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Retirement: How and When to Save

June 26, 2017

Learn more about how and when to start saving for retirement.

Retire Comfortably: How and When to Save

The time to start saving for retirement was yesterday. The younger an earner starts to save for retirement, the more flexibility that the earner will have as they near retirement age.

For example, if an earner saved $5,000 a year starting at age 22, they would save about $500,000 more by retirement age than an earner who started saving the same amount at age 32. This is the magic of compounding interest. Obviously, everyone is not able to start saving at such a young age, but the point is to start saving as soon as possible. Although it may not be easy to save your hard-earned dollars at first, saving can become a habit. Watching your savings account grow can be as satisfying as any new toy.

Saving Account Options

The type of savings accounts the earner chooses will be connected to the earner’s job. If the earner is employed at a for-profit employer that offers a retirement savings plan, the earner will generally use a 401(k) plan.  Under a 401(k), the earner need only fill out a form which states the percentage of the paycheck that will be placed in the savings account. The employer will then deposit that amount with a company that will hold it for the earner. Some businesses may even offer to match all or a portion of the money that is contributed to the 401(k). If the earner’s employer matches, the earner should take advantage to get all the ‘free money’ that they can. Another bonus under a 401(k) is the money is not taxed until it is removed from the account.

If the earner is employed at a not-for-profit employer, the earner may use a 401(k), a 403(b), or a 457 plan. A 457 plan is a lot like the 401(k) plan that was discussed above. 403(b) plans, which are used frequently by not-for-profits, involve annuities. Annuities are very difficult to decipher so they result in very high fees. Accordingly, if an employer is not matching earner’s contribution to a 403(b) plan, it may be a good idea for the earner to use a different plan to avoid rising fees.

If the earner’s employer offers no plan or the earner is self-employed, there are a few options. The earner could establish an I.R.A. (Individual Retirement Account), which puts all of the earner’s investments into a single account. The institution who manages the account will charge maintenance fees, and fees to buy and sell investments. It is important that the earner shop for the institution who offers the lowest fees. An I.R.A. allows some earners a tax deduction for contributions to the fund, but only up to a certain amount.  A ‘Roth I.R.A.’ acts similar to a regular I.R.A. except it does not offer an upfront tax deduction. However, once the money goes into the account, it is not taxed again, which makes this plan perfect for younger earners who pay low-income taxes.

How Much To Save

Most people know they need to start saving for retirement but they are unsure of how much to save. 401(k)’s typically start out by setting aside just 3 percent of employees’ income. That’s way too little if the earner plans to primarily live off that account in retirement.  Although different in every situation, the absolute minimum an earner should save is 12% of their salary. However, for many people, the savings should be closer to 15%.

The most important consideration when determining how much to save for retirement is the earner’s current and future pay. Social Security will replace more of a lower-income earner’s income, while higher-income earners need more savings if they want to live the same lifestyle as when they were working. Middle-class earners ($35,000 to $75,000 per year) should start by saving 12% then reassess their retirement situation around the age of 50 to see if they need to increase percentages to avoid falling short. Upper-middle class earners (above $75,000 per year) should start out saving 15% and plan on increasing to 20% around the time their children leave the house.

The earner’s career is also an important consideration in determining the correct amount to save. If the earner’s job is physically demanding, it is a good idea to save as much as possible early. As health deteriorates it may be difficult to keep earning levels stable. Similarly, if the earner is employed in a cyclical industry (oil, technology, real estate, finance, etc.) the earner should save as much as possible when in a ‘boom’. This will prepare the earner for a potential ‘bust’ in the market where saving may become difficult. 

Another consideration is the earner’s age. When the earner is younger, they should focus on paying off high-interest debt while saving as much as they can. As the earner gets older, the focus should be on increasing savings and paying off any mortgages. Satisfaction of a mortgage makes retirement much less expensive.

The bottom line is to save as much as possible.  If possible, earner should save to the maximum deductible amount.  In 2017, for a 401(k), the maximum is $18,000, but $6,000 additional in ‘catchup’ is allowed if earner is over the age of 50. Dedicated saving for retirement can put an earner in a position of great flexibility as they near retirement. After all, everyone wants to be comfortable and enjoy post-career life.

If you are determining which retirement options are best for you, it is essential that you discuss your situation with a lawyer so you understand the implications and benefits of different retirement plans before one is chosen.

If you have any questions about the above material or wish to speak to an attorney, please contact HoganWillig at 716-636-7600. HoganWillig is located at 2410 North Forest Road in Amherst, New York 14068, with additional offices in Buffalo, Lancaster, Lockport, and Ellicottville.