Tag: 401K

Are you hoping to travel the world after you retire? Traveling is the most common activity people dream of doing after they stop working (65%, according to a November 2021 Transamerica Center for Retirement Studies survey)—and it’s totally possible for most retirees. With a bit of planning, creativity, and discipline, you’ll be ready to jump on your transportation of choice and experience unforgettable moments. The following tips will help you turn that daydream into your retirement reality.

KEY TAKEAWAYS

• Travel is the most popular dream of retirees, with 65% expressing a wish to see the world.
• Before you just set off, be honest with yourself about your love of being on the road, your obligations to others, and the state of your health.
• Traveling can be expensive, so look carefully at your retirement savings and make sure that the cost of traveling is incorporated into your retirement plan.
• Medicare generally doesn’t cover your healthcare costs outside of the United States and its territories, so additional healthcare insurance may be necessary.

Make a Plan Before Retirement

Retirement planning is an ongoing, multistep process. If you already know travel is on your retirement bucket list, you should factor the cost into your plans. To ensure a comfortable, secure, and fun retirement, you’ll want a personalized plan based on the following:

• Retirement date
• Financial and investment goals
• Risk tolerance
• Retirement lifestyle

To help solidify your plans for traveling during retirement, consider doing these things.

• Discuss your travel ideas: Where do you want to go? What type of traveler are you? Do you plan to take short trips, or will you go the nomad route of retiring with no permanent home? Be specific and realistic, as costs will vary greatly. 
• Consider your finances: Based on your anticipated retirement income, what type of travel will you be able to afford? The U.S. Department of Labor has a set of interactive worksheets, such as a balance sheet, to help you organize all your accounts and calculate your net worth.
• Plan for Social Security benefits: Social Security is a major income source for many retirees, and the age at which you begin claiming benefits affects how much you will receive. Plan your ideal age to start receiving benefits using this claiming age calculator. You can also get an estimate of your future benefit by checking your Social Security account.
• Factor in health concerns: Do you or your partner have any health issues that may impact where and how you can travel? 
• Make a list of wants and needs: What kind of amenities, culture, access to healthcare and public transportation, etc. are you looking for? What is nice to have and what is non-negotiable? 

Planning for the above will help you create a realistic retirement plan that includes travel. See if you have access to retirement planning and savings tracking tools through your 401(k) or individual retirement account (IRA). You can also talk with a financial advisor. 

Create a Retirement Travel Budget

If you’re like most retirees, a retirement travel budget will be key to making sure you can afford everything you want to see and do. According to Fidelity, most retirees will spend between 55% and 80% of their annual working income each year in retirement. If you plan to travel frequently in retirement, you’ll need to raise that percentage. For reference, the average retiree spends $11,077 per year on travel.

To begin building a retirement travel budget that matches your situation, estimate your future travel expenses. Research cost of living, accommodations, groceries, eating out, and other activities in the places you want to visit to get a rough idea of your future spending needs. The U.S. Department of Labor’s planning worksheets include a “Goals & Priorities” section to help you prioritize what you save based on short- and long-term goals. Then use the “Cash Flow Spending Plan” worksheet to build a guide for how you expect to spend your money. Track actual spending to compare it with what you planned.

Use the 50/30/20 Spending Rule to Budget for Travel in Retirement

Kimberly L. Curtis, a certified financial planner (CFP) at Wealth Legacy Institute, recommends the 50/30/20 rule to budget for traveling in retirement. This budgeting framework breaks after-tax income into three main categories with corresponding percentages.

• Needs (50%)
• Wants (30%)
• Savings (20%)

Based on this rule, cash flow for spending on travel in retirement comes out of the 30% allotted for wants.

“Retirees spend, on average, 5% to 10% of their annual budget on travel,” Curtis said. “Instead of a monthly dollar amount, many retirees will ‘chunk’ their retirement travel budget into annual amounts. For example, a big European trip might mean putting aside $10,000 for that year. Otherwise, retirees may plan on around $5,000 a year for the next 10 to 15 years of retirement.” 

Consider Insurance

Retired travelers’ needs may differ from those of younger travelers, particularly the potential need for medical care while on the road. Individuals become eligible for Medicare at age 65. If you plan to travel during retirement, make sure you don’t miss your initial enrollment period. 

Medicare Parts A and B cover hospital care and doctor visits in all 50 U.S. states, the District of Columbia, and all U.S. territories (Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands) as long as the provider accepts Medicare.8 Certain Medicare Advantage (MA) plans also provide state-to-state coverage, including a national pharmacy network. 

Keep in mind that many MA plans limit the amount of time you can spend outside your service area (i.e. your state) and still be covered (for example, six months).8 Additionally, once you travel outside the U.S. Medicare generally doesn’t cover healthcare.9 For this reason additional insurance is recommended for traveling during retirement. 

If you want to travel the world after you retire, consider additional travel insurance to protect against potential medical emergencies. Travel insurance may also cover inconveniences such as trip cancellations or interruptions and lost or stolen baggage.

What to Consider When Selecting Travel Insurance

Cost shouldn’t be the only factor when choosing travel insurance. Travel expert Chris Appleford of Travelling Apples notes some of the most important coverage options to look out for:

• Medical coverage (including medical expenses, evacuation, and repatriation in case you need to be brought back to the U.S. for care)
• Trip cancellation or interruption
• Travel delays
•  Luggage and personal belongings
• Terms and conditions surrounding pre-existing conditions
• Coverage duration

How to Cut Down on Travel Costs

Balancing cash flow can get tricky when you’re no longer receiving a paycheck or business income. Cutting down on travel expenses is one of the biggest concerns for retirees as they explore the world. 

Hotel, airline, and attraction prices are highest in summer and on weekends, so retirees with flexible schedules can save money by traveling in the offseason. The same flexibility can pay off when it comes to travel dates and destinations. Kasper de Wijs, travel expert and owner of HotelRoutePlanner.com, says travel websites and newsletters often post destination-based deals and last-minute offers. 

De Wijs also recommends exploring senior discounts, early bird discounts, and loyalty programs for travel-related services. Amber Dixon of Elderly Guides agrees that most establishments offer discounts to seniors. She adds that house swapping with other travelers or making house sitting arrangements can also save retirees on accommodation costs. Sites such as Trusted Housesitters and Mind My House.com connect home owners and house/pet sitters with each other.

