Q: I am 24 and make $60k a year. I am currently saving 5 percent, which is about $225 a month into my company's 401(k) plan. I have a portfolio that is more aggressive since I am young and have time to wait out the stock market. I currently have $3,000 in a rollover account from my previous job. Is $225 a month enough for my retirement?
A: It sounds like you are off to a good start, but you are probably going to need to ramp up your savings rate over time.
Running your numbers through a MoneyRates Retirement Calculator shows that you are on target to accumulate a little more than $930,000 by the time you are 65. That may sound impressive, but when adjusted for projected inflation, this is the equivalent of just over $270,000 in today's dollars. When you think of stretching that over 20 or 30 years of retirement, that is not such a healthy amount.
Also, those figures are based on an assumed 8 percent rate of return, which may be a little ambitious with bond and money market rates near historic lows. You say you are invested aggressively and therefore might think you could do better than 8 percent, but be advised that even stock returns are vulnerable with interest rates at such low levels. Your best shot at a bigger nest egg comes simply from saving more.
You should work with a retirement calculator to figure out just how much more you should save. As you weigh the variables involved, keep in mind four key points:
- Max out your employer match. If your employer matches any portion of your 401(k) contributions, your immediate goal should be to contribute at least enough to receive the maximum match. This is less about future savings projections than making sure you don't leave any dollars on the table today.
- Income replacement. A savings projection may look like an impressive nest egg, but think of it in terms of income replacement - how will it look spread out over the years you plan to spend in retirement?
- Keep in mind taxes on withdrawals. People tend to think of retirement savings accounts as tax-free, but they are only tax-deferred. You will have to pay taxes on your 401(k) dollars when you eventually withdraw them, so the portion of your nest egg available for spending won't be quite as big as it looks.
- Push the upper limit. At $225 a month, you are currently saving $2,700 a year. That's a far cry from the $18,000 2015 401(k) contribution limit. That maximum may represent too hefty a portion of your current salary, but your goal should be to work closer to the maximum over the next few years.
To be regularly saving for retirement at age 24 probably puts you ahead of most of your peers. However, it is your needs, not theirs, that you need to focus on, and meeting your needs is probably going to require a higher savings rate.
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