Life throws you many curveballs that make it hard to always stick to a financial plan. With the right insight, you can build flexibility into your financial plan to deflect some of those curveballs. You know you need a roadmap to follow. However, establishing what you need to do and how to stay on track can cause anxiety. That is especially true in the case of large expenses, such as weddings and college expenses.
Losing a spouse, losing a job, or not being able to afford emergency expenses when they arise can derail plans that were made without the right preparation. All of these events can result in your retirement savings taking a back seat, pushing you further away from your goals.
Contact Korving & Company, LLC to take control of your future today. Our expert staff can help you make a plan that allows you peace of mind. We specialize in comprehensive planning and all its facets (retirement, income, estate, college), and coordinated wealth management and investment advice. Our team can help you create a retirement plan that will get you on track to meet your goals while teaching you what you need to know along the way.
How Much Money Has The Average 30-Year-Old Saved?
The Transamerica Center for Retirement Studies reported the average retirement savings per age group in the United States is:
- Americans at age 30: $45,000
- Americans at age 40: $63,000
- Americans at age 50: $117,000
- Americans at age 60: $172,000
How does your retirement savings account compare? Everyone manages and saves their money differently. There are several types of accounts to use to save, but one of the first accounts you should create is one for emergency funds.
What Is an Emergency Fund?
An emergency fund is a sum of money that you set aside specifically for one of life’s curve balls, an unforeseen crisis. It provides a financial safety net in the event of job loss, time off for a health issue, a major expense to a home or vehicle, and a variety of other situations that could be a potential reality but are hard to plan around that you would otherwise not be able to pay for immediately with cash in your regular checking account. Even though you will probably keep the emergency fund money in a checking or savings account, you have the peace of mind of knowing it is there for when life does throw you a curve ball and that it is protected by the FDIC.
When faced with an unexpected financial emergency, you want to avoid at all costs having to resort to high-interest options, such as credit cards and unsecured loans, or having to endanger your retirement savings by dipping into those funds.
We typically recommend that your emergency fund should equal three to six months’ worth of your salary or living expenses. These funds should be liquid assets or funds (like cash or money market funds) that are easily and readily available to you.
How Do You Create an Emergency Fund?
Here are tips for building an emergency fund to help safeguard your retirement goals:
- Utilize a tax refund or other unexpected windfalls to help fund your emergency savings account.
- Inquire if your business or company has a program to assist you in starting or maintaining an emergency fund.
- Determine an amount that you can comfortably have withdrawn from your income or your checking every month, and then set up an automatic deposit to your emergency savings account. Often, if you do not see the money in your regular account, you will not miss it.
Creating an emergency fund may feel like a challenge if you’ve never done it before, especially when you are living paycheck to paycheck, but it is the foundation or creating financial freedom. If you focus on the fact that you are saving for your future self in a future crisis, you can find the discipline and willpower to help you make that small change every month. When you realize the satisfaction of funding your emergency savings account, you are now well on your way to developing the discipline to continue to save for other future expenses, including things such as a down payment on a home, your retirement, and other important milestones.
What Is the Cost of Retirement?
How much money do you need in your retirement account? According to a study done by Sofi, the average 65-year-old retiree in the U.S. spent an average of $48,791 per year during the study’s time period of 2016 – 2020. Retired Americans aged 65-74 spent an average of $53,916, and the average 75-year-old spent $41,637 during the same time period. This benchmark is a useful starting point for thinking about your retirement expenses.
The breakdown of the study’s cost of living expenses during retirement consists of:
- Housing – The average expense for housing during retirement was $16,880 for the 65-year-old, $18,027 for 65- to 74-year-olds, and $15,281 for 75-year-olds. This expense can dramatically fluctuate depending on the state or area you live in as well as the type of housing you live in.
- Healthcare – This category includes medications, hospitalizations, insurance, supplies, and medical services. Not surprisingly, this expense goes up as a person ages due to an increased need for medical interventions required with an aging body. People 65 and over spent an average of $6,583 per year during the 2016-2020 period. This amount varied based on genetics, pre-existing conditions, and lifestyle choices such as smoking.