Explore the Open Road to Save Money on Travel in Retirement

For slightly more adventurous, lower-cost travel, many retirees swear by recreational vehicle (RV) camping. The purchase of an RV is an up-front cost, for sure, but as many RV travelers live in their vehicle for months at a time, other costs are absorbed or reduced. For example, you’re eating most meals in, and the site fee is small compared with hotels or Airbnbs.  

Andrew Kuttow, RV enthusiast and travel blogger at RVCampGear.com, notes that memberships with organizations such as Good Sam, AAA, and AARP often include camping and travel discounts.

“You might also consider an America the Beautiful Senior Pass,” Kuttow said. For $80, a lifetime senior pass allows access to more than 2,000 recreation sites managed by the National Parks Service and other federal agencies. An annual Senior Pass is $20. You must be 62 years old to be eligible.

What Percentage of Older People Travel?

According to the AARP Travel Trends survey, 62% of people age 50 and older plan to take at least one leisure trip in 2023, with the majority taking between three and four trips. However, those who are 70 and older plan to spend 40% less on travel in 2023 than they did in 2022. They are also the group most cautious about COVID-19.

How Much Do I Need in Retirement to Travel?

It depends on your retirement plan, overhead costs, and budget. Kimberly L. Curtis, a CFP at Wealth Legacy Institute, says that retirees pay between 5% and 10% of their annual budget on travel and puts the average yearly amount at about $5,000 for the first 10 to 15 years of retirement. AARP’s 2023 Travel Trends survey found that people 50 and over planned to spend an average of $6,688 on travel in 2023.

What Is the Cheapest Way to Travel in Retirement?

There is no one answer to this question, but there a number of ways to curtail the costs of travel, including traveling in the off season, having flexibility re dates and destinations, and taking advantage of senior discounts, early bird discounts, and loyalty programs. There are also house swapping and house sitting arrangements. The adventurous can buy an RV and travel the open road, saving on restaurant costs (by eating in) and accommodation costs (by sleeping in).

The Bottom Line

Traveling is a popular pastime for many people, and retirees are no exception, especially with all the free time they have on their hands. However, if you want to travel in retirement, and particularly if you want to travel internationally, it takes prudent planning starting early in your professional career. You need to decide how and where you want to travel, then build those costs into the total amount you are saving for retirement. Don’t forget to factor in healthcare concerns and when you should start taking Social Security. There are also plenty of cost-cutting measures you can take to make your journeys more affordable.

When you’re in your 20s, retirement seems so far off that it hardly feels real at all. In fact, it’s one of the most common excuses people make to justify not saving for retirement. If that describes you, think of these savings, instead, as wealth accumulation, suggests Marguerita Cheng, CFP®, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

Anyone nearing retirement age will tell you the years slip by, and building a sizable nest egg becomes more difficult if you don’t start early. You’ll also probably acquire other expenses you may not have yet, such as a mortgage and a family.

You may not earn a lot of money as you begin your career, but there’s one thing you have more of than richer, older folks: time. With time on your side, saving for retirement becomes a much more pleasant—and exciting—prospect. You’re probably still paying off your student loans, but even a small amount saved for retirement can make a huge difference in your future.

KEY TAKEAWAYS

• It’s easier to save for retirement when you’re young and may have fewer responsibilities.
• You can map out your retirement plan, but if you don’t have the know-how, an investment advisor can help prioritize your goals.
• Compound interest, which is the interest earned on your initial savings and the reinvested earnings, is a great reason to start saving early.
• You can invest post-tax dollars in a Roth IRA, while pretax dollars can build a traditional IRA.

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Know Your Goals

The sooner you start saving for retirement, the better it will be down the road. But you may not be able to do it yourself. It may be necessary to hire a financial advisor to help you out—especially if you don’t have the know-how to navigate the process of retirement planning.

Make sure you set realistic expectations and goals, and make sure to have all the necessary information when you meet with an advisor or start mapping out a plan on your own. A few things you may need to consider during your analysis:

• Your current age
• The age when you plan to retire
• All income sources including your current and projected income
• Your current and projected expenses
• How much you can afford to set aside for your retirement
• How and where you plan to live after you retire
• Any savings accounts you have or plan to have
• Your health history and that of your family to determine health coverage later in life

Important: While you may not be able to predict certain life events like divorce, death, or children, it’s important to keep these in mind when you plan for retirement.

Compound Interest Is Your Friend

Compound interest is the best reason it pays to start early with retirement planning. If you’re unfamiliar with the term, compound interest is the process by which a sum of money grows exponentially due to interest more or less building upon itself over time.

Let’s start with a simple example to get down the basics: Say you invest $1,000 in a safe long-term bond that earns 3% interest per year. At the end of the first year, your investment will grow by $30—3% of $1,000. You now have $1,030; however, the next year you’ll gain 3% of $1,030, which means your investment will grow by $30.90—a little more, but not much.

Fast forward to the 39th year. Using this handy calculator from the U.S. Securities and Exchange Commission’s website, you can see that your money has grown to around $3,167. Go ahead to the 40th year, and your investment becomes $3,262.04. That’s a one-year difference of $95.

Notice that your money is now growing more than three times as quickly as it did in year one. This is how “the miracle of compounding earnings on earnings works from the first dollar saved to grow future dollars,” says Charlotte A. Dougherty, CFP®, founder of Dougherty & Associates in Cincinnati, Ohio.

The savings will be even more dramatic if you invest the money in a stock market mutual fund or other growth-oriented investments.

Saving a Little Early vs. Saving a Lot Later

You may think you have plenty of time to start saving for retirement. After all, you are in your 20s and have your whole life ahead of you, right? That may be true, but why put off saving for tomorrow when you can start today?

If you have access to an employer-based retirement plan, take advantage of it. Most employers will match some of your contributions, so you’ll benefit from having an extra boost to your savings. And with pretax deductions, you won’t even notice your money is being put away.

You can also put money aside outside of your employer. Let’s consider another scenario to drive this idea home. Let’s say you start investing in the market at $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.

Who Will Have More Money Saved Up in the End?

Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.

Remember, the longer you wait to plan and save for retirement, the more you’ll need to invest each month. While it may be easier to enjoy your 20s with your full income at your disposal, it will be harder to put money away each month as you get older. And if you wait too long, you may even need to postpone your retirement.

What to Consider When Investing

The types of assets in which your savings are invested will significantly impact your return and, consequently, the amount available to finance your retirement. As a result, a primary object of investment portfolio managers is to create a portfolio that is designed to provide an opportunity to experience the highest return possible.

Amounts that you have saved for short-term goals are usually kept in cash or cash equivalents because the primary objective is usually to preserve principal and maintain a high level of liquidity. Amounts that you are saving to meet long-term goals, including retirement, are usually invested in assets that provide an opportunity for growth.

