Most Americans have less in their retirement accounts than they would like and far less than the rules dictate. So if this applies to you, then of course you are not alone. By now, most financial advisors recommend that you have between five and six times your annual income in a 401(k) or other retirement account by age 50. In general, assuming continued growth throughout your career, this should be enough for you to have enough savings to retire comfortably at age 65.
Consider working with a financial advisor as you finalize your retirement plan.
What your retirement provision should look like at the age of 50
Financial experts sometimes suggest that your retirement income should be around 80% of your pre-retirement income. For example, someone who made $100,000 a year until retirement would have about $80,000 a year when they retired. The reason for this discrepancy is that most households in retirement tend to have fewer needs and responsibilities and therefore spend less. The only major exception to this rule concerns healthcare. You should expect these costs to increase in your later years.
To maintain your savings, financial experts recommend that you withdraw about 4% a year from your retirement savings. This depends on three main factors:
How much money you have in your pension fund
The average return that your pension fund generates
Your projected Social Security income
Let's say you plan to need $80,000 a year in retirement.
If you are ready to be matched with local advisors who can help you achieve your financial goals, get started now.
First, you should check how much money you can expect to receive from Social Security each month. This income depends on how much you have earned during your working life and when you decide to retire. If you're an average Social Security recipient, the amount is about $1,650 per month or $19,800 per year. So you should expect to withdraw an additional $60,200 per year to make up the difference.
Using the 4% rule of thumb, $60,200/0.04, suggests this household wants about $1.5 million in their retirement savings. Other, more conservative recommendations suggest creating these plans without considering Social Security. In this case, you would want about $2 million in your retirement savings.
Don't miss any news that could affect your finances. Get news and tips for making smarter financial decisions with SmartAsset's semi-weekly email. It's 100% free and you can unsubscribe at any time. Sign up today.
The 4% rule can cause too much withdrawal. They are based in part on conservative estimates of your pension fund's rate of return. By the time you retire, you should have switched your portfolio to safe assets. Many bond funds with comparatively safe assets will have a yield of around 3% to 5% at this point, allowing you to stay around the replacement rate for your withdrawals.
So someone making $100,000 a year would want about $1.5 million in their retirement fund by age 65. So by age 50, according to many experts, that retiree would need to have at least about $600,000 in a 401(k) or other tax-deferred account. That would give the retiree 15 years to add another $900,000 to their retirement nest egg, or grow by an average of $60,000 each year for the next 15 years. Without significant capital appreciation in the retiree's tax-advantaged account, this is unlikely. Many advisors recommend aiming for a return of around 7% to 8% to reach the $1.5 million you need.
Reaching the retirement finish line
Aside from making sure your retirement fund's asset allocation is sufficiently aggressive, there are at least four other steps you can take to go from $600,000 by age 50 to $1.5 million by age 65 come.
Maximize your catch-up contributions
That's the most important thing you can do. The IRS limits how much you can put into a 401(k), Individual Retirement Account (IRA), and Roth IRA in a single year. From the age of 50, the upper limit increases so that you can make so-called “catch-up contributions”. For example, in 2022, most workers can only deposit up to $20,500 into their 401(k) accounts. However, anyone age 50 or older can donate up to $27,000. That extra $6,500 is significant, and between the ages of 50 and 65 is time to add up to something very real. Take advantage of it.
Open concurrent retirement funds
The IRS allows you to make contributions to a 401(k), an IRA, and a Roth IRA in the same year. However, there is an overlap between the contribution limits for an IRA and a Roth IRA.
If you're already maximizing your contribution limits on your 401(k) but are still concerned that this isn't enough, consider opening an IRA or Roth IRA to supplement your savings. This allows you to deposit money into multiple retirement accounts at the same time, significantly increasing your savings.
If you already have concurrent retirement accounts, you might want to consider simply opening a special purpose account. While it doesn't have the same tax benefits, there's no reason you can't save for retirement with an ordinary investment portfolio. You can put as much money into it as you want and then plan to leave it there for retirement.
Manage debt, manage expenses
An excellent way to free up cash is to stop paying interest on debt. If you already have debt, paying it off faster will reduce the amount you spend on interest and fees. This, in turn, gives you more money to use in your retirement account.
When it comes to long-term debt like a mortgage, paying down more aggressively can also lower your potential retirement expenses. You don't have to make these payments, which can reduce the amount of money you need each month when you stop working.
At the same time, consider your overall lifestyle. If you think you might not have enough for your retirement, are there ways to make long-term lifestyle changes to help reduce spending? For example, is there a cheaper place to live? It's not as easy as skipping the morning latte. Instead, consider shifting your monthly needs so that your budget changes significantly both today and in retirement.
Consider working more and retiring later
If you don't have enough money to fund additional retirement accounts, consider doing extra work to make that money. This can range from freelance work or gig work to a formal part-time job.
This is not a recommendation we make lightly. By the time you're in your fifties, the last thing most people want to do is “rush.” However, part-time work is a great way to supplement your finances, and if you need the money for retirement, it has to come from somewhere. More importantly, while needing a second job at 55 would be uncomfortable, needing a job at 75 would be far worse. Working today could help ensure you don't have to depend on it tomorrow.
The increase in social security payments from normal retirement age to 70 is significant. If you were born between 1943 and 1954, you will receive 100% of your monthly benefit when you start receiving benefits at age 66. If you start drawing pension benefits at age 67, you will receive 108% of your monthly pension because you have deferred drawing your pension for 12 months. If you start drawing pension benefits at age 70, you will receive 132% of your monthly pension because you have deferred drawing your pension for 48 months.
Most financial experts believe that by the age of 50, retirees should have about five to six times their annual income saved in their retirement account. If you haven't reached that mark yet, it's probably a good time to maximize catch-up contributions and start thinking about opening one or more supplementary retirement accounts. Also, make sure your investments are geared towards capital appreciation, which of course comes with greater risk, and reduce your discretionary spending.
We can all use some help with our finances, especially when it's time to start saving for retirement. This is where a financial advisor can provide valuable advice and insight.
Finding a qualified financial advisor doesn't have to be difficult. SmartAsset's free tool puts you in touch with up to three financial advisors based in your area, and you can interview the right advisors for free to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset's 401(k) calculator to get a quick estimate of how much your 401(k) account will have by the time you retire.
Photo credits: ©iStock.com/Andranik Hakobyan, ©iStock.com/AndreyPopov, ©iStock.com/DNY59
How much should I have in my 401(k) at 50? appeared first on the SmartAsset blog.