Am I saving enough for retirement? Are you?

Am I saving enough for retirement? What about you? It’s not necessarily an easy question to answer off the top of your head. The answer is, most people aren’t. Here’s what you can do about it.

The average person doesn’t have enough saved for retirement. Increasing 401(K) or other IRA contributions is the best way to fix that, and the maximum contribution may be higher than you think.

How much do most people have saved for retirement?

Do I have enough saved for retirement
Most people don’t have enough saved for retirement. A reasonable target is at least $800,000. To reach that kind of money, you have to contribute regularly to a retirement account.

In 2019, the average 401(K) balance at Fidelity Investments, one of the larger financial firms, was $106,000. That’s nowhere near enough for retirement, but that includes everyone, whether they retired last year or just opened their account last year. The breakdown by age is more important.

Twentysomethings have an average balance of $11,800, and on average are contributing 7% of their income. That’s not a terrible start. Starting that early, they can get by with a contribution rate that low and potentially have enough if they continue it.

Thirtysomethings have an average balance of $42,400 and on average contribute 7.8% of their income. So the kids who are saving are doing alright. More on that in a minute.

Fortysomethings have an average balance of $102,700 and on average contribute 8.5% of their income. That looks like a big improvement, but it’s probably too low at an average salary of $50,000 a year if that’s their primary source of retirement income.

Fiftysomethings have an average balance of $174,100 and an average contribution rate of 10.1% of their income. This is also too low if it’s their only source of retirement income. See a pattern yet?

Sixtysomethings have an average balance of $195,500 and an average contribution rate of 11.2%. Why aren’t they retired yet? Because they can’t afford to yet.

How much should you have saved for retirement?

You can calculate it a couple of different ways, based on your current salary.

By the time you’re 30, Fidelity says you should have half your annual salary in your 401(K) balance. At 40, you should have twice your annual salary. By 50, it should be four times your annual salary. And at 60, it should be six times, and by 67, it should be eight times.

The traditional advice is to save the equivalent of 80% of your salary for 20 years. That may be easier to calculate. So the equation is your salary x .8 x 20. If you make $50,000 and you’re living on it, you need $800,000 to retire. This is a bit higher than Fidelity’s calculations. I’d recommend aiming higher.

The general advice that I see is to contribute at least enough to your 401(K) to get your employer match. Better yet, contribute 15% of your salary, which can include your employer match.

Why are 20/30somethings better at savings?

The numbers above suggest people in their 20s and 30s are better at savings. That goes against what you hear on TV, that Millennials and Zoomers are financially irresponsible. The answer is fairly simple. Only 34% of Millennials have a 401(K) balance. The ones who are participating in their 401(K) plans are doing really well. But 66% of them aren’t even in the game.

Now, I don’t know what the percentages were when I was that age but it sounds similar. And when you look at the puny balances older people have, it suggests that people started late. The median balances are telling: the median balance for a 40something is only $36,000, and the median balance of someone in their 50s or 60s is only about $60,000.

The median is the number that half the total balances are at or below. That means at least half the people over the age of 40 haven’t been doing this very long.

And the Fall 1994 issue of Social Security Bulletin proves it. On page 19, it tells what percentage of workers had 401(K) plans in April 1993. Only about 1/3 of workers were even eligible for 401(K) plans that year. About half of workers were eligible for pensions.

So the rules changed. And if no one told the Millennials, is it really their fault?

What to do if you’re not saving enough for retirement

Looking down on Millennials is pointless, because they have more time to make it up if they started late. And the answer if you don’t have enough, regardless of your age, is to save more.

If you’re not saving at least 15% of your income, try to do that. But the legal limit you can contribute to your 401(K) in 2020 is $19,500. That amount increases slightly every year. You can contribute that much, and your employer contribution can go above and beyond that. Depending on what your employer’s policy on matching is, that can be several thousand dollars above that.

If you’re 50 or older, you’re eligible to make a $6,500 catch-up contribution. This number doesn’t necessarily rise every year, but it means that as you near retirement, you’re able to contribute a higher percentage of your salary.

These numbers don’t sound like a lot, but keep in mind stocks double in value every seven years, on average. So if you contribute $19,500 at age 35 and invest it all in index funds, you can reasonably expect those funds to be worth $312,000 by age 63. A 50-year-old who contributes $26,000 this year will have $104,000 at age 64.

So if you make large contributions every year for several years, you can build up a sizeable balance even if you start late.

Tax considerations

More and more employers are offering Roth 401(K) plans. These work differently from a tax standpoint. With a traditional 401(K), you pay taxes as you withdraw and use your funds. With a Roth, you owe no tax, but you get no tax deduction when you make the contribution.

This means a Roth plan is more expensive to contribute to, but since you won’t owe income tax on whatever you withdraw, you’ll be able to get by on a smaller balance. If your employer offers a Roth 401(K) plan, it’s worth considering.

One last retirement savings weapon: The Roth IRA

If the name Roth sounds familiar, it should. Before there were Roth 401(K) plans, there were Roth IRAs. Anyone can contribute to an Individual Retirement Plan. The legal limit you can contribute to a Roth IRA in 2020 is $6,000 if you’re under 50, or $7,000 if you’re 50 or older. This operates independently of your 401(K) plan. So if you’re under the age of 50 but feel the legal limit of $19,500 is too low for you to catch up, contribute $6,000 into a Roth IRA as well.

One more thing: Contribute religiously

The other thing to do is contribute religiously, no matter what the market is doing. It’s tempting to reduce your contributions when the market drops, like it did in February 2020 due to the COVID-19 scare. Don’t. Even when the market drops a few thousand points, it can recover its value in as little as four months. But that also means that if you’re making retirement account contributions every month for those four months, you’re buying stock at a discount.

When the market crashed in 2008, it took four years for it to fully regain its value. But I was contributing religiously during that time. Stock that you buy when the market is slumping doubles in value faster than the typical seven years. You can make money when stock goes down.

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