When is the perfect time to start thinking about retirement planning? As you start your first job? As you quickly approach your target retirement date? Somewhere in between? The truth is, no matter where you are in your professional or personal life, you need to start doing something about a retirement plan, if you haven’t already. The mistake people make isn’t waiting too long, it’s never planning in the first place. Wondering how to get started? That’s where the 401(k) enters retirement planning.
Let’s look at some numbers.
- Out of all non-retired people over the age of 60 in the U.S., 13% have no retirement savings.1
- A 65-year-old couple retiring today can expect to spend more than $300,000 in healthcare and medical expenses throughout retirement.2
- Most Americans close to retirement have saved only 12% of what they need.3
- 41% of millennials, 35% of Gen Xers and 30% of baby boomers have no access to an employer-sponsored retirement plan.4
- Retirees will need 70-90% of pre-retirement income to maintain their standard of living when they stop working.5
- The average American spends roughly 20 years in retirement.6
Increasingly, people can no longer depend on others to help support them during retirement. Instead, you need a source of income that is more robust than Social Security and more reliable than winning the lottery.
It’s true that some employers offer traditional pensions, but that number is dwindling all the time. What most employers offer is the opportunity to participate in a salary reduction plan such as a 401(k) or 403(b).
Are 401(k)s a Good Retirement Plan?
These plans are a painless way to set aside money for the future; all you have to do is agree to have a percentage of your gross income withheld every pay period.
- Any tax-deferred contributions reduce your current income taxes since they’re subtracted from your income before tax withholding is calculated.
- Contributions to a tax-free Roth 401(k) or 403(b) aren’t deductible. But when you withdraw after 59½, your earnings are tax-free (as long as your account has been open at least five years).
- Many employers match a percentage of the contributions you make, building your retirement funds even faster.
- Any earnings in your retirement plan account accumulate tax deferred. That means the earnings are reinvested to increase the base on which additional earnings can accumulate - a process called compounding.
Timing
Time is money when compounding is involved. The longer you add contributions to your plan and the longer those earnings increase your capital, the larger your account balance has the potential to grow.
Remember, though, that these are investments and they will go through periods of growth and decline. Having time on your side means that bumps in the road don’t have to be catastrophic.
To get a better idea of how early investing can impact your retirement planning, compare the potential results if you began investing at different points in your work life.
Remember that returns are not guaranteed. Your return could be low, and you could lose as well as make money. To better understand the importance of starting to save earlier in life, let's look at a few different scenarios.
401(k) Plan Started at Age 45
Living life in the moment, you decide to skip contributing to a 401(k) until you’re 45. Contributing $5,000 a year with an average 8% return, you’ll have about $247,000 in your account if you stop contributing at 65, based on a total contribution of $100,000.
401(k) Plan Started at Age 35
In this scenario, you begin contributing at age 35 with the same annual allocations. Assuming an 8% return average, you would have about $611,000 at retirement, based on a total contribution of $150,000.
401(k) Plan Started at Age 25
You start contributing to a 401(k) at 25, as soon as you’re eligible for a plan. You contribute $5,000 a year for 40 years until you retire at 65. Your return averages 8%, so your account value is almost $1.4 million, based on a total contribution of $200,000.
A 401(k) by Any Other Name
401(k) plans aren’t the only plans available to employees. If you work for a non-profit institution, such as a hospital, school or charitable organization, your employer may offer you a 403(b) plan that operates much like a 401(k). Other plans out there include 457 plans for state and municipal workers, TSP plans for federal employees and SIMPLE plans if you work for a small company.
To see how different amounts and interest earned impact your savings, please be sure to use this savings calculator.
Whichever vehicle you choose to help save for your retirement plan, the key is to start saving as early in life as you can. The more time you have to save, the more likely it is that you will have enough to last throughout the whole of your retirement.
To learn more about Atlantic Union Bank Wealth Management, please visit their page.
1,3Federal Reserve
2Fidelity
4PEW Research
5,6Department of Labor
This material is provided solely for educational purposes and is not intended to constitute tax, legal or accounting advice, or a recommendation for any investment strategy or transaction. You should consult your own legal, accounting, tax advisers, and/or portfolio manager.
Atlantic Union Bank Wealth Management is a division of Atlantic Union Bank that offers asset management, wealth banking and trust and estate services. Securities are not insured by the FDIC or any other government agency, are not deposits or obligations of Atlantic Union Bank, are not guaranteed by Atlantic Union Bank or any of its affiliates and are subject to risks including the possible loss of principal.