Saving is hard. If you are like most Americans you struggle to put money aside, you’re probably wondering how to save for retirement. In fact, according to a recent Northwestern Mutual study, 1 in 3 Americans have less than $5,000 saved for retirement. Whether you want to learn the best way to boost your retirement savings or you’re beginning the savings process, we have created a guide to help you navigate each retirement savings account.
You know you should be putting money away, but what’s the best way to do it? Everyone has a different financial situation. Despite our differences, there are different ways you may want to consider to accelerate your retirement saving plan. Here’s a breakdown of how much you should save for retirement and where your savings should go.
How much money will you need for retirement?
Before we dive into the types of accounts you should consider for your retirement savings, we should discuss how much money you should save. This is a popular topic among pre- and post-retirees. While you may hear numbers tossed around, everyone has a unique retirement plan. Each plan will need a different amount of money.
Many experts recommend saving at least 20% of your income. This is not always an accurate number. To determine your retirement number, you will need to review many factors. These factors include your current income, your debt repayment plan, your financial goals, and your current savings amount. Partnering with a financial planner can help you evaluate the financial factors that play a role in calculating the right number for you. They will help you establish a retirement plan that will aid you in achieving this number.
According to a Charles Scwab survey, only 28% of Americans have a written financial plan. This low statistic highlights how many Americans fail to plan. This is why they find themselves in sticky financial situations. If they took the time to plan, they could avoid failure. If you want to secure your financial success in your golden years, it’s best to work with a financial planner. They can help you create a personalized plan for wealth management and financial security.
In addition to partnering with a financial planner, it’s wise to have an understanding of the types of retirement savings accounts you should consider. Your financial planner will help guide you in selecting the most suitable accounts for your situation. Here are some of the retirement savings accounts you may want to include in your retirement savings initiative.
Build an emergency fund
It’s important to have a little bit of money set aside for financial emergencies. You never know when you’re going to need money for a car repair or even worse, lose your job. Building an emergency fund will give you peace of mind. It will allow you to know that if something goes wrong you don’t have to worry about where to find the money.
Experts recommend you should have at least 3 to 6 months of your expenses tucked away in an emergency fund. This is not your income amount. It’s the amount you need on a monthly basis to support your lifestyle. If you add up your housing costs, food, transportation, and other living expenses, this is the number you’ll need to survive.
While it’s tempting to store this extra dough in a basic savings account, you may want to consider a high-yield savings account. Since you will only tap into these funds in an emergency, a high-yield account will allow you to make interest. Do some research and determine which savings account will work for you. You may also want to speak with your financial planner. They may be able to point you in the right direction.
Take advantage of your company’s 401(k) or 403(b)
Many companies offer retirement savings plans. If your company offers a 401(k) or 403(b), you may want to contribute to this account. Traditional 401(k) accounts allow employees to contribute on a pre-tax basis. This means that, by contributing to their 401(k), they are lowering the amount they pay on current income taxes. This year participants can contribute up to $19,000 annually.
Also, some company-sponsored plans offer match programs. With these programs, the company will match the contribution amount up to a certain percentage. For instance, if an employee contributed 5% of their salary toward their 401(k) the company may match up to 4%. This helps the employee significantly boost their retirement savings.
There is a downside to this account. Since you are prolonging taxation, you must pay income taxes on all distributions taken from the account. If you take an early distribution, (before you reach 59 ½ ) you may also be subject to a 10% penalty. Of course, there are exceptions depending on your financial situation.
Since the IRS has not received your tax money during your contribution years, they require all account holders to take distributions once they reach 70 ½. These distributions are your required minimum distributions or RMDs. To learn more about how to fare RMDs, check out our guide to managing RMD strategies.
Consider contributing to a Health Savings Account
According to Fidelity Retiree Health Care Cost Estimate, a 65-year old couple who retired in 2019 would need about $285,000 to cover their remaining health care expenses. Health care is one of the most expensive costs in retirement. To minimize the shock of this expense in retirement, you may want to consider opening a Health Saving Account (HSA).
If you have access to one of these accounts, they are available with high-deductible health plans. They also offer triple tax advantages. These advantages include deductible contributions, tax-deferred growths, and tax-free distributions for all qualifying medical expenses. Currently, you can contribute up to $2,650 each year. While this isn’t a large amount, it can still boost the savings you have set aside for your retirement health care costs.
You can use your HSA funds to pay for certain medical premiums. These include Medicare premiums and long-term care insurance premiums. For more information on an HSA account visit irs.gov.
Roth and traditional IRA
If you work for a company that doesn’t have a retirement plan, you may want to consider opening an IRA account. Your financial advisor can help you open an IRA account. You can contribute up to $6,000 in 2019 ($7,000 if you’re 50 or older). You contribute to IRA accounts with pre-tax dollars, similar to the taxation of 401(k) accounts.
If you’re self-employed you should consider opening a Simple IRA account, SEP IRA account, or solo 401(k) account. Each account has different contribution limits, regulations, and requirements. Speak with your financial advisor before opening any of these accounts. Click here for our in-depth guide on saving for retirement as an entrepreneur.
Roth IRA distributions are tax-free. As of 2019, you can contribute up to $6,000 in your IRA each year. If you’re 50 or older you can contribute an extra $1,000, making your total contribution limit $7,000. There are additional contribution limits for taxpayers who earn too much.
Contributing to a Roth IRA can help you minimize your tax burden in retirement. While you’re paying taxes now, you can let your retirement savings grow. This will prevent additional taxation when it comes time to take distributions in retirement.
A contingency to note, with both IRAs you must be 59 ½ or older in order to take distributions without the 10% penalty.
Taxable brokerage accounts
If by chance you max out your tax-advantaged accounts, you have the option to open a brokerage account. Brokerage accounts don’t have the same tax advantages as retirement savings accounts. However, there is another option to help your money grow.
With brokerage accounts, the taxes you owe will vary. When you sell an asset, your taxes will depend on the profit you make from the sale and how long you’ve held the asset. This is generally known as your capital gains tax.
If you sell an asset within the first year of ownership, it will be short-term capital gains. This establishes the tax for this sale at a 37% threshold of the ordinary tax rate. After the first year, any sale of an asset is long-term capital gains, with a threshold set at 20% of the ordinary tax rate. Tax rates vary depending on your taxable income.
The purpose of this account is to hold your assets until you need the proceeds to support your lifestyle in retirement. Like retirement savings accounts, it’s best to let your money grow. The longer the money has to grow in this account, the more benefit you’ll receive.
Retirement savers may also want to consider other investments such as real estate, annuities, or shares of a specific stock. These investments do not offer the same tax advantages as retirement savings accounts. They may only benefit specific financial situations.
If you’re maxing out your retirement savings contributions, you may want to explore other investment options. Speaking with your financial planner will help you decide which ones are right for your situation. They can help you decide if adding other strategies will make sense for your long-term goals.
The bottom line
What’s the best way to save for retirement? Partnering with a financial planner who can help you create a retirement plan specific to your needs. Since there are many different retirement savings accounts it’s wise to consult a financial planner. A financial planner will develop a tailored financial plan to maximize your savings and help you achieve your retirement goals.
If you’re looking for a financial planning partner who can help you realize your retirement goals, we have financial planning offices in Redmond, Seattle, Mill Creek, the Tri-cities region, and Denver. Our firm focuses on helping retirees and those preparing for retirement achieve financial freedom by creating a plan that shows them how they can have the income they need and want until they turn 100.
If you’re ready to take the first step toward achieving your retirement goals, our team is ready to assist you. We’ve helped hundreds of couples and individuals transition into retirement with confidence, and we’d like to do the same for you.