Ace Your 401(k): Retirement Savings at Every Age
Why It Matters:
- HealthView Services says total lifetime healthcare costs for a healthy 65-year-old couple retiring in 2021 are expected to be $662,156.1
- Surveys show that 57% save less than 10% of income.2
- Retirement accounts offer tax-advantaged growth and compounding to help build wealth faster than putting away money in a savings account.
Ask older Americans what they regret in their retirement planning, and chances are, they’ll say they wish they had started saving for retirement earlier.3
According to a survey conducted by the Insured Retirement Institute, 44% of workers believe they will not have enough income to last throughout retirement.2 It’s never too early to start thinking about the future — and never too late to start catching up on saving.
Retirement saving can look different for someone in their 20s versus someone only a decade or two away from retirement. Here’s a look at savings goals, habits, and suggestions to try in every decade, from ages 20 to 60.
Starting to save for retirement in your 20s
Financial professionals often encourage clients to start contributing to a tax-advantaged 401(k) plan or other retirement account as early in their careers as they can afford. That’s so that clients can enjoy the benefits of compound growth, which helps the money invested in a retirement account build on itself over time.
For example, if you put $1,000 in a 401(k) and invest in a portfolio that grows 3 percent over the course of a year, you will then have $1,030 — a bigger foundation to build upon if the market continues going up. Use this investment calculator to see what will happen to your initial investment over time if you continue to see 3 percent growth each year, even if you don’t make any more contributions. Not too shabby, right?
If your employer offers a traditional 401(k) plan, you can ask your employer to send part of your paycheck directly to your account, before any taxes are taken out. Some employers will match those pre-tax contributions up to a certain amount. Let’s say your employer offers a 3 percent match. If you contribute 3 percent of your pay to your 401(k), your employer will match that amount. It’s like free money.
Then you can invest those tax-deferred 401(k) contributions in choices provided by your retirement plan. These often include mutual funds or exchange-traded funds (ETFs). Any investment growth in a traditional 401(k) is tax-deferred, meaning you won’t be taxed on your gains until you withdraw the money much later down the road, in retirement. (Withdrawing money early, before age 59½ can trigger penalties, on top of taxes.)
If your employer doesn’t offer a 401(k) or similar retirement plan (or even if your employer does), you can open an individual retirement account, or IRA, so that you enjoy tax-deferred investment growth when markets are up. Talk to a financial professional to open an account. Ask about contributing to a Roth IRA, which can be valuable for young investors who are in a lower tax bracket today but hope to one day be making big bucks.
You might be thinking that at this early stage in your career, there’s not much left in your paycheck after paying bills and expenses to save for retirement. Certainly, if you can’t pay off your credit card debt or don’t have a stash of cash that’s readily available to you in case of disaster, focus on building an emergency fund first.
After all, a 401(k) is called a retirement plan and not a piggy bank for a reason: it’s meant to help you live the life you want in retirement. Ideally you don’t want to take money out of it any earlier than you need.
As soon as you can afford to contribute to a retirement plan, get started. While the 401(k) contribution limit for 2022 is $20,500,4 no one is requiring you to contribute that much this year. Start small, even if it’s just 1 percent of your paycheck. Your employer can help you automate your contributions, so it becomes a habit that sticks. It’s a move that could pay off when you’re ready to retire.
The takeaway: Building an emergency fund and paying down high-interest credit card debt should be priorities in your 20s, but once both are under control, you have more flexibility to pursue your other financial goals. This may be a good time to start contributing a small amount of each paycheck to your 401(k). Aim to contribute at least enough to trigger the maximum match from your employer. Each year, see if you can contribute 1 percent more of your paycheck than you did the year before.
Did you know: A health savings account (HSA) can help you save for retirement too. You may qualify for an HSA if you have a high-deductible health insurance plan. You can contribute pre-tax dollars to your HSA, and if those dollars are invested via your HSA provider, you can enjoy tax-free investment growth. Withdrawals are also tax-free if the money is used to pay for qualified medical expenses. Even if you contribute money to an HSA today, you can wait to withdraw it years later to cover retirement healthcare costs, such as expenses not covered by Medicare.