If you manage your investments instead of using the services of a robo-advisor or professional, it is important to understand that there are other factors to consider. The following are just a few.

Market Risk

The investments that provide the opportunity for the highest rate of return are usually the ones with the highest level of risk, such as stocks. The ones that provide the lowest rate of return are usually the ones with the least amount of market risk.

Risk Tolerance

Your ability to handle market losses should be factored in when designing your investment portfolio. If the amount of market risk associated with your portfolio causes you undue stress, it may be practical to redesign your portfolio to one with less risk, even if it is determined that the amount of risk is suitable for your investment profile. In some cases, it may be practical to ignore a low level of risk tolerance if it is determined that it negatively impacts the ability to provide your investments with sufficient growth.

Generally, the level of discomfort one experiences with risk is determined by one’s level of experience and knowledge about investments. As such, it is in your best interest to, at a minimum, learn about the different investment options, their market risks, and historical performance. Having a reasonable understanding of how investments work will allow you to set reasonable expectations for your return on investments, and help to reduce the stress that can be caused if expected returns on investments are not achieved.

Retirement Horizon

Your targeted retirement age is usually taken into consideration. This is usually used to determine how much time you have to regain any market losses. Because you are in your twenties, it is presumed that investing a large percentage of your savings in stocks and similar assets is suitable, as your investments will likely have sufficient time to recover from any market losses.

Individual Retirement Account (IRA)

How you invest in your retirement will determine how much income you’ll have in retirement but also how you are taxed.

If you invest in a traditional individual retirement account (IRA), you can contribute or deposit up to $6,500 in 2023 ($7,000 in 2024). If you are 50 or older, you can contribute an additional $1,000. As a benefit, you also get a tax deduction, meaning you can subtract your annual IRA contribution from your taxable income when you file your taxes. As a result, you pay less in taxes. Also, the money within an IRA grows tax-free until you withdraw the funds in retirement.

Whenever you withdraw this money, you’ll have to pay applicable federal and state taxes on it. It’s supposed to be used as an annual retirement income supplement. If you withdrew the whole lot at once, you’d owe a bundle in taxes.

One other disadvantage of a traditional IRA is something called the required minimum distribution (RMD). If this still exists when you’re 72, you will be required to withdraw a specified sum every year and pay income taxes on it. Previously, the RMD age was 70½, but following the December 2019 passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act, the RMD age is now 72.

Roth IRA

Alternatively, you could invest in a Roth IRA. You open a Roth with post-tax income, so you don’t get the tax deduction on your contributions; however, when you’re a retiree and withdraw the money, you owe no taxes on it—and that includes all the money your contributions earned over all those years. Also, you can borrow the contributions—not the earnings—if you need to before you retire.

However, there are income limits on who can have a Roth, and those limits also depend on your tax-filing status (married or single). If you file taxes as a single individual, you can’t make contributions to a Roth if your income exceeds $153,000 in 2023 and $161,000 in 2024.

If your income is below those levels, your contribution might get phased out or get reduced. For the 2023 tax year, the income phase-out range for singles is $138,000 to $153,000. For 2024, the income phase-out range is $146,000 to $161,000.

For married couples who file a joint tax return, the Roth income phase-out range for 2023 is $218,000 to $228,000, and for 2024, it’s $230,000 to $240,000. This means that you can’t contribute to a Roth if your income as a couple exceeds $228,000 in 2023 and $240,000 in 2024. If you’re in your 20s, you’re probably safely below the income limits.

401(k) Retirement Plan

If your employer offers a 401(k) or a Roth 401(k), be sure to take advantage of it before you open an IRA, especially if the company matches your contributions. Companies often match a certain percentage of your salary, such as 3%, as long as you contribute to the plan as well. A 401(k) deducts money from your paycheck on a pre-tax basis and deposits those funds into a retirement account, which is then invested in a diversified portfolio of stocks and bonds.6

You can contribute to both an IRA and a 401(k) in the same year; however, there are contribution limits for 401(k)s. For 2023, you can contribute up to $22,500 per year into a 401(k) or a Roth 401(k). That number rises to $23,000 for 2024.

And put your savings on auto-pilot, says financial planner Carlos Dias Jr., founder and managing partner of Dias Wealth LLC in Lake Mary, Florida. “Money deposited straight into your retirement account can’t be spent elsewhere and won’t be missed. It also helps you maintain discipline with your savings.”

Invest in a Savings Account

A savings account from your local bank may not get you a great rate, but you can deposit and withdraw as much as you want—when you want. Every bank has its own rules, though, which means some may require a minimum balance or restrict the number of withdrawals before they charge. But unlike registered retirement accounts, there are no tax deduction benefits with a savings account. In other words, any interest earned on the savings is taxed in the tax year that it was earned.

The other benefit of having a savings account is convenience. You can use a savings account for whatever you need, whether for short-term expenses or longer-term needs. You may be saving to purchase appliances for your home, a trip, or a down payment on a car or home—which is when a savings account will come in handy.

Should I Start Saving for My Retirement in My 20s?

Yes, you should start saving for your retirement in your 20s. Though retirement may seem far off, saving for it as early as possible will ensure you have enough money to get you through your retirement years. In addition, investing benefits from compounding returns, which will increase your money more over a longer period of time.

How Much Should I Save for My Retirement in My 20s?

Knowing how much to save for retirement in your 20s is a very personal question for every individual and will depend on their job, their expenses, and any other obligations they may have. In general, it is a good idea to save 10% to 15% of your income, but even saving less is better than not saving at all.

In your 20s, you’re starting out in your career and might be paying off student loans or learning how to manage your finances. Creating a budget is a good way to start saving. It provides a plan you can stick to and ensures you’re putting money aside. If your company has a 401(k) plan, you can start saving there, or, you can also start putting money away in an IRA.

What Are the Saving Limits for Retirement Plans?

For a 401(k) retirement plan, the annual contribution limit is $22,500 in 2023 and $23,000 in 2024. If you are 50 or older, you can save an additional $7,500 and $8,000, respectively. For an IRA, the contribution limit is $6,500 in 2023 and $7,000 in 2024. If you are 50 or older, you can save an additional $1,000 in both years.

The Bottom Line

The sooner you begin saving for retirement, the better. When you start early, you can afford to put away less money per month since compound interest is on your side. For people in their twenties, the most important aspect of saving is to just get started.

