Which Retirement Plan Is Best For You
In many cases you simply wont have a choice of retirement plans. Youll have to take what your employer offers, whether thats a 401, a 403, a defined-benefit plan or something else. But you can supplement that with an IRA, which is available to anyone regardless of their employer.
Heres a comparison of the pros and cons of a few retirement plans.
It’s Way Less Than You Might Expect
Many workers are saving for retirement. That’s the good news. The bad news is many people are not saving nearly enough. In fact, the estimated median retirement account balance is very low and would produce only a tiny amount of annual income every year.
Here’s how much workers have saved, and what this nest egg would actually do for them in their later years.
Image source: Getty Images.
Average Retirement Savings Of Americans Under 3: $13000
Most retirement savings are accrued after the age of 35. Median retirement savings grow $30,000 or more every 10 years for Americans over 35 until they reach 75 years of age.
A few factors may be at play in this sharp increase: the power of compounding interest leading to snowballing returns in 401s and similar retirement investing accounts, employer matching plans kicking in, higher incomes resulting in more savings, or a combination of all three.
Median retirement account value by age
Data source: Board of Governors of the Federal Reserve System .
Despite being the youngest age group in the Federal Reserve’s dataset, 62% of Americans aged 18 to 29 had some retirement savings. Saving early is a surefire way to work towards a comfortable retirement.
Despite that, only 30% of that age group felt as though their retirement savings were on track. This could reflect the relatively low amount of savings among Americans under 35 compared to older age groups.
The older the age group, the more likely they are to have retirement savings and feel as though their savings are on track.
Americans remained pessimistic about their preparedness for retirement. Just 45% of those aged 45 to 59 and only 52% of those 60 and over felt prepared.
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The Federal Thrift Savings Plan
The Thrift Savings Plan is a lot like a 401 plan on steroids, and its available to government workers and members of the uniformed services.
Participants choose from five low-cost investment options, including a bond fund, an S& P 500 index fund, a small-cap fund and an international stock fund plus a fund that invests in specially issued Treasury securities.
On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.
Pros: Federal employees can get a 5 percent employer contribution to the TSP, which includes a 1 percent non-elective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed.
The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent, says Littell. Another positive is that the investment fees are shockingly low four hundredths of a percentage point. That translates to 40 cents annually per $1,000 invested much lower than youll find elsewhere.
Cons: As with all defined contribution plans, theres always uncertainty about what your account balance might be when you retire.
What it means to you: You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it makes a lot of sense to contribute at least 5 percent of your salary to get the maximum employer contribution.
The 80% Of Income Rule
The 80% rule for retirement focuses on how much of your current income you’ll need to live on instead of what percentage of your income to save. It dictates saving enough to replace 80% of your income in retirement years.
If you make $100,000 a year, you’d aim to save enough to provide you with 80% of that, or $80,000, per year in retirement. So, youll need to estimate your expected length of retirement. How much you will truly need will depend on many factors, including the expenses for your expected lifestyle.
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How Much Does The Average American Have Saved For Retirement
So, we did learn quite a few things.
The median amount saved is $65,000.
A significant number of Americans have little to no savings at all.
It seems like its time for everyone to get back on track with their savings.
If you realized that you are part of the group with below-average savings and have no idea where to start, consider the following factors when building your retirement nest egg. The most important one is how much money will you need exactly? The cost of living is different in each state, and living expenses vary by individuals.
Will you still be paying off your mortgage? Will your savings cover expected and unexpected health care expenses?
If retirement savings statistics make you doubtful about where you are with your retirement funds, remember that the next best time to start planning for your retirement is now.
Hopefully, we managed to give you a good sense of direction. Till next time!
Start Saving For Retirement
Take advantage of your employers 401 plan
Try to save at least 10 percent of your pay, including any employer match, in a tax-advantaged retirement account, such as a 401. About 68 percent of workers have access to a retirement plan through their employer, as of March 2021, but only about 51 percent used it, according to a November 2021 report from the Bureau of Labor Statistics.
New workers may be auto-enrolled in a retirement plan, a great move except you may be set up to save a smaller portion of your salary say, 3 percent than whats recommended.
Make sure to increase your contribution or at least set up an auto-escalation so that you put in more each year. And above all, make sure youre getting any free match money from your employer. Here are some other smart moves to make in your 401 plan.
How to save without a 401
If your employer doesnt offer a 401 or youre a part-time worker, consider a Roth IRA. You can save $6,000 in after-tax income, but the money grows tax-free and wont be taxed when you withdraw the funds in retirement.
