Five Retirement Success Steps RevealedApril 11, 2018
- Although every situation is unique, many investors share similar concerns about saving for retirement.
- Guidelines can help investors get started even when they’re uncertain about the future.
- Investors should regularly revisit their strategies and assumptions to keep their plans and goals aligned.
Saving for retirement represents an important long-term financial goal for most investors. Although your savings strategy will reflect your personal circumstances and the type of retirement you envision, certain challenges are common to nearly everyone. For instance, those still in the workforce frequently want to know whether they are saving enough for retirement, while retirees often wonder how much they can afford to spend. The answers to these common questions may vary from person to person, but the following recommendations can help start you down the path toward retirement success.
1. How much should I ultimately be saving for retirement?
"Exactly how much you need to save depends on several factors, including your lifestyle, how much you earn, and your unique vision for this next stage of life," says Keith McGurrin, CFP®, lead financial planner with T. Rowe Price. However, by aiming to save at least 15% of your income—including any employer match—you can give yourself a good chance to maintain your current lifestyle in retirement.
Each extra percentage point you save will make a difference in your retirement savings. (See “Every Little Bit Helps.”) T. Rowe Price’s 15% guideline is based on several factors, including the potential that your retirement will last 30 years or longer. Life expectancy increases with age: For example, your likelihood of living to age 95 is higher at age 70 than at age 65. That means as you live longer, you’ll face increased risks from inflation and higher health care costs. A 15% target can help your savings generate a robust income stream in the face of these long-term challenges.To set up automatic investments, log in to your account.
Contributing a few percentage points more each year could make a big difference in your retirement savings.
All figures assume 7% annualized returns (based on a blend of historical rates of return for stocks, bonds, and short-term investments), a $50,000 starting salary at age 30, and a 3% annual salary increase. The savings estimates are rounded and shown in future dollars. This example is for illustrative purposes only and does not represent performance of any particular security. Investment returns will vary and may be higher or lower than in this example. These assumptions do not account for plan or IRS limits, may not match your situation or market conditions, and may differ from other saving target estimates. If you use this chart, please be sure to take all your assets, income, and investments into consideration. All investments involve risk, including possible loss of principal.
2. Have I really saved enough for retirement so far?
To help investors better gauge their preparedness, T. Rowe Price has determined recommended savings targets based on age and salary. (See “Target Savings Amount.”) For example, by age 45, consider aiming to have saved four times your current salary. If you fall below this target, don’t panic. Work to increase your savings rate—possibly raising it above the 15% target. If you are on track, congratulations; keep working to maintain your momentum.Take 30 seconds to see if you're on track for retirement.
Compare your current savings with the T. Rowe Price benchmark for your age.
Assumptions: Individuals have saved (from age 25 to a retirement age of 65) 15% of their annual salary (increased by 3% each year) in a tax-deferred retirement account with a preretirement portfolio consisting of 60% stocks/30% bonds/10% short-term bonds, changing to 40% stocks/40% bonds/20% short-term bonds during retirement. Gross retirement income through age 95 is estimated to equal 75% of preretirement salary, consists of annual retirement account withdrawals of 4% plus estimated Social Security benefits (both beginning at age 65), and is increased by 3% annually for inflation. The savings benchmark analysis is based on results from our Retirement Income Calculator, which considers 1,000 market simulations and an 80% simulation success rate, using hypothetical age 65 salaries of $70,000, $100,000, and $110,000. That tool’s methodology and assumptions are explained in detail at troweprice.com/ric. Users should consider their own circumstances. Results may not apply to earnings that vary substantially from modeled salaries.
3. Should I contribute to a Roth IRA or a Traditional IRA?
Setting money aside in a Roth individual retirement account (IRA) offers a few distinct benefits over saving in a Traditional IRA. (See “Comparing IRAs.”) In particular, withdrawals from a Roth IRA are tax-free in retirement (provided you are age 59½ or older and have held the account for five years). By comparison, withdrawals from Traditional IRAs generally are taxed as ordinary income. This difference in tax treatment means that a Roth IRA offers the potential for greater income flexibility and tax diversification in retirement.
Moreover, Roth IRAs aren’t subject to the required minimum distributions (RMDs) that apply to most retirement accounts starting at age 70½, so you can let any Roth assets continue to benefit from potential tax-free growth for the rest of your life, if you choose. “Roth contributions can be a good choice if you don’t expect your tax bracket to decrease in retirement or if you already have significant Traditional assets and won’t need all of those funds for income,” says McGurrin.Learn more about Roth and Traditional IRAs.
When it comes to making a thoughtful decision between a Roth IRA and a Traditional IRA, it helps to understand the differences.
4. Which retirement account should I fund first?
The order in which you contribute to your retirement accounts can help increase future spendable income. Your best contribution order will depend on your personal situation. When deciding on the right approach, make sure not to miss out on any matching contributions if offered by your employer’s retirement plan. Also, consider taking advantage of the potential tax-free withdrawals from a Roth account—both within your employer’s retirement plan (if available) and through a Roth IRA (if you meet income qualifications).*
Let's look at an example. Suppose Roth contributions make sense for your situation and you’re eligible to contribute to a Roth IRA, but your company doesn’t offer a Roth option in its 401(k) plan. In this case, contribute enough to your Traditional 401(k) to earn any company match, then to a Roth IRA. Then direct any supplemental savings to your Traditional 401(k) and/or a taxable account, depending on your circumstances and other financial goals.
5. What should I consider when establishing an income plan for retirement?
First, think about how much money you’ll need in retirement to maintain a comfortable standard of living. A 4% withdrawal guideline with annual adjustments for inflation can help provide a good starting point to balance your need for income with your desire not to outlive your assets. "There is flexibility in this recommendation, however, primarily to help you manage your assets conservatively," McGurrin says. "For example, you might want to consider forgoing an inflation adjustment after a down market."
Next, decide which accounts you will draw on first in retirement. T. Rowe Price suggests starting with taxable accounts to benefit from lower long-term capital gains rates. Then, access tax-deferred accounts (i.e., 401(k)s or IRAs), where distributions are taxed at ordinary income rates. Finally, tap in to your tax-free accounts (i.e., Roth IRAs, Roth 401(k)s) last. This order may vary depending on your situation; seek out the advice of a tax advisor if your situation is complicated.
Also, consider your options for Social Security. You can start taking Social Security benefits at age 62, but waiting just a few years will allow you to claim your full benefits. For individuals born between 1947 and 1954, your full retirement age (FRA) is 66. If you were born between 1955 and 1959, your FRA is between 66 and 2 months and 66 and 10 months, depending on your birth year. And for those born in 1960 and later, your FRA is 67. No matter your FRA, the longer you wait—up to age 70—the higher your lifetime benefit may be. Consider coordinating your claiming strategy with your spouse. For instance, to maximize the benefit for a surviving spouse, the higher earner should wait as long as possible before claiming benefits.
Finally, remember that you’ll need to take RMDs from retirement accounts by April 1 of the year after you reach age 70½. (Roth IRAs generally are exempt from the RMD rules.) If you don’t initiate this distribution, you may have to pay a 50% tax penalty on the amount not withdrawn.
*In 2017 and 2018, eligibility to make the maximum Roth IRA contribution requires a modified adjusted gross income (AGI) of less than $118,000 and $120,000, respectively, for single filers and less than $186,000 and $189,000, respectively, for married couples, filing jointly. (A modified AGI of less than $133,000 and $135,000, respectively, for single filers or less than $196,000 and $199,000, respectively, for married couples is required for partial contributions.)
This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments or investment management. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
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