More women are working and taking charge of their own retirement planning than ever before. What does retirement mean to you? Do you dream of traveling? Pursuing a hobby? Volunteering your time, or starting a new career or business? Simply enjoying more time with your grandchildren? Whatever your goal, you’ll need a retirement income plan that’s designed to support the retirement lifestyle you envision and help reduce the risk that you’ll outlive your savings.

When will you retire?

Establishing a target age is important, because when you retire will significantly affect how much you need to save. For example, if you retire early, you’ll shorten the time you have to accumulate funds, and you’ll increase the number of years that you’ll be living off of your retirement savings. Also consider:

• The longer you delay retirement, the longer you can build up tax-deferred funds in your IRAs and employer-sponsored plans such as 401(k)s, or accrue benefits in a traditional pension plan if you’re lucky enough to be covered by one.
• Medicare generally doesn’t start until you’re 65. Does your employer provide post-retirement medical benefits? Are you eligible for the coverage if you retire early? Do you have health insurance coverage through your spouse’s employer? If not, you may have to look into COBRA or a private individual policy, which could be expensive.
• You can begin receiving your Social Security retirement benefit as early as age 62. However, your benefit may be 25% to 30% less than if you waited until full retirement age. Conversely, if you delay retirement past full retirement age, you may be able to increase your Social Security retirement benefit.
• If you work part-time during retirement, you’ll be earning money and relying less on your retirement savings, leaving more of your savings to potentially grow for the future (and you may also have access to affordable health care).
• If you’re married, and you and your spouse are both employed and nearing retirement age, think about staggering your retirements. If one spouse is earning significantly more than the other, then it usually makes sense for the higher-earning spouse to continue working in order to maximize current income and ease the financial transition into retirement.

How long will retirement last?

We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. The problem is particularly acute for women, who generally live longer than men. To guard against the risk of outliving your savings, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or life expectancy calculators to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live; but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.

Project your retirement expenses

Once you know when your retirement will likely start, how long it may last, and the type of retirement lifestyle you want, it’s time to estimate the amount of money you’ll need to make it all happen. One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to save by the time you retire. It’s often repeated that you’ll need 70% to 80% of your pre-retirement income after you retire. However, the problem with this approach is that it doesn’t account for your specific situation.

Focus on your actual expenses today and think about whether they’ll stay the same, increase, decrease, or even disappear by the time you retire. While some expenses may disappear, like a mortgage or costs for commuting to and from work, other expenses, such as health care and insurance, may increase as you age. If travel or hobby activities are going to be part of your retirement, be sure to factor in these costs as well. And don’t forget to take into account the potential impact of inflation and taxes.

Identify your sources of income

Your next step is to assess how prepared you (or you and your spouse, if you’re married) are. What sources of income will be available to you? Does your employer offer a traditional pension? You can likely count on Social Security to provide a portion of your retirement income. Other sources may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the investment rate of return, and other factors. Finally, if you plan to work during retirement, your earnings will be another source of income.

When you compare your projected expenses to your anticipated sources of retirement income, you may find that you won’t have enough income to meet your needs and goals. Closing this difference, or gap, is an important part of your retirement income plan. In general, if you face a shortfall, you’ll have five options: save more now, delay retirement or work during retirement, try to increase the earnings on your retirement assets, find new sources of retirement income, or plan to spend less during retirement.

Transitioning into retirement

Even after that special day comes, you’ll still have work to do. You’ll need to carefully manage your assets so that your retirement savings will last as long as you need them to.

• Review your portfolio regularly. Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people shift their investment portfolio to fixed-income investments, such as bonds and money market accounts, as they enter retirement. The problem with this approach is that you’ll effectively lose purchasing power if the return on your investments doesn’t keep up with inflation. While it generally makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion in growth investments.
• Spend wisely. You want to be careful not to spend too much too soon. This can be a great temptation, particularly early in retirement. A good guideline is to make sure your annual withdrawal rate isn’t greater than 4% to 6% of your portfolio. (The appropriate percentage for you will depend on a number of factors, including the length of your payout period and your portfolio’s asset allocation.) Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.
• Understand your retirement plan distribution options. Most pension plans pay benefits in the form of an annuity. If you’re married, you generally must choose between a higher retirement benefit that ends when your spouse dies, or a smaller benefit that continues in whole or in part to the surviving spouse. A financial professional can help you with this difficult, but important, decision.
• Consider which assets to use first. For many retirees, the answer is simple in theory: withdraw money from taxable accounts first, then tax-deferred accounts, and lastly tax-free accounts. By using your tax-favored accounts last and avoiding taxes as long as possible, you’ll keep more of your retirement dollars working for you. However, this approach isn’t right for everyone. And don’t forget to plan for required distributions. You must generally begin taking minimum distributions from employer retirement plans and traditional IRAs when you reach age 73 (75 for those who reach age 73 after December 31, 2032), whether you need them or not. Plan to spend these dollars first in retirement.
• Consider purchasing an immediate annuity. Annuities are able to offer something unique — a guaranteed income stream for the rest of your life or for the combined lives of you and your spouse (although that guarantee is subject to the claims-paying ability and financial strength of the issuer). The obvious advantage in the context of retirement income planning is that you can use an annuity to lock in a predictable annual income stream, not subject to investment risk, that you can’t outlive.*

Unfortunately, there’s no one-size-fits-all when it comes to retirement income planning. A financial professional can review your circumstances, help you sort through your options, and help develop a plan that’s right for you.

It’s important for you to be involved in the retirement income planning process even if you’re married. While you may plan to be married forever, many women end up single at some point in their lives due to divorce or death of a spouse.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

A 65-year-old woman is expected to live another 19.7 years, compared with 17.0 years for a man.

Source: NCHS Data Brief, Number 456, December 2022 (most current data available)

*Generally, annuity contracts have fees and expenses, limitations, exclusions, holding periods, termination provisions, and terms for keeping the annuity in force. Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity. Withdrawals of annuity earnings are taxed as ordinary income.

Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

There is no assurance that working with a financial professional will improve investment results.

This content has been reviewed by FINRA.

*Fixed Annuities are long term insurance contracts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.

One of the most common questions when people hear I am a financial planner is some version of “Do you think I am on track for retirement?” The reality is most people could be saving more, but keep reading as we share the average retirement savings by age. Hopefully, this will give you a sense that you are on track or need to ramp up your savings for retirement.

What Is The Average Retirement Savings By Age?

If you are trying to see if you are on track for a secure retirement, you may wonder how much others your age have socked away. While I would love everyone to (eventually) become a 401(k) millionaire , many people need to save more and invest wisely enough to reach this big financial milestone.

