There are two cardinal rules to remember about saving for retirement:
- The money you put in a retirement fund is tax-free, so it reduces your tax burden. You only pay taxes on it when you withdraw it at retirement (although you can also withdraw it early for certain hardships).
- The earlier you contribute to your retirement plan, even if it is a small amount, the richer you will be at retirement due to the magic of compound interest.
Your retirement goals may be slightly different from mine but probably not too much. Personally, I would like to be completely out of debt and maintain approximately the lifestyle I have now. Unfortunately, Social Security, as wonderful a program as it is, will not accomplish that. As I will explain a little later, Social Security is just a safety net that will not support you in the style to which you are accustomed. Social Security benefits are much more modest than many people realize; the average Social Security retirement benefit in June 2019 was about $1,470 a month, or about $17,640 a year. If you retire at the full retirement age (which is now 67) the maximum you can receive in monthly Social Security benefits is $3,011, if you have earned a good salary and paid in your 6.25% Social Security Tax each month (as a payroll deduction). This is only $36,132 per year, and it is subject to income tax deductions. You can earn a bit more if you delay receiving SS benefits until the age of 70, but generally, the economics are better to start receiving them at 67, even if you are still working.
In a recent survey, close to 50% of people 18 years and older report that they have no retirement savings—a national tragedy! We have to assume this means retirement savings other than Social Security, because if you are working, the 6.25% Social Security Payroll Tax is deducted from your payroll by your employer and sent to the IRS.
A good goal for retirement is to have enough income to match 70% of your pre-retirement disposable income. You will likely have your mortgage paid off and will not have any work-related expenses such as transportation, so 70% is a reasonable goal to achieve. I have read some recent articles that say 60% of pre-retirement income is adequate based on lower expenses. However, I am not ready to advocate that. In any case, these instruments can help you save up to 70% of your pre-retirement income:
- Social Security Payments
- Personal Savings
- 401(k)s or 403(b)s
- Individual Retirement Accounts (“IRAs”)
- Roth Individual Retirement Accounts (“Roth IRAs”)
- Annuities