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How to Calculate Retirement Contributions by Age


If you’ve ever tried to navigate your way through a maze, you undoubtedly know that choosing which way to turn to get through it can range from being challenging to outright frustrating.

Calculating how much to contribute toward your retirement can be equally challenging―if not more so, if you approach it based on your age bracket. Many questions come into play. Depending on which investment vehicles you choose to save for retirement, you may end up facing more perplexing questions than answers.

In order to take some of the confusion out of the mix, let’s take a look at some approaches for calculating your retirement contributions by age. 

Video #5 - Tips for calculating your retirement contributions

How much will you need for retirement?

This may seem like a question with an obvious answer, but it’s quite the opposite. There are several variables that you need to take into account before you arrive at an accurate figure of how much money you will need to sail through retirement.

A wrong calculation could lead to an unanticipated bumpy ride. If you want to retire at age 67 and maintain your pre-retirement lifestyle, one good rule of thumb suggests saving 10 times your annual salary.

You may find the following age-based timeline a useful guidepost for how much you should have saved by a given age:

  • By age 30—have the equivalent of your annual salary saved
  • By age 40—have three times your salary saved
  • By age 50—have six times your salary saved
  • By age 60—have eight times your salary saved
  • By age 67—have 10 times your salary saved

The suggested savings rate can be higher or lower based on the fact that everyone’s situation is different. However, the common thread is that you should aim to save for retirement early on in your career.

How long will savings last?

Financial advisors have long recommended that you bank at least $1 million to cover expenses during retirement, but that number is highly questionable depending on where you choose to retire and other factors.

If you choose to retire in Hawaii, you could quickly blow through $1 million in as little as 12 years, due to the high cost of living. Retiring in Florida, however, could stretch that same amount of savings to just over 22 years.

Another factor to consider besides where you will retire is how much it costs to receive medical care and the rate at which those costs are increasing. One analysis studied the annual percent growth in health care expenditures state-by-state from 1991 to 2014. The average price hike in the U.S. was about 5 percent, but was as high as 6.6 percent in Alaska and Vermont and as low as 4.2 percent in Washington, D.C.

Lifestyle choices like frequency of travel and the size of home you live in can take huge bites out of your savings over time due to increasing costs for transportation, lodging, property taxes, and periodic repairs, to name a few.

Expect the cost of healthcare and your lifestyle choices to make big impacts on how long your savings will last.

How will inflation affect my retirement?

In a nutshell, inflation is defined as the general increase in the price of goods and services and the fall in the purchasing power of your money over time. It can be a negative number, like -10.30 percent in 1932, or a very high number, like in 1917 when it approached nearly 18 percent.

The good news is that inflation rates have been fairly low and manageable for the past few decades. Still, inflation can impact your retirement if you are drawing from your savings at a rate higher than inflation and/or if your investments are not providing returns that beat inflation rates.

For example, if inflation is 2.5 percent and you have a money market account that is only paying out 1.5 percent annually, you will need to find a way to recoup the difference in lost purchasing power.

If these fluctuations make you skittish about your investments, it may be a good idea to seek the advice of a financial advisor to guide your investment strategies.

How much can I save with my 401(k)?

Your 401(k) is a fantastic way for working adults to save for retirement. Currently, the IRS allows employees to contribute up to $18,500 annually in elective deferrals which may increase in future years for cost-of-living adjustments.

The picture is even better for those age 50 and over, who can make what are called catch-up contributions of up to $6,000 if permitted by the plan. So an employee saving for retirement could contribute up $24,500 in 2018―the $18,500 regular limit for 2018 plus the $6,000 catch-up limit for 2018.

Another important feature of saving via your 401(k) account is that your employer may provide matching contributions, thereby helping you reach your savings goals even faster.

How does Roth 401(k) compare to Traditional 401(k)?

Some employers offer a Roth 401(k) for you to save toward retirement. Contribution allowances in 2018 for both Roth 401(k) and traditional 401(k) are the same. However, one of the big differences of a Roth 401(k) compared to traditional 401(k) is that Roth is funded with post-tax money, as opposed to pre-tax, as is the case with traditional 401(k).

Savers with a Roth 401(k) are hedging their bets on the notion that tax rates will be higher in the future. Current rules allow tax- and penalty-free withdrawals from the account, as long as you’ve had the account for five years and are at least 59 ½ when you take the money out.

A traditional 401(k) will be taxed as ordinary income once the time comes for you to withdraw the money.

It may seem daunting at times to manage how much money you should be contributing toward your retirement during your working career, but the key is to start saving as soon as possible and make use of retirement planning tools to take some of the guesswork out of planning for the future.

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