Here are some numbers from Fidelity Investments showing the average 401(k) balance by age range.

• Age 20-29 Average 401(k) Balance $12,800
• Age 30-39 Average 401(k) Balance $43,100
• Age 40-49 Average 401(k) Balance $100,300
• Age 50-59 Average 401(k) Balance $175,400

I will point out that these are just averages. Even if your 401(k) balance is above these numbers, if your income is also above average, you may still be behind when it comes to reaching financial freedom and a secure retirement.

What Is The Median Retirement Savings By Age?

High and low savers can heavily skew average retirement savings. Some higher-income folks or super savers are likely bringing up the averages. On the flip side, quite a few people probably have an old 401(k) with just a few dollars in it, dragging down the averages. The median is the balance at which half of people have more and half have less saved in a 401(k).

• Age 20-29 Median 401(k) Balance $4,600
• Age 30-39 Median 401(k) Balance $16,200
• Age 40-49 Median 401(k) Balance $32,100
• Age 50-59 Median 401(k) Balance $53,400

As a retirement planner, it is scary to see how much lower the median 401(k) balance is than the average 401(k) balance.

What Is The Recommended Retirement Savings By Age?

The recommended retirement savings will depend on three main factors: your age, when you want to retire, and your income. Other things to consider are how much you will receive from Social Security, how much you will need/want to spend in retirement, as well as other sources of income.

Keep reading as we share some target retirement savings recommendations by age.

What Is The Average Retirement Savings For Married Couples By Age?

Married couples have some advantages and disadvantages when it comes to retirement planning. On the plus side, many expenses are similar, whether living alone or with a spouse. On the other hand, the odds are much higher that at least one-half of a couple will need long-term care.

All the same, the rules of thumb below can be used for singles or couples. However, if one spouse doesn’t work, these could underestimate the ideal amounts of retirement savings by age for married couples.

How Much Should I Have For Retirement By 30?

How much you should have saved for retirement by age 30 is related to how much you earn. You should strive to have at least one year of salary saved for retirement by the time you reach age 30. The median salary for people aged 25 to 34 is around $55,000. Ideally, you would be at least at this number, especially if your income is higher.

How Much Should I Have For Retirement By 40?

Four times your annual salary is the target for people who reach the ripe old age of 40. For example, if you earn $100,000, you should have at least $400,000 in your retirement account by age 40. If you are behind, now is the time to supercharge your 401(k) contributions.

How Much Should I Have For Retirement By 50?

If you are pushing 50, you should have around 7 times your salary in retirement accounts. From the average and median retirement account numbers listed above, quite a few people need to catch up when it comes to hitting this retirement account target. Age 50 seems to be when many people get serious about making work an option.

There is some good news for those 50 and older who need to supercharge their retirement savings : 401(k) contribution limits increase at age 50. For 2023, you can contribute an extra $7,500 via a catch-up contribution to your 401(k). This contribution amount is on top of the $22,500 regular 401(k) contribution limit. This total jumps to $73,500 for some self-employed business owners.

How Much Should I Have For Retirement By 60?

To stay on pace for your dream retirement or maintain your standard of living as you age, you should have at least 11 times your salary by age 60. More if you want to retire earlier than age 67.

The numbers above are just retirement-planning benchmarks. How much you need to retire will depend on your lifestyle and debt levels (if any). If you have paid off your mortgage and/or have a large pension, you will need to generate less income from your other retirement accounts to get by. On the other hand, if you love getting a new car every two years and are renting your apartment, none of those expenses are likely to drop much once you leave the workforce. They will likely continue to rise over time. That means you will need more money to maintain your standard of living in retirement.

The important thing is to get started if for no other reason than to lower your tax bill by opening a retirement account. Be sure to get every penny of your employer’s matching contribution . This is like free money from your boss. Becoming a 401(k) Millionaire is actually easier than it sounds.

By David Rae, Contributor

© 2024 Forbes Media LLC. All Rights Reserved

This Forbes article was legally licensed through AdvisorStream.

If you own a small business and you haven’t set up a retirement savings plan, what are you waiting for? A retirement plan can help you and your employees save on taxes while saving for the future.

Tax advantages

A retirement plan can have significant tax advantages:

1. Employers with 100 or fewer employees are eligible for a tax credit of up to $5,000 per year for the first three years for establishing a new retirement plan and up to $1,000 per eligible employee for the first five years for making employer contributions on behalf of employees who earn no more than $100,000. In order to qualify, the employer must have 100 or fewer workers earning at least $5,000 in compensation, including at least one non-highly compensated employee, and must not have maintained another retirement plan for the same group of employees during the previous three years.
2. Employers are eligible for a tax credit of $500 for adding an auto-enrollment feature to their plans.
3. On an ongoing basis, a portion of the amount you contribute to employee accounts is generally tax deductible (you may not take both deductions and credits for contributions in the same tax year).
4. Contributions and earnings in traditional accounts grow on a tax-deferred basis. In Roth accounts, only earnings grow on a tax-deferred basis, but qualified withdrawals are tax-free. ¹

Types of plans

Retirement plans are typically IRA-based (SEP and SIMPLE IRAs) or qualified [profit-sharing plans, 401(k) plans, and defined benefit plans]. In general, qualified plans are typically more complicated and expensive to maintain because they must comply with specific IRS and Department of Labor laws and rules. Also, qualified plan assets must be held either in trust or by an insurance company. With IRA-based plans, your employees own (i.e., “vest” in) your contributions immediately. With qualified plans, you can generally require that your employees work a certain numbers of years before they vest.

Recent law changes have made it easier and less expensive for small businesses to offer some types of qualified plans.

Simplified Employee Pension (SEP)

A SEP allows you to set up an IRA for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year, offering you some flexibility when business conditions vary. For 2024, your contributions for each employee are limited to the lesser of 25% of pay or $69,000 (up from $66,000 in 2023). Most employers, including those who are self-employed, can establish a SEP. You may permit your employees to designate contributions as Roth contributions.

The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns at least $750.

SIMPLE IRAs

The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pre-tax and/or Roth contributions in 2024 of up to $16,000 ($19,500 if age 50 or older; up from $15,500 and $19,000, respectively, in 2023). You must either match your employees’ contributions dollar for dollar — up to 3% of each employee’s compensation — or make a fixed contribution of 2% for each eligible employee, regardless of whether they contribute. (The 3% match can be reduced to 1% in any two of five years.)

