Ohio and Kentucky rank highly when it comes to affordable living options for retirees. But that doesn’t mean you can take shortcuts when it comes to saving for retirement. The average American spends about 20 years in retirement, so even if you can live comfortably on a bit less than your annual salary, you’ll still need substantial savings to ensure you can enjoy your golden years.
Many people get their retirement income from a combination of Social Security, employer retirement plans, and personal savings. According to the federal government, Social Security should replace about 40 percent of an average wage earner’s income in retirement.1 So, if you’re planning to live on 80 percent of your pre-retirement income, about half of that amount will need to come from your personal and retirement savings.
Here are four tips to help you set your retirement savings goals and stay on the path to reaching them.
Both employer-sponsored retirement accounts like 401(k) plans and traditional individual retirement accounts (IRAs) encourage you to save for retirement by allowing you to contribute income before you pay taxes on it. Some employers will also match your retirement contributions up to a certain amount. In those cases, it’s a good idea to contribute at least enough to get the full match, if possible.
If you don’t have access to an employer plan, you still have options. For instance, are you self-employed or do you run a small business? You may be able to save using a Solo 401(k), SIMPLE IRA, or a SEP IRA. Many of these accounts are available as Roth variations, which allow contributions of after-tax money. When you retire, you can withdraw Roth contributions (including any gains) tax-free.
Time is your best ally when saving for retirement. The more time you have, the more time you can take advantage of compound growth. For most people, contributing 10 to 15 percent of their pre-tax income is a good target to keep in mind. Some retirement plans will help you reach that target through automatic increases in your contributions each year. This tool can be useful if you need to start small and work your way up as you earn more.
Pay yourself first by setting up automatic deductions from your paycheck to go toward retirement savings. This way you can build your savings without having to think about it. Direct these contributions toward a workplace plan if you have one or to an IRA that you set up yourself. This approach can help with budgeting too; you’ll be less tempted to spend that money on something else if it goes toward savings before it even hits your checking account.
Withdrawing money from a 401(k) or IRA before you reach retirement age can result in hefty penalties. You’ll generally end up paying a 10 percent early withdrawal fee, on top of regular income tax on the entire amount of the money you pull out.
However, taxes and penalties are only part of the story. The longer your money stays invested, the greater the impact of compound growth. That’s the phenomenon by which your investment earnings can produce earnings of their own, and it’s more powerful the longer you leave your money invested.
To help keep your retirement savings secure, establish an emergency fund with savings to cover three to six months of living expenses. Use your emergency fund for financial curveballs, like a large medical bill or paying for car repairs, so you won’t need to tap into your retirement savings.
Saving for retirement can seem overwhelming, but starting early, using tax-advantaged savings options, and making saving a habit can help ensure you live out your golden years in comfort and style.
1 USA.Gov, “Retirement.” Accessed Sept. 2020. https://www.usa.gov/retirement#item-212761
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