Retirement savings in your 30s
As in your 20s, saving for retirement may compete with other financial goals that you’ve asked your financial professional to help you plan for, like saving for a down payment for a house, paying for a graduate degree, or supporting a family.
Yet Millennials, who are now about 25 to 40 years old, are making progress in saving for retirement. The median household retirement savings for Millennials is about $68,000 versus about $26,000 for Generation Z, according to the nonprofit Transamerica Center for Retirement Studies® (TCRS) and its annual retirement study.5
So how much should you have saved as a 30-something? One theory suggests you’ll need retirement income of about 70 percent of what you earned annually pre-retirement, with Social Security benefits representing perhaps 40 percent of that amount and your savings representing the rest.6 So if you retire in your 60s and need to have 30 or so years' worth of savings, you’ll want to have at least nine times your salary saved up by the time you retire.
Thanks to compounding growth, you may only need to have one to two times your salary saved for retirement when you’re in your 30s.
The takeaway: As you earn raises and promotions, see if you can devote slightly more of your paycheck to your retirement account each year. Focus on budgeting so you can continue to make retirement savings a priority along with your other financial goals. And if you change jobs, remember to explore your retirement savings benefits at your new employer.
Spending habits when saving for retirement in your 40s
If you have kids, your hair may be turning gray just thinking about how you’ll afford to send them to college. Perhaps in your 40s, you’re starting to care for aging parents or grandparents. Meanwhile, your hard work may have earned you better career mobility, more generous benefits, or a healthy raise that you can maximize with the help of a financial professional.
If you haven’t already done this in your 20s and 30s, it can be a good idea to schedule regular meetings with your financial professional, at least once a year to go over:
- Progress in saving for retirement and achieving your financial goals
- How tax-advantaged accounts can help your family save for a child’s college education
- Strategic approaches for families dealing with cancer or dementia
- Moves that could lower your taxes
The needs of children and parents can pull money away from saving for retirement, and sometimes rightly so. But depleting your 401(k) to support them may not be the best strategy for everyone, especially in your 40s.
The takeaway: As you get closer to retirement, check in with a financial professional regularly to stay on track toward your financial goals. See how close you can get to contributing up to the annual cap for your retirement plan. Again, that cap is $20,500 for a 401(k) in 2022. IRA contributions are capped at $6,000 for 2022.
Catching up on retirement savings in your 50s
Turning the big 5-0 means retirement is getting closer and closer. Are your retirement savings ready for it?
Ask your financial professional to figure out what your monthly retirement income would be if you were to start withdrawing money from your retirement accounts and savings. Factor in what you might receive in Social Security benefits too. Is that enough for you to live on in retirement?
If the answer is no, your 50s can help you make up for lost time. You can contribute an extra $1,000 to IRAs (or up to $7,000 in 2022) if you are 50 or older. Your 401(k) might also allow people who are 50 or older to make “catch-up” contributions of up to $6,500 in 2022, on top of the $20,500 cap for everyone else.
If the answer is yes, the siren song of early retirement may be calling your name. Before you quit working for good, be sure to account for healthcare costs if you’ll lose employer-sponsored health insurance and are too young to qualify for Medicare.
HealthView Services says total lifetime healthcare costs for a healthy 65-year-old couple retiring in 2021 are expected to be $662,156.1 So remember to plan for that.
The takeaway: Take advantage of your privilege as an older investor to boost what you contribute to your retirement savings.
Things to Consider:
- Even though retirement may be years away, the magic of compounding growth rewards those who start saving early.
- As you juggle financial priorities, think about how retirement savings fit in the mix.
- IRAs make it possible for workers to save for retirement, even if their employers don’t offer a 401(k) or similar plan.
1 “2021 Retirement Healthcare Costs Data Report,” HealthView Services, December 2020, ahead of publication
2“Retirement Readiness Among Older Workers 2021,” Insured Retirement Institute, March 2021
3 “5 of the Most Common Regrets When It Comes to Saving for Retirement,” CNBC, September 2021
4“Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits,” IRS.gov, November 2021
5“Living in the COVID-19 Pandemic: The Health, Finances, and Retirement Prospects of Four Generations,” Transamerica Center for Retirement Studies, August 2021
6“Alternate Measures of Replacement Rates for Social Security Benefits and Retirement Income,” Social Security Administration, accessed November 2021
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.