As a general guideline, you'll need to replace at least 75% of your current annual income to retire comfortably, and Social Security probably won't be enough.
Thanks to stunning advances in medicine, health and nutrition, most of us expect to live long past the traditional retirement age. Americans who reach 65 these days are likely to live well past 85. (Society of Actuaries Retirement Plan Preferences Survey, January 2004)
Research indicates that financial freedom is the goal of working people planning active retirements that may last 20 or 30 years. Financial freedom will allow more time for family, travel, hobbies, new careers, volunteer efforts and continuing education.
Studies indicate most Americans must replace at least 75% of their current salary to enjoy a measure of financial freedom when their working days are done. Social Security is likely to provide 30% or less of their retirement income needs. (The 2006 Annual Report of the Board of the OASDI) As a result, many of today's working Americans could face a looming "income gap" in their retirement years.
Annual Projected Retirement Income Needs
| Current Annual Income |
Estimated Annual Retirement Income |
Approximate Annual Social Security |
Projected Annual Income Gap |
Total Needed for 20 Years at 3% Inflation |
| $20,000 |
$15,000 |
$4,500 |
$10,500 |
$ 282,139 |
| $35,000 |
$26,250 |
$7,875 |
$18,375 |
$ 493,743 |
| $50,000 |
$37,500 |
$11,250 |
$26,250 |
$ 705,347 |
Determine how much you need to save, enter your personal data into this LifeSpan Road to Retirement calculator. (Click here for the Spanish version)
Start Saving Now!
Time is on your side if you start as soon as possible to fill this potential income gap. Don't make the mistake that many of today's retirees made. A large number of retired Americans say they wish they'd saved more - and started saving earlier - during their working years.
Enjoy Tax-deferred Growth Potential
Through time and compounding, the potential for growth exists in tax deferred accounts. Money deducted from your paycheck is invested in your retirement plan before taxes. And through tax deferral, you don't pay taxes on any potential investment gains until you withdraw money. At that point, taxes on any investment gains would be taxed at ordinary rates. And note that investment values will fluctuate so that, when redeemed, it may be more or less than the original amount invested.
Assuming:
-
$100 monthly contribution
-
6% interest
-
25% tax bracket (assuming 25% federal taxes with no other state taxes or additional changes removed)
 This is a hypothetical example and is not indicative of any product or performance and does not reflect any fees or expenses associated with investing. Investment values will fluctuate with changes in market conditions. Taxes will be due upon distribution of the tax-deferred amount, and if taken prior to age 59 1/2 may be subject to an additional 10% federal tax penalty. If taxes and investment expenses were shown the results would be lower. Changes in tax rates and tax treatment of investment earnings may impact the comparative results. You should consider your personal investment horizon and income tax bracket, both current and anticipated when making an investment decision as these may further impact the results of the comparison.
Through Contributions, Your Current Tax Amount Can Decrease
You also may receive an immediate tax break as a participant in your retirement plan. The money set aside is not included in your current taxable income, and you pay less in taxes every pay period.
The Power of Pre-tax Savings
Assumption: $39,000 annual salary / $1,500 pay every other week
| Contribution Rate |
0% |
3% |
5% |
10% |
| Retirement plan contribution |
0 |
$45 |
$75 |
$150 |
| Take-home pay (Taxes at 25%) |
$1,125 |
$1,091 |
$1,069 |
$1,112 |
| Tax Savings |
0 |
$11 |
$19 |
$38 |
| Net difference in take-home pay with tax-savings is only... |
0 |
$34 |
$56 |
$112 |
This is a hypothetical example and assumes a 25% federal tax bracket with no other state taxes or additional changes.
The "tax savings" is a result of currently not paying 25% federal tax on your retirement plan contribution.
Distributions will be subject to taxes, and if taken before age 591/2 may be subject to additional 10% federal tax penalty.
Consider Investing the Maximum Allowed
The maximum amount that may be set aside annually in a retirement plan has been increasing in recent years. Moreover, if you're 50 or older, additional "catch-up" amounts are allowed:
| Year |
Maximum |
'Catch-up' Amounts for Over Age 50 |
| 2008 |
$15,500 |
$15,500 + $5,000 Catch-up = $20,500 Total |
A Convenient Way to Invest
When you invest a set amount every payday, you're following a strategy recommended by many financial professionals. It's called dollar cost averaging. Here's how it works: Because prices of investment options fluctuate, you buy more shares when prices fall and fewer shares when prices rise. However, this strategy, also known as periodic investing, cannot assure a profit and cannot protect against loss in a declining market. You should consider your financial ability to continue buying shares through periods of low price levels.
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