You put away money from each paycheck into your 401(k), but are you saving enough for your retirement? How much money should be in your 401(k)? Should you also open an IRA?
These are all fantastic questions. Being prepared for retirement means getting educated about your saving options. Read on for a better idea of how much you may want to save in your 401(k).
The amount of money you’ll need for retirement is not a uniform number for every person. It’s recommended that you save enough money so that your retirement income is about 70 to 85% of your pre-retirement income.
The CDC reports current life expectancy is 78 years. This means that if you plan on retiring at age 65, you’ll need to save enough money to cover a minimum of 70% of your current annual income for all 13 years. Since many people live well beyond 78, it’s smart to add additional years of income to give yourself a financial cushion.
The short answer is, you should save as much as you possibly can. The more you save for retirement, the better off you’ll be when you get there. Remember, you can’t go back and do it all over again, so it’s better to err on the side of caution and put away more money than you may need rather than too little.
If a person, starting at age 30, consistently saves 20% of their income, assuming they earn the average median salary in Pennsylvania (see chart here), into a retirement account with a compound annual interest rate of 6.5% percent, they’ll see their account grow to nearly $1 million by the time they turn 60.
Does this mean that 20% is the right amount for you to save? Not necessarily. How much you’ll need to retire depends on many factors, such as when you start saving, when you plan to retire, your anticipated expenses during retirement, and the lifestyle you’re hoping to maintain. You should meet with a trusted financial advisor to determine what’s best for you.
Many, though not all, employers offer matching contributions to 401(k)s up to a certain percentage. You should take advantage of this match program. Employers offer them as a means to encourage employees to save for retirement.
Not taking advantage of a contribution matched, employer-provided retirement account is like passing up free money.
Some people get confused about what type of retirement savings they should have or even what these two terms mean. To clarify:
Should you open an IRA even if you already have a 401(k)? For many people, the answer is yes. Diversifying retirement options can be smart. However, it’s recommended that you meet with a trusted financial advisor to determine what’s best for you.
Contact us today to learn more about opening an IRA with PSECU to complement your 401(k). You can also see more tips about retirement and saving on our blog.