Alternatively, you can contribute pre-tax income to a traditional IRA up to the same amount as a Roth IRA each year and the funds arent taxed until you withdraw.
In order to replicate the simplicity of a 401, you can set up your direct deposit to automatically contribute to whichever retirement fund you choose. By directing just $500 of your monthly income to an IRA, you can max out your contributions for the year.
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How Much Could Social Security Benefits Go Up In 2023
Ongoing inflation means the cost-of-living-increase for Social Security could be the biggest in four decades.
Dan is a writer on CNET’s How-To team. His byline has appeared in Newsweek, NBC News, The New York Times, Architectural Digest, The Daily Mail and elsewhere. He is a crossword junkie and is interested in the intersection of tech and marginalized communities.
Social Security recipients could see a blockbuster increase in their benefits next year, analysts predict. As Americans grappled with inflation, the cost of living adjustment, or COLA, for 2022 was the biggest in nearly 40 years. Payments rose by 5.9% in January — or about $93 a month, taking the average monthly payment to $1,657.
But by June the US Bureau of Labor Statistics had announced that the Consumer Price Index, the year-over-year change in prices consumers pay for goods and services, was already up to 9.1% — far ahead of the adjustment Social Security accounted for. In July, the CPI dipped slightly, to 8.5%, but that still marked 17 consecutive months that inflation outpaced the 2% target set by the Federal Reserve.We’re still waiting on the rates for August, which will be released Sept. 13, and September, slated to come out Oct. 13. Not coincidentally, the COLA for 2023 will also be announced in October.
In the weeks before the official announcement, estimates for increases to next year’s Social Security benefits are already emerging.
Retirement Age: 51% Of Americans Retire At 61 Or Younger
Data shows that, in 2019, 51% of Americans retired at 61 or earlier, and 23% retired between 62 and 64, before Medicare coverage kicks in at 65.
And, despite white Americans having higher retirement savings on average, their average retirement age tends to be higher than Black and Hispanic Americans.
Data source: Board of Governors of the Federal Reserve System .
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How Have 401 Participants Allocated Their Investments
On average, 401 participants had 63 percent of their 401 plan balances invested directly or indirectly in equity securities at year-end 2018 in the EBRI/ICI 401 database. That consisted of equity funds, including mutual funds and other pooled investments , employers company stock , and the equity portion of balanced funds . Eight percent of account balances was invested in bond funds, 2 percent in money market funds, 6 percent in guaranteed investment contracts and other stable value funds, and 12 percent in the fixed-income portion of balanced funds.
Average Asset Allocation of 401 Plan AccountsPercentage of account balances, 2018
Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated. Percentages are dollar-weighted averages. Components do not add to 100 percent because of rounding.
Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See ICI Research Perspective, 401 Plan Asset Allocation, Account Balances, and Loan Activity in 2018.”
Life Expectancy And Retirement Income
Nobody knows how long they will live. This is one of the most challenging facts about retirement planning: How many years of retirement income will you need? Save too little and you risk spending your savings and relying solely on Social Security income.
Looking at average life expectancy is a good place to start. The Social Security Administrations life expectancy calculator can provide you with a solid estimate, based on your date of birth and gender. Just remember: Average calculations cant take into account your health and lifestylenow or in retirementor family history that could impact your life expectancy, so youll want to consider them in any calculations you do.
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Retirement Savings Statistics: How Do You Compare To The Average
How Much Does the Average American Have Saved for Retirement?
According to most retirement savings statistics, saving for retirement is something a lot of people put on the backburner. Until it is too late, that is.
For some people, the reason is that they are simply living paycheck to paycheck, so there isnt much left to put aside. Others have some leftover money after covering the monthly expenses but arent sure how much they need to put in their retirement fund.
There are some basic guidelines regarding the recommended retirement savings by age 62, which is when most people retire. Most experts agree that by the time you are 60, you should have eight or ten times your current annual salary in retirement savings.
So how do you fare compared to the average savings of Americans? Take a look at the stats below to find out:
Age : The 5x Recommendation
Ally Bank recommends that 50-year-olds should have five times their annual earnings saved, while Fidelity is more aggressive with a recommendation of six times the salary.
If you find that you’ve fallen behind in your retirement savings as money was diverted to other expenses — such as college tuition for your children — you can make a “catch-up contribution.” Once you hit 50, you can make an extra contribution to a tax-advantaged retirement account each year. The Internal Revenue Service determines the amount, which is $7,000 in 2022. That is a per-person figure, so couples can double the contribution.