Beginning in 2024, employers may make additional non-elective contributions to all employees of up to 10% of compensation or $5,000, whichever is less. Moreover, employers with no more than 25 employees may allow their employees to contribute 10% more than the standard and age-50 limits. Employers with 26 to 100 employees may allow higher limits as long as they provide either a 4% match or a 3% nonelective contribution.

Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan.

Profit-sharing plan

Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are discretionary — there’s usually no required amount each year, and you have the flexibility to contribute nothing at all in a given year (although your contributions must be nondiscriminatory, and “substantial and recurring,” for your plan to remain qualified).

The plan must contain a formula for determining how your contributions are allocated among employees. A separate account is established for each participant. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested). Contributions for any employee in 2024 can’t exceed the lesser of $69,000 (up from $66,000 in 2023) or 100% of the employee’s compensation.

401(k) plan

With a 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature), employees can make pre-tax and/or Roth contributions in 2024 of up to $23,000 of pay ($30,500 if age 50 or older; up from $22,500 and $30,000, respectively, in 2023). Generally, each employee with a year of service must be allowed to contribute to the plan.

You can also make employer matching and/or profit-sharing contributions. Combined, employer and employee contributions for any employee in 2024 can’t exceed the lesser of $69,000, up from $66,000 in 2023 (plus catch-up contributions of up to $7,500 if your employee is age 50 or older) or 100% of the employee’s compensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested.

401(k) plans are required to perform somewhat complicated testing each year to make sure benefits aren’t disproportionately weighted toward higher-paid employees. However, you may avoid discrimination testing if you adopt a “safe harbor” 401(k) plan. With a safe harbor 401(k) plan, you’re generally required to either match your employees’ contributions (100% of employee deferrals up to 3% of compensation, and 50% of deferrals between 3% and 5% of compensation), or make a fixed contribution of 3% of compensation for all eligible employees, regardless of whether they contribute to the plan. Those contributions must be fully vested.

You may also avoid discrimination testing by adopting a SIMPLE 401(k) plan. SIMPLE 401(k) plans are similar to SIMPLE IRAs in terms of contribution limits and eligibility requirements, but may also allow loans and hardship withdrawals. Because they’re qualified plans, they’re a bit more complicated to administer than SIMPLE IRAs.

In addition, beginning in 2024, employers with no other retirement plan (with limited exceptions) can adopt what’s known as a starter 401(k) plan. Designed to be low cost and easy to administer, starter 401(k) plans allow only employee contributions. Employees must be auto-enrolled at a minimum contribution rate of 3% (not to exceed 15%) and may contribute up to $6,000 in 2024 ($7,000 for employees age 50 or older).

Defined benefit plan

A defined benefit plan guarantees your employees a specified level of benefits at retirement (for example, an annual benefit equal to 30% of final average pay). In 2024, a defined benefit plan can provide an annual benefit of up to $275,000 (or 100% of pay if less), up from $265,000 in 2023. An actuary is generally needed to determine the annual contributions you must make to fund the promised benefit. Contributions may vary each year based on the performance of plan investments and other factors.

In general, defined benefit plans are too costly and complex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and therefore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses with a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

In general, the amount of employee compensation that can be taken into account when determining employer and employee contributions is limited to $345,000 in 2024, up from $330,000 in 2023.

¹ A Roth distribution is qualified if the account has been held for at least five years and the distribution is made after the employee reaches age 59½, dies, or becomes disabled. Distributions prior to age 59½ or otherwise nonqualified distributions from Roth accounts may be subject to income taxes and a potential 10% penalty, unless an exception applies.

The following questions may help you determine which type of plan to offer:

• How much do you want to save for retirement?
• Do you want to fund your plan through employer contributions? Employee contributions? Both?
• Do you want your plan to allow employees to make pre-tax and/or Roth contributions?
• How much flexibility do you want in terms of employer contributions?
• Are you looking for a plan with the lowest cost and easiest administration?

This content has been reviewed by FINRA.

You’ve worked hard your whole life anticipating the day you could finally retire. Congratulations — that day has arrived! But with it comes the realization that you’ll need to carefully manage your assets to give them lasting potential.

Review your portfolio regularly

Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, you may assume your investment portfolio should be shifted to all fixed-income investments, such as bonds and money market accounts. The problem with this approach is that you’ll effectively lose purchasing power if the return on your investments doesn’t keep up with inflation.

While generally it makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion of your portfolio in growth investments.

Spend wisely

Don’t assume that you’ll be able to live on the earnings generated by your investment portfolio and retirement accounts for the rest of your life. At some point, you’ll probably have to start drawing on the principal. But you’ll want to be careful not to spend too much too soon. This can be a great temptation, particularly early in retirement.

A good guideline is to make sure your annual withdrawal rate isn’t greater than 4% to 6% of your portfolio. (The appropriate percentage for you will depend on a number of factors, including the length of your payout period and your portfolio’s asset allocation.) Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.

Understand your retirement plan distribution options

Most traditional pension plans pay benefits in the form of an annuity. If you’re married, you generally must choose between a higher retirement benefit paid over your lifetime, or a smaller benefit that continues to your spouse after your death. A financial professional can help you with this difficult, but important, decision.

Historically, other employer retirement plans, such as 401(k)s, typically haven’t offered annuities; however, this is changing as a result of legislation passed in 2019 that makes it easier for employers to offer such products. If your plan offers an annuity as a distribution option, you may want to consider how it might fit in your long-term plan.

You might also consider whether it makes sense to roll your employer retirement account into a traditional IRA, which typically has flexible withdrawal options. If you decide to work for another employer, you might also be able to transfer assets you’ve accumulated to your new employer’s plan, if allowed.¹

Finally, you may also choose to take a lump-sum distribution from your work-based retirement plan; however, this could incur a substantial tax obligation and a possible 10% penalty on the tax-deferred portion of the amount if you are under age 59½, unless an exception applies.

Plan for required distributions

Keep in mind that you must generally begin taking required minimum distributions (RMDs) from employer retirement plans and traditional IRAs after you reach age 73 (75 for those who reach age 73 after December 31, 2032), whether you need them or not.²

If you own a Roth IRA, you aren’t required to take any distributions during your lifetime. Your funds can continue to grow tax deferred, and qualified distributions will be tax free.³ Because of these unique tax benefits, it may make sense to withdraw funds from a Roth IRA last.

Know your Social Security options

You’ll need to decide when to start receiving your Social Security retirement benefits. At normal retirement age (which varies from 66 to 67, depending on the year you were born), you can receive your full Social Security retirement benefit. You can elect to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your normal retirement age, your benefit will be reduced. Conversely, if you delay retirement, you can increase your Social Security retirement benefit.