- Transportation – Retirees over age 65 spent on average $7,062 annually on transportation. In comparison, those aged 65 to 74 spent $8,497 per year, and people 75 and older spent $5,073 per year during the 2016-2020 period. With the skyrocketing prices of fuel and other factors that affect transportation, this will only increase. This cost will also be higher for people who are more active and plan on traveling and going on adventures in their retirement years.
- Entertainment – The concept of retirement isn’t the same as it was many years ago, and now many retirees plan for an active retirement with lots of fun and entertainment. The Sofi study found that people over 65 spent an average of $2,527 annually on entertainment, which included things such as fees and admissions to places like museums and movies. People 65 to 74 spent an average of $3,080 per year on entertainment during the past five years, but once they hit age 75, spending on entertainment dropped to $1,749 annually for a variety of reasons expected as a person ages.
- Food costs – The average 65-year-old retiree spent an average of $6,207 per year on food expenses. These expenses include groceries and meals eaten at restaurants. Retirees aged 65 to 74 spent an average of $6,864 per year, and people over age 75 averaged $5,274 per year. Food expenses will vary, based on habits and diet.
With Social Security often well below these annual amounts, it is essential to have your own savings, especially if the annual expense numbers seem low to you.
What Is the Retirement Savings Goal for the 30s, 40s, and 50s?
As a rule of thumb, you should begin saving for your retirement as soon as you begin working in your first job. Realistically, however, many people often do not start thinking about their retirement until their 30s or after. According to Forbes, at the age of 30, you should have savings equal to your yearly salary. For example, if you make $100,000 annually, you should have at least $100,000 saved for your retirement when you turn 30.
By the time you are 40, you should have at least three times your salary, which when using the $100,000 example, you should have saved at least $300,000. When you turn 50, you should have retirement savings of at least five to six times your salary, and with our example of $100,000, that would equal $500,000 – $600,000. Finally, at the age of 60, you ideally want to have at least seven to eight times your salary, meaning $700,000 – $800,000.
However, the average savings rates of Americans often don’t live up to these ideal goals. So, how can you save money to meet the goals of your age group?
Strategies to Reach Your Savings Goal
A retirement fund is a savings option that allows an employee to set aside a portion of their income for retirement. This allows a person, after retirement, to continue receiving a regular income. It is a way to defer a portion of your income for after you stop working at retirement age.
There are a variety of retirement funds and options available to allow a worker the option that best suits their needs. Our financial advisors can help everyone from Baby Boomers to Generation Z create a financial plan to increase their retirement income.
Defined Contribution Plans
The most recognizable type of defined contribution plan is the 401(k). A traditional 401(k) allows an employee to contribute to the plan with pre-tax wages. This allows the participant to avoid paying taxes on the money they are saving in the plan. The plan lets the employee’s contributions grow tax-free for as long as they remain in the plan or in another tax-deferred account. Eventually, when money is taken out of the account in retirement, at that time it is taxed as ordinary income. We always recommend that you put in at least enough to maximize the employer match. (A good rule of thumb for everyone without a pension is to save at least 15% of your earnings for retirement.)
A Roth 401(k) also allows an employee to save for retirement and not pay taxes along the way. Contributions to the plan are made after taxes have been taken out, but when money is taken out of the account in retirement (after age 59 ½), you are not taxed on it.
The major consideration when choosing between a traditional 401(k) and a Roth 401(k) is this: is it more beneficial for you to pay taxes now, or later? Our financial advisors can review your current situation to help you make an informed choice.
IRA (Individual Retirement Account) Plans
A traditional IRA is a plan that is tax-advantaged to allow a significant tax break while you save for retirement. The IRA allows your contributions to grow tax-free until the funds are withdrawn at retirement and become taxable. You may be eligible for a tax deduction for contributing to a traditional IRA.
