Are you one of the 37% of workers who worry about outliving their retirement savings? | Smart Change: Personal Finances
For many people, retirement is about finally putting your career aside and doing the things that give you the most joy or that you’ve always wanted to do. This should be one of the most carefree times of your life, but unfortunately it’s hard for that to happen if you’re constantly worrying about your finances.
According to the latest survey from the Transamerica Center for Retirement Studies, 37% of workers are worried about outliving their retirement savings.
If you’re in that 37%, here’s what you can do to be better prepared.
Have a good idea of how much you will need
It’s easier to plan your retirement finances if you have a good idea of how much you’ll need. There is no single amount, as the expenses of people in retirement will vary. There are, however, some general rules you can follow to at least give yourself a baseline.
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First, start with the “80% rule,” which says you should try to bring 80% of your annual pre-retirement income into retirement to maintain your current lifestyle. In other words, if you currently earn $100,000 per year, you should aim for $80,000 per year in retirement.
Once you’ve figured out the annual amount you’ll need, use the “4% rule,” which states that retirees can plan to withdraw 4% of their savings per year for 30 years without worrying about outliving those savings. . Multiplying your annual amount needed by 25 will give you your “ideal” amount of retirement savings. If your annual goal is $80,000, your savings goal would be $2 million.
It is also important to consider inflation when implementing the 4% rule. Ideally, you withdraw 4% in the first year, then adjust the total in subsequent years for the current year’s inflation. So if you withdrew $80,000 the first year and inflation increased by 4%, you would withdraw $83,200 the following year.
Adjust your 401(k) contributions
Not only do 401(k) plans help you save and invest for your retirement, they also reduce your taxable income. At a minimum, the amount you should contribute to your 401(k) is the percentage your employer will match — not one percent less.
The maximum amount you can contribute to a 401(k) plan in 2022 is $20,500 ($27,000 if you’re 50 or older). While maximizing your 401(k) may not be feasible for everyone, a good rule of thumb should be to aim to increase your contributions by 1% each year. You probably won’t miss 1% of your paycheck, but thanks to time and compound interest, 1% of your 401(k) can make a big difference.
If time is not on your side and you are approaching retirement, be aggressive in trying to take advantage of the allowable catch-up contribution. This will save you extra money and reduce your tax bill – a win-win.
Use multiple retirement accounts
You need to prepare financially for retirement from several angles. Retirement accounts like IRAs can be great supplements to other forms of retirement income like 401(k) payments and Social Security. A traditional IRA allows you to deduct some or all of your contributions, depending on your income, whether you are covered by a workplace retirement plan, and your filing status. Similar to a 401(k), traditional IRAs required minimum distributions (RMDs) starting at age 72. A Roth IRA has no RMDs and allows you to contribute after-tax money and then make tax-free withdrawals in retirement.
The maximum amount you can contribute to an IRA — both Roth and traditional combined — is $6,000 per year ($7,000 if you’re 50 or older). The account you choose largely depends on your current tax bracket versus your projected tax bracket. If you’re younger, you’ll probably want to take advantage of a Roth IRA because you can pay taxes up front while you’re in a lower tax bracket and let the money grow and compound tax-free. tax. If you’re at the peak of your career and this is likely your highest tax bracket, consider a traditional IRA because you may be able to deduct your contributions from your taxable income.
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