Consider phasing

For many workers, the sudden change from employee to retiree can be a difficult one. Some employers, especially those in the public sector, have begun offering “phased retirement” plans to address this problem. Phased retirement generally allows you to continue working on a part-time basis — you benefit by having a smoother transition from full-time employment to retirement, and your employer benefits by retaining the services of a talented employee. Some phased retirement plans even allow you to access all or part of your pension benefit while you work part time.

Of course, to the extent you are able to support yourself with a salary, the less you’ll need to dip into your retirement savings. Another advantage of delaying full retirement is that you can continue to build tax-deferred funds in your IRA or employer-sponsored retirement plan. As mentioned earlier, however, you generally will be required to start taking RMDs from most employer-sponsored plans and traditional IRAs once you reach age 73, if you want to avoid substantial penalties.²

If you do continue to work, make sure you understand the consequences. Some pension plans base your retirement benefit on your final average pay. If you work part time, your pension benefit may be reduced because your pay has gone down. Remember, too, that income from a job may affect the amount of Social Security retirement benefit you receive if you are under normal retirement age. But once you reach normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.

Facing a shortfall

What if you’re nearing retirement and you determine that your retirement income may not be adequate to meet your retirement expenses? If retirement is just around the corner, you may need to drastically change your spending and saving habits. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return. And by making permanent changes to your spending habits, your savings could last even longer. Start by preparing a budget to see where your money is going. Here are some suggested ways to stretch your retirement dollars:

• Refinance your home mortgage if interest rates have dropped since you obtained your loan, or reduce your housing expenses by moving to a less expensive home or apartment.
• Access the equity in your home. Use the proceeds from a second mortgage or home equity line of credit to pay off higher-interest-rate debts, or consider a reverse mortgage. (Consider these strategies very carefully before making any final decisions.)
• Sell one of your cars if you have two. When your remaining car needs to be replaced, consider buying a used one.
• Transfer credit card balances from higher-interest cards to a low- or no-interest card, and then cancel the old accounts.
• Ask about insurance discounts and review your insurance needs (e.g., your need for life insurance may have lessened).
• Reduce discretionary expenses such as lunches and dinners out.

By planning carefully, investing wisely, and spending thoughtfully, you can increase the likelihood that your retirement will be a financially comfortable one.

¹ When considering a rollover, to either an IRA or to another employer’s retirement plan, you should consider carefully the investment options, fees and expenses, services, ability to make penalty-free withdrawals, degree of creditor protection, and distribution requirements associated with each option.

² If you are still employed and own no more than 5% of your company, you may be able to delay RMDs from your current employer’s plan until after you actually retire. You will have to take RMDs from IRAs and plans from former employers.

³ To qualify for tax-free and penalty-free withdrawal of earnings, a Roth IRA must meet a five-year holding requirement and the distribution must take place after age 59½, with certain exceptions.

Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.

The decision of when and how to tap your Social Security benefits can be complicated. You might want to review your options long before your planned retirement date to be sure you fully understand the pros and cons of each.

This content has been reviewed by FINRA.

Employer-sponsored qualified retirement plans such as 401(k)s are some of the most powerful retirement savings tools available. If your employer offers such a plan and you’re not participating in it, you should be. Once you’re participating in a plan, try to take full advantage of it.

Understand your employer-sponsored plan

Before you can take advantage of your employer’s plan, you need to understand how these plans work. Read everything you can about the plan and talk to your employer’s benefits officer. You can also talk to a financial planner, a tax advisor, and other professionals. Recognize the key features that many employer-sponsored plans share:

• Your employer automatically deducts your contributions from your paycheck. You may never even miss the money — out of sight, out of mind.
• You decide what portion of your salary to contribute, up to the legal limit. And you can usually change your contribution amount on certain dates during the year or as needed.
• With 401(k), 403(b), 457(b), SEP IRAs, and SIMPLE plans, you contribute to the plan on a pre-tax basis. Your contributions come off the top of your salary before your employer withholds income taxes.
• Your retirement plan may let you make after-tax Roth contributions — there’s no up-front tax benefit but qualified distributions are entirely tax free.
• Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.
• Your funds grow tax deferred in the plan. You don’t pay taxes on investment earnings until you withdraw your money from the plan.
• You’ll pay income taxes (and possibly an early withdrawal penalty) if you withdraw your money from the plan.
• If your plan allows loans, you may be able to borrow a portion of your vested balance, up to specified limits.
• Your creditors cannot reach your plan funds to satisfy your debts.

Contribute as much as possible

The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to the legal limit (or plan limits, if lower). If you need to free up money to do that, try to cut certain expenses.

Why put your retirement dollars in your employer’s plan instead of somewhere else? One reason is that your pre-tax contributions to your employer’s plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan — a big advantage if you’re in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you’ll pay income taxes on $90,000 instead of $100,000. Keep in mind that distributions will be subject to income tax.

Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren’t taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your employer’s plan. You should end u½p with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.

For example, say you participate in your employer’s tax-deferred plan (Account A). You also have a taxable investment account (Account B). Each account earns 6% per year. You’re in the 24% tax bracket and contribute $5,000 to each account at the end of every year. After 40 years, the money placed in a taxable account would be worth $567,680. During the same period, the tax-deferred account would grow to $820,238. Even after taxes have been deducted from the tax-deferred account, the investor would still receive $623,381. (Note: This example is for illustrative purposes only and does not represent a specific investment.)

Roth contributions are after-tax contributions, and therefore do not offer the up-front pre-tax benefit. However, Roth earnings grow tax-deferred and qualified distributions from Roth accounts are tax free. A qualified distribution is one made after five years and the account owner reaches age 59½, becomes disabled, or dies.

Capture the full employer match

If you can’t max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are basically free money once you’re vested in them (check with your employer to find out when vesting happens). By capturing the full benefit of your employer’s match, you’ll be surprised how much faster your balance grows. If you don’t take advantage of your employer’s generosity, you could be passing up a significant return on your money.

For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is 50 cents on the dollar up to 6% of your salary. Each year, you contribute 6% of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer.

Evaluate your investment choices carefully

Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer’s plan could be one of your keys to a comfortable retirement. That’s because over the long term, varying rates of return can make a big difference in the size of your balance.

