One of the most discussed topics in the United States is retirement security. Few Americans have set aside sufficient savings to live comfortably throughout retirement. In fact, the most recent National Retirement Risk Index (NRRI) found

• The retirement landscape is shifting dramatically, making the outlook for retiring Baby Boomers and Generation Xers far less sanguine than for current retirees;
• 50 percent of households are at risk of not having enough to maintain their living standards in retirement;
• Explicitly including health care in the Index further drives up the share of households at risk;
• Saving more and working longer may substantially improve the outlook.

One of the easiest ways to save for retirement is through an employer’s plan. However, not everyone has the opportunity to do so.

You may not have realized it, but less than 10 percent of private sector companies offer pension plans, and just under 50 percent offer 401(k), or similar, retirement plans. As a result, a significant number of working Americans don’t have the opportunity to save for retirement through a workplace plan.

If you’re not sure whether your employer offers a plan, ask. If it does, gather as much information about the plan as possible. Here are a few questions to ask:

1.      What type of retirement plan is available? Some companies offer more than one type of retirement plan. If you work for a large company, you may have access to a pension plan or 401(k) plan. If you work for a smaller firm, you may have access to a SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account), SEP IRA (Simplified Employee Pension Individual Retirement Arrangement), or payroll-deduction IRA (Individual Retirement Account).

Make sure you know what plans are available and when you are eligible to participate. Your Human Resources (HR) team should have the information you need.

2.      Will your retirement income be taxable or tax-free? Your company’s 401(k) plan may allow different types of contributions. For instance, you may be able to make

·      Traditional contributions. These contributions are made before taxes, so they may help reduce taxes today. Taxes will not be owed on the money contributed and any earnings until money is distributed from the plan.

·      Roth contributions. These contributions are made with after-tax dollars, so there is no tax break today. However, contributions and any earnings are tax-free when you withdraw them, as long as the distributions are qualified. Withdrawals of contributions and earnings from a designated Roth 401(k) account are tax-free and penalty-free as long as the account is held for at least five (5) years and distributions are made at age 59.5 years or later, or because of disability or death.

·      Catch-up contributions. These contributions give all older Americans the opportunity to save more for retirement. For 2020, plan participants aged 50 years or older can contribute an additional $6,500 to a 401(k) plan each year.

It has been recommended Americans save 10–20 percent of their gross income for retirement. Though not everyone can save that much, it’s important to get started now, especially if your employer makes matching contributions.

3.      Does the company make a matching contribution? Some employers make matching contributions. The amount of the matching contribution varies from plan to plan. Regardless, it’s free money you receive simply for participating in the plan.

For instance, a company might contribute 50 cents for every dollar you contribute—up to 5 percent of pay. If a match is offered, try to contribute enough to receive the full match. Even if you can only save a small amount, receiving the employer match can increase that amount significantly.

Once you have gathered information about your plan, there are other questions you’ll need to answer, too:

1.      How much should I save? The answer is likely to be: as much as you can afford to save. Let’s face it. The future is unknown. There are a lot of variables to consider when planning for retirement. For example, no one can be certain

·      How long they will be able to work,

·      How long they will live,

·      How investment markets will perform,

·      What may happen between now and then.

As a result, it’s wise to save more rather than less. If you save more than you spend, that’s wonderful. The assets you leave behind can help your spouse/partner, children, grandchildren, or favorite charity.

Another way to approach the question of how much to save is to determine a replacement ratio. How much of your current income will you need to live comfortably each year in retirement? Once you have a figure in mind, you can determine how much to save today.

2.      How should I invest my savings? Once you’ve decided how much to save, you’ll need to determine how to invest your savings. Many workplace retirement plans offer diverse options such as stocks, bonds, and other investments. Each investment offers distinct risks and rewards.

Before you choose investments, decide how much risk you are comfortable taking. It may be wise to speak with your trusted advisor for help in determining what makes sense for you and your family.

If your employer offers a workplace retirement plan, count yourself fortunate and sign up. Don’t let uncertainty about how much to save or where to invest prevent you from participating.

Happy Investing,

Marcos

Sources:

https://crr.bc.edu/wp-content/uploads/2018/01/IB_18-1.pdf (pages 1–2, 7)

www.bls.gov/ncs/ebs/benefits/2018/ownership/private/table01a.htm

www.irs.gov/retirement-plans/roth-comparison-chart

www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions

www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans

www.cnbc.com/2019/09/30/salary-needed-to-save-15-percent-of-your-income-and-retire-with-1-million-dollars.html