3 Keys to Retirement SavingsSubmitted by Retirement Choices of California on April 30th, 2019
Help grow your savings even more by putting the 3 A's (account, amount, and asset mix) to work for you.
We all hope Social Security will be able to help pay for our retirement. But for most people, it won't be enough to maintain their standard of living. In fact, we estimate that the average retiree will need to provide somewhere around 45%-50% of their income from savings. How can you prepare? Here are three tips that can go a long way to helping you get ready; call them the three A's of retirement savings. Amount: saving early and often and enough. Asset mix: making smart decisions about what to do with your savings. And account: taking full advantage of tax breaks that may help make your savings more effective.
- Amount. How much - and how long - you save is key. We suggest socking away at least 15% of your pretax income each year to have a good chance of meeting your retirement income needs.1 Our 15% includes your employer's contribution, so if you put 5% of your income in a 401(k) or other workplace savings account and your employer matches it, that would be 10%. Even if you can't contribute that much immediately, make sure to defer enough to get any 401(k) match that is available, that is effectively "free money." Then step up your savings as soon as possible.
- Asset mix. Just putting your money in an account probably won't be enough to meet your goals. You will need to decide how to invest it. The key to investing is balancing the potential for growth with your timeline and tolerance for risk. Here you have a couple options: you can do the research and selection on your own, or work with a professional and select either a single-fund solution or a managed account. There are typically two types of single-fund solutions: target date funds (based on an anticipated retirement date) and target allocation funds (based on a risk tolerance and time horizon). If you work with a professional by investing in a managed account, the manager can take your situation into consideration.
If you handle the decisions yourself, there are a few things to keep in mind: For example, history shows that stocks have delivered more growth than bonds and cash over the long term. Even though past performance is not a guarantee of future results, you will want to consider keeping some of your investments in stocks to outpace inflation no matter what age you are. But, if you are decades away from your retirement, it may make sense to have a larger allocation to stocks than someone nearing or in retirement, provided you're comfortable with the risk. One way to help manage the volatility that comes with stocks is to make sure your portfolio is diversified within and among asset classes. Diversification doesn't guarantee gains, but it can help to manage risk - so you will still want some bonds for ballast. As time passes, you, or your manager, will want to reevaluate your investment lineup in response to changes in your life and the markets.
- Account. Where you save also matters. Be sure to make the most of 401(k) and other workplace savings accounts where contributions can grow tax deferred. And if you are eligible, take advantage of health savings accounts (HSAs), which can offer the most effective means of saving for retirement health care expenses.2
There are other tax-advantage vehicles to consider as well:
- Traditional individual retirement accounts (IRAs): The advantage of saving in a traditional IRA instead of a taxable bank or brokerage account is that you make contributions with money you may be able to deduct on your tax return. Any investment gains you make will grow tax-deferred until you withdraw them in retirement. Even if you have a workplace savings plan, you or your spouse may be able to benefit from an IRA.
- Tax-deferred annuities: If you have hit the contribution limits on your workplace savings plan and IRA and still want to save more, you might want to consider deferred variable annuities. There are no contribution limits, you can still invest the money you contribute, and the annuity can turn into a periodic payment when you retire.
- Roth 401(k) or IRA: Traditional IRAs and deferred annuities above may allow you to put off taxes into the future while your money has the potential for tax-deferred growth. Roth accounts, which are not available to everyone, are different. A Roth lets you accelerate taxes.3 This means you pay taxes on your contributions now, but when you withdraw the money, your contributions and any gains are Federal income tax free, provided you meet certain requirements. That can be an advantage if your tax rate is the same or higher in retirement.
The bottom line
Making good financial plans is a long process, but getting the three A's right can help to position you on the path to meeting your goals.