Saving for retirement is important. If you don’t, you may be limited to only social security once your time in the labor market comes to an end. And that could be a dangerous thing.
Social Security will only replace about 40% of your pre-retirement income, and that’s assuming you’re earning an average salary over your career. Most seniors, however, need about twice as much income to manage their bills without undue stress or budget cuts. And so you will clearly need your own savings if you want to hit that mark.
If you haven’t reached the $250,000 mark in your 401(k) plan, there may be no reason to panic. But if you’re older, you may need a serious catch-up plan.
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It all depends on your personal schedule
If you’re in your 20s or 30s and haven’t saved $250,000 for retirement, don’t worry. The reality is that many people start out with lower salaries earlier in their careers, and at this point you’ve only had a decade or two to benefit from the compounded returns in your 401(k).
But if you’re in your 50s and don’t have a $250,000 reserve for your retirement, that could be more of a problem. And if you’re a few years away from retirement, well, frankly, that can be very problematic.
If you withdraw from your retirement savings plan at a 4% annual rate, a balance of $250,000 will result in an annual income of $10,000. Frankly, it’s not much. And so, if you don’t even have $250,000 to your name and you’re nearing retirement, it’s important to take steps to increase your contributions.
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This may require you to cut back on your expenses or take on a side job. But making those sacrifices now could save you a world of financial stress in retirement.
In fact, let’s say you’re 60 with $200,000 in your 401(k). Let’s also assume that you want to retire at age 67 and have already opted for more conservative investments in your retirement plan that provide you with an average annual return of 5%.
Depending on your age, you can contribute up to $27,000 per year to a 401(k). Do it for seven years and you will increase your balance from $200,000 to $501,000. That’s more than double what you started with.
Plus, with that balance, a 4% annual withdrawal rate earns you about $20,000 in annual retirement income. It’s definitely better than $10,000.
Get back on track
If you’re low on retirement savings as you approach this stage, it’s important to push yourself to increase your capital while you can. This could mean cutting expenses, working more, or even delaying your official departure from the workforce. But if you don’t make this effort, you could find yourself very unhappy in retirement. And that’s really not what you want.
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