1,000 are also available for HSAs if you are age 55 or over.
Regardless of what type of savings you are available to you, start saving as much as you can as soon as you can. As Fidelity SVP of Retirement, Ket Hevert, says “It’s Important to focus on 3 main things during your working years: the amount you save, the accounts you save in, and your asset mix. Of the 3, of course, the first is the most important, as no account or asset mix can make up for not saving enough."
Read Viewpoints on Fidelity.com: Just 1% more can make a big difference
Account: Where you save
As discussed above (Amount: How much and how long), make the most of retirement savings accounts like 401(k)s, 403(b)s, and IRAs. If you have an HDHP, consider taking advantage of health savings accounts (HSAs) which are one of the most effective means of saving for qualified medical expenses now and later in retirement. Your contributions to these accounts can grow tax-deferred or tax-free. In addition to saving towards retirement, contributing to a traditional 401(k) or IRA is pre-tax which means that they generally reduce your taxable income, thus lowering your tax bill in the year you make them. You’ll pay income taxes on any money you withdraw from your traditional 401(k) or IRA in retirement. A Roth 401(k) or IRA, on the other hand, are contributions made with money that has already been taxed so you generally don’t have to pay taxes when you withdraw from them.
How do you decide which type of 401(k) or IRA to contribute to—a traditional or Roth account? Although there are several things to consider, it comes down to a simple question: will I be at a higher tax bracket today or later? If you expect your retirement tax rate to be higher than your current rate, tax-free withdrawals from a Roth 401(k) or IRA might be a better choice. On the other hand a traditional 401(k) or traditional IRA may make more sense if the reverse is true.
For some, it may make sense to contribute to both a traditional and a Roth account for more flexibility when it comes time to take withdrawals in retirement for future tax implications. Keep in mind that if you participate in an employer match or profit-sharing plan from your employer, these contributions are always a traditional 401(k).
Read Viewpoints on Fidelity.com: Traditional or Roth account? 2 tips to choose
In addition to 401(k)s and IRAs, there are other alternative saving options to consider:
- Self-employed 401(k) or SIMPLE or SEP IRA allow you to set aside a certain percentage of your income if you’re self-employed or a small-business owner.
- Spousal IRA allow non-working spouses to contribute to their own traditional IRA or Roth IRA which are also eligible for catchup contributions. You must file a joint federal income tax return.
- HSA contributions are tax deductible if you have an HSA-eligible health plan and withdrawals are also tax-free for qualified medical expenses— now or in the future. The cost of healthcare continues to increase in retirement so it’s a good idea to prepare specifically for these expenses. Fidelity estimates a typical 65-year-old couple retiring today will need $285,000 saved on average (in a taxable account) to pay for out-of-pocket healthcare expenses in retirement***. HSAs can be very helpful for future healthcare costs in retirement in addition to tax benefits today.
Asset mix: How you invest
Stocks historically outperform bonds and cash over the long term. Investing in stocks and stock mutual funds make sense for retirement goals which can be years away. With higher returns, however, stocks also come with higher volatility so you must be comfortable with the risks.
Keystone Financial Group understands risks and long-term expected returns. We provide an equity strategy to help construct a well-diversified portfolio to generate the greatest potential return with the lowest risk. The appropriate mix of investments should be based on your time horizon, financial situation, and tolerance for risk. As a general rule, investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks. Having a significant exposure to stocks that’s appropriate for your investing time frame may help grow savings****.
Keystone Financial Group understands that risk and long-term expected return are related and we help combine assets that respond differently to market forces. High-risk high-potential return portions of portfolios are balanced with low-risk investments to moderate the overall portfolio volatility. We help our clients with strategies designed to ride out a market downturn so money can be there when they need it.