The Roth IRA is another type of IRA. Like a traditional IRA, contributions to a Roth IRA grow tax-free within the account. While Roth IRA contributions are not eligible for a tax deduction, all withdrawals from a Roth IRA in retirement come out tax-free and are not taxed as ordinary income.
Withdrawals made from an IRA before age 59 ½ may result in taxes and penalties. Retirement accounts often have a diverse array of investment options. Our financial advisors can help you decide the best way to build a nest egg to supplement your retirement savings.
Solo 401(k) Plan
This plan is designed for a business owner with no employees (and potentially their spouse). The business owner is considered both the employer and employee, so elective deferrals of up to $20,500 can be made in 2022. Additionally, an elective profit-sharing contribution of up to 25 percent of compensation, up to a total annual contribution of $61,000 in 2022, can be made to these accounts for business owners, not including catch-up contributions. If you are considering the solo 401(k) for a side gig, be aware that 401(k) limits apply by individual person, not by plan, so if you’re also participating in a 401(k) at your day job, the limits apply across both plans instead of on each individual plan.
If you are lucky enough to have a traditional pension, congratulations. Employees don’t have to fund a traditional pension, and therefore it is the easiest form of retirement option. Instead of the employee contributing to the plan, the employer is required to fund it for your retirement. Pensions, which are payable for life, usually replace a percentage of your pay based on your tenure and salary.
The Federal Thrift Savings Plan
This type of retirement plan is available to government workers and people in the uniformed services. People who are eligible for this option can choose from five low-cost investment options, including an S&P 500 index fund, a bond fund, a small-cap fund, an international stock fund, and a fund that invests in specially issued Treasury securities. Additionally, there are a number of lifecycle funds with different retirement dates that an employee can invest in. Depending on when the employee entered service, employees may or may not be eligible for an employer match on their savings.
Cash Balance Plans
A cash balance plan is a type of pension plan that has characteristics of both a traditional pension and a 401(k) plan. Like a 401(k) plan, each employee has their own account, complete with a specified account balance. Like a traditional pension, each employee has the option of a lifetime annuity, or payout. Cash balance plans define the amount that will be available for each employee upon reaching their retirement age. With a cash balance plan, employers credit a participant’s account with a set percentage of their salary plus an annual interest rate credit. The real draw and benefit of these plans is that contribution limits increase with age – people that are 60 years and older can save up to $245,000 in 2022.
So How Much Should I Be Saving?
Different personal budgets and life situations can help you determine how much you should be contributing toward your retirement goals. As you can see from the referenced article, both Fidelity and T. Rowe Price recommend that you try to save at least 15% of your income for retirement. Fidelity assumes that you will save more aggressively earlier in life and projects you should have 1 time your salary by age 30, which T. Rowe Price assumes you’ll get to 1 time your salary savings by age 35. However, in following T. Rowe Price’s plan, it is expected that you’d have 11 times your salary by age 65, while Fidelity’s plan has you at 10 times salary by age 67.
So, as you can see, these are simply educated guesses and rules of thumb. It is about making smart and informed financial decisions at whatever age you start seriously thinking about and planning for retirement that will have the biggest impact on your success. It is about understanding the plans you have available to you and how to best utilize them to save for retirement and balance those decisions with tax concerns both now and in retirement. Additionally, don’t forget that it is critically important to build up an emergency savings fund so that you will not have to wipe out your savings in the event of a medical, occupational, or other emergency.
Where Are You Compared to the National Average for Your Age When It Comes to Saving Money?
So, where are you compared to the national average of retirement savings for your age? Whether you’re below and want to get back on track with financial services tailored to your financial situation, or whether you’re at or above the average but know that you don’t want to put your retirement at risk by trying to manage it on your own or autopilot anymore, let Korving & Company help. Our experts will review your situation and present options to help secure your financial future. We love helping our clients get to and through retirement with clarity and conviction! Call us today at 757-638-5490 to learn how we can improve your savings plan.