If you are like the majority of Americans, you are not financially ready for retirement. According to a survey published by CNBC in September 2021, three out of five people surveyed said they anticipate they will still need to work later in life. In the same survey, 41% claimed it “would take a miracle” for them to retire in financial security (1).
Preparing for retirement requires active financial planning. Social Security payments will account for just a portion of what most people will need to pay expenses post-retirement. You can view your anticipated check amount by creating an account and logging in at the Social Security website.
As a rule of thumb, financial experts recommend having three times your annual salary saved by the time you reach 40, and six times your salary saved by 50. If you are earning $50,000 a year those amounts calculate to $150,000 (by 40) and $300,000 (by 50). If you are like the typical American, your retirement balance is under the recommended amounts.
According to a 2020 TD Ameritrade report, 60% of 40 year-olds have less than $100,000 saved for retirement, with 41% having saved less than $50,000 saved. At age 50, the numbers are not much better; 53% have less than $100,000 saved with over one-third of those responding having less than $50,000 (2).
Building a retirement balance takes active participation. If you are 30 years old and invest $4,000 each year into an account earning a return of 5.00%, your balance will grow to about $275,000 by the time you reach age 67. While this may initially appear to be a daunting task, it becomes more manageable when you break it down and start planning.
If your company offers a 401(k), start investing. Most companies offer to match a portion of your contribution. At Horizon, we match dollar for dollar of an employee’s contribution up to the first 5% of their pay. An employee making $40,000 a year contributing $2,000 will see their investment doubled to $4,000 with matching funds.
- $2,000 per year equals $77.00 per bi-weekly pay.
- Since the contribution is pre-tax, it equates to approximately $57 less in your take-home pay every two weeks.
Another retirement option is to open and contribute to an Individual Retirement Account. If you are employed with earned taxable income you are likely able to contribute to an IRA. Contribution limits are based on your age, currently $6,000 for those under 50, and $7,000 for individuals age 50 and older. Contributions are based on the tax year, and you can still contribute for 2021 up until the tax filing deadline. This year, that date is Monday, April 18.
There are two different types of IRA plans available: Traditional and Roth. Both offer different tax benefits. A Traditional IRA allows you to deduct your contributions from your income, which lowers your tax liability. Contributions in a ROTH IRA are not tax-deductible. However, they are available for you to withdraw later without tax or penalty, which makes a ROTH not only a retirement fund but also an emergency savings. Choosing between a Traditional and ROTH IRA is specific for each individual. Please consult with your tax advisor to determine the right plan for you.
Regardless of how you decide to plan for retirement, the key is to start early. For each year you delay, you miss not only the ability to contribute your own money (or your employer match), you are also losing a year of compounding interest. By saving today, you will set yourself up for a brighter financial future in retirement.
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Michael Patterson is the Chief Branding Officer for Horizon Federal Credit Union. With 30 years’ banking experience, he has conducted financial literacy workshops to help individuals with banking, budgeting, and career development.