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Retirement Accounts For Small
According a 2020 Bureau of Labor Statistics report, 33% of workers don’t have access to a workplace retirement plan. At companies with fewer than 100 workers, roughly half of employees are offered a retirement savings plan.
If you work at or run a small company or are self-employed, you might have a different set of retirement plans at your disposal. Some are IRA-based, while others are essentially single-serving-sized 401 plans. And then there are profit-sharing plans, which are a type of defined contribution plan.
Main advantages of plans for the self-employed:
Plans for contractors, the self-employed and small-business owners have higher contribution limits than most employer plans and IRAs.
These plans often offer more investment choices than employer-sponsored plans, such as 401s.
Many of these plans are easy to set up and therefore not much of a burden on the employer that’s you, if you’re a small-business owner.
You might be able to set up your account at a financial institution you already use.
If you’re self-employed, you can give yourself a generous profit-sharing contribution, plus make your elective deferral with catchup as the employee.
Main disadvantages of plans for the self-employed:
How Much Do I Need To Retire
How much you need to retire depends on how much you plan to spend in retirement. How much will you want to shell out on travel? What about saving for medical expenses? These considerations and more make planning your retirement paycheck difficult for many people, especially when theyre decades from retirement.
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How Much To Save For Retirement
Naturally, the next question becomes: how much should a person save for retirement? Simply put, it’s an extremely loaded question with very few definite answers. Similar to the answer to the question of whether to retire or not, it will depend on each person, and factors such as how much income will be needed, entitlement for Social Security retirement benefits, health and life expectancy, personal preferences regarding inheritances, and many other things.
Below are some general guidelines.
What Is The Maximum Contribution To A 401
For most people, the maximum contribution to a 401 plan is $20,500 in 2022. If you are more than 50 years old, you can make an additional catch-up contribution of $6,500 for a total of $27,000. There are also limitations to the employer’s matching contribution: The combined employer-employee contributions cannot exceed $61,000 .
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What Is The Average Pension Amount
Breakdown of the Average Retirement Income in 2021 Note that the median retirement income for households aged 60-64 is almost twice as high as the median retirement income for households aged 75 and over.
How much is the average pension in the US?
Pension Less than a third of Americans retire with a defined benefit pension plan today. For those retiring with a pension plan, the median annual pension benefit is $ 9,262 for a private pension, $ 22,172 for a federal government pension, and $ 24,592 for a railroad pension.
How much does the average person have when they retire?
A Federal Reserve survey found that the average retirement account balance in the U.S. looking only at those with retirement accounts was only $ 65,000 in 2019 . The conditional average balance was $ 255,200.
Best Individual Retirement Plans
Not everyone has access to an employer-sponsored retirement plan. Even if you do have a retirement plan through work, like a 401, you may want to save additional money beyond the annual 401 contribution limits. If thats the case, some of the best retirement plans for saving on your own are Individual Retirement Accounts and annuities.
|Who Is It Best For?||Eligibility|
Not subject to IRS contribution limits.
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Why Social Security Benefits Alone Wont Be Enough
For many Americans, Social Security benefits are the only source of income during their retirement. Social Security was never meant to be the sole source of retirement income, though. Retired workers average a monthly Social Security benefit of $1,543 as of January 2021 roughly the equivalent of a minimum-wage job. Add the rising debt levels among older Americans and you have a situation thats a far cry from most peoples retirement dream of travel and leisure.
What Role Do Retirement Account Investments Play In The Mutual Fund Industry
Mutual fund assets held in retirement accounts plans) were $12.1 trillion as of the end of June 2021, or 47 percent of overall mutual fund assets. Fund assets in 401 plans stood at $4.8 trillion, or 19 percent of total mutual fund assets as of June 30, 2021. Retirement savings accounts held a little more than half of long-term mutual fund assets industrywide but a much smaller share of money market fund assets industrywide .
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Figure Out Your Retirement Budget
How much is enough? That depends on your lifestyle and expenses, potential medical bills and the kind of support youll have from, say, a pension plan and Social Security. But as you review your savings goals, be careful not to set the bar too low, thinking youll spend less in retirement.
People typically dont downsize, says Harold Evensky, certified financial planner professional and founder of Evensky & Katz/Foldes Financial in Coral Gables, Florida. Its not uncommon for them to spend more in retirement than less.
Fill out a comprehensive retirement expenses worksheet to get a sense of where your money is going when a paycheck is no longer coming in.
To get a more personalized account, contact a fee-only certified financial planner, and make sure they put your needs before their own.