Note: Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

Research the investments available to you. How have they performed over the long term? How much risk will they expose you to? Which ones are best suited for long-term goals like retirement? You may also want to get advice from a financial professional (either your own or one provided through your plan), who can help you pick the right investments based on your personal goals, your attitude toward risk, how long you have until retirement, and other factors. Your financial professional can also help you coordinate your plan investments with your overall investment portfolio.

Know your options when you leave your employer

When you leave your job, your vested balance in your former employer’s retirement plan is yours to keep. You have several options at that point, including:

• Taking a lump-sum distribution. Before choosing this option, consider that you’ll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you’re giving up the continued potential of tax-deferred growth.
• Leaving your funds in the old plan, growing tax deferred. (Your old plan may not permit this if your balance is less than $5,000 ($7,000 in 2024), or if you’ve reached the plan’s normal retirement age — typically age 65.) This may be a good idea if you’re happy with the plan’s investments or you need time to decide what to do with your money.
• Rolling your funds over to an IRA or a new employer’s plan (if the plan accepts rollovers). This may also be an appropriate move because there will be no income taxes or penalties if you do the rollover properly (your old plan will withhold 20% for income taxes if you receive the funds before rolling them over, and you’ll need to make up this amount out of pocket when investing in the new plan or IRA). Plus, your funds continue to potentially benefit from tax-deferred growth .

Distributions from traditional retirement savings accounts and non-qualified distributions from Roth accounts will be subject to income tax. In addition, distributions prior to age 59½ will be subject to a 10% penalty, unless an exception applies.

This content has been reviewed by FINRA.

When you determine how much income you’ll need in retirement, you may base your projection on the type of lifestyle you plan to have and when you want to retire. However, as you grow closer to retirement, you may discover that your income won’t be enough to meet your needs. If you find yourself in this situation, you’ll need to adopt a plan to bridge this projected income gap.

Delay retirement: 65 is just a number

One way of dealing with a projected income shortfall is to stay in the workforce longer than you had planned. This will allow you to continue supporting yourself with a salary rather than dipping into your retirement savings. Depending on your income, this could also increase your Social Security retirement benefit. You’ll also be able to delay taking your Social Security benefit or distributions from retirement accounts.

At full retirement age (which varies, depending on the year you were born), you will receive your full Social Security retirement benefit. You can elect to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your full retirement age, your benefit will be reduced. Conversely, if you delay retirement, you can increase your Social Security benefit.

Remember, too, that income from a job may affect the amount of Social Security retirement benefit you receive if you are under full retirement age — $1 in benefits will be withheld for every $2 you earn over a certain earnings limit ($22.320 in 2024). In the year you reach full retirement age, different rules apply; $1 in benefits will be withheld for every $3 you earn over the annual earnings limit ($59,520 in 2024). Once you reach your full retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.

Another advantage of delaying retirement is that you can continue to build tax-deferred (or in the case of Roth accounts, tax-free) funds in your IRA or employer-sponsored retirement plan. Keep in mind, though, that you may be required to start taking minimum distributions from your qualified retirement plan or traditional IRA once you reach age 73 (75 for those who reach age 73 after December 31, 2032), if you want to avoid harsh penalties.

And if you’re covered by a pension plan at work, you could also consider retiring and then seeking employment elsewhere. This way you can receive a salary and your pension benefit at the same time. Some employers, to avoid losing talented employees this way, offer “phased retirement” programs that allow you to receive all or part of your pension benefit while you’re still working. Make sure you understand your pension plan options.

Spend less, save more

You may be able to deal with an income shortfall by adjusting your spending habits. If you’re still years away from retirement, you may be able to get by with a few minor changes. However, if retirement is just around the corner, you may need to drastically change your spending and saving habits. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return. Make permanent changes to your spending habits and you’ll find that your savings will last even longer. Start by preparing a budget to see where your money is going. Here are some suggested ways to stretch your retirement dollars:

• Refinance your home mortgage if interest rates have dropped since you took the loan.
• Reduce your housing expenses by moving to a less expensive home or apartment.
• Sell one of your cars if you have two. When your remaining car needs to be replaced, consider buying a used one.
• Access the equity in your home. Use the proceeds from a second mortgage or home equity line of credit to pay off higher-interest-rate debts.
• Transfer credit card balances from higher-interest cards to a low- or no-interest card, and then cancel the old accounts.
• Ask about insurance discounts and review your insurance needs (e.g., your need for life insurance may have lessened).
• Reduce discretionary expenses such as lunches and dinners out.

Earmark the money you save for retirement and invest it immediately. If you can take advantage of an IRA, 401(k), or other tax-deferred retirement plan, you should do so. Funds invested in a tax-deferred account may grow more rapidly than funds invested in a non-tax-deferred account.

Reallocate your assets: consider investing more aggressively

Some people make the mistake of investing too conservatively to achieve their retirement goals. That’s not surprising, because as you take on more risk, your potential for loss grows as well. But greater risk also generally entails potentially greater reward. And with life expectancies rising and people retiring earlier, retirement funds need to last a long time.

That’s why if you are facing a projected income shortfall, you may want to consider shifting some of your assets to investments that have the potential to substantially outpace inflation. The amount of investment dollars you might consider keeping in growth-oriented investments depends on your time horizon (how long you have to save) and your tolerance for risk. In general, the longer you have until retirement, the more aggressive you can typically afford to be. Still, if you are at or near retirement, you may want to keep some of your funds in growth-oriented investments, even if you decide to keep the bulk of your funds in more conservative, fixed-income investments. Get advice from a financial professional if you need help deciding how your assets should be allocated.

And remember, no matter how you decide to allocate your money, rebalance your portfolio periodically. Your needs will change over time, and so should your investment strategy. Note: Rebalancing may carry tax consequences. Asset allocation and diversification cannot guarantee a profit or insure against a loss. There is no guarantee that any investment strategy will be successful; all investing involves risk, including the possible loss of principal.

Accept reality: lower your standard of living

If your projected income shortfall is severe enough or if you’re already close to retirement, you may realize that no matter what measures you take, you will not be able to afford the retirement lifestyle you’ve dreamed of. In other words, you will have to lower your expectations and accept a lower standard of living.

Fortunately, this may be easier to do than when you were younger. Although some expenses, like health care, generally increase in retirement, other expenses, like housing costs and automobile expenses, tend to decrease. And it’s likely that your days of paying college bills and growing-family expenses are over.

Once you are within a few years of retirement, you can prepare a realistic budget that will help you manage your money in retirement. Think long term: Retirees frequently get into budget trouble in the early years of retirement, when they are adjusting to their new lifestyles. Remember that when you are retired, every day is Saturday, so it’s easy to start overspending.