New retirement challenges
Life expectancy is increasing, pension plans are decreasing, and saving for the future looks a lot different these days. Learn more about modern-day retirement challenges and what to consider when planning for yours.
Life expectancies are rising, medical costs are increasing, fewer employers are offering traditional pension plans, and Social Security benefits could be lower for future generations.
These challenges mean you might need to save more for a longer and possibly more expensive retirement than people have in the past.
There’s a lot of uncertainty when it comes to predicting a future that’s thirty or forty years away. But, the sooner you begin planning for retirement, the better off you could be. And when you’re young, you have one of the greatest advantages when it comes to planning for retirement: time.
By starting early and getting in the habit of regularly setting aside money to invest for your retirement—even just a little bit—you’re going to be able to take advantage of thirty, maybe forty years of potential market growth.
When thinking about how much you’ll set aside for your retirement investments, one common target is about 15% of your gross income, that is your income before taxes.
Why 15%? Well, some researchers have estimated that setting aside about 15% of your income every year for retirement could allow you to keep a lifestyle in your later years that is as comfortable as the one you may have gotten used to in your working life.
Now, if you’re just starting in a career, you may not be able to do that right away, but 15% is a good benchmark to reach for--and you can always try setting aside more if you can afford it.
On the other hand, if you’re starting to save for retirement later—say in your 30s or 40s, or if you haven’t been able to consistently set aside 15% of your income—you will likely need to put a larger percentage of your income aside to reach your goals.
Another potential benefit that young people have today is more options for retirement investments than previous generations. There are tax advantaged accounts like 401(k)s, Roth IRAs and Traditional IRAs.
Another advantage you might have, if you work at a company that offers it, is what’s called a matching contribution. Basically when you contribute money to a 401(k), your employer may also contribute a percentage of what you contribute to your account. That percentage is set by your employer and may be based on things like how long you’ve worked for the company, or how much you earn. It’s worth looking into the details because this benefit can really give your retirement account a boost.
Of course there are risks to investing. The market is constantly going up and down. And, unlike a deposit account at a bank, an investment account is not FDIC insured, not bank guaranteed, and could lose value.
Also, these types of accounts might have fees for things like the administration of the account.
And there may also be expenses or fees associated with some specific investments as well.
These plans are created to help you invest for retirement, but they also may result in the payment of additional taxes if you withdraw money from them early- that is, before you’re 59 and a half. Generally, with these types of accounts, if you withdraw money early, you could be charged an additional 10% tax on top of any income tax you might owe. Though there are some situations where these penalties for premature distributions might not apply. You can find out more about the tax implications of early withdrawals from retirement accounts at IRS.gov.
It’s a good idea to do some research when you set up your plan, or talk with your employer or an investment professional so you understand how your account works.
Even though there are a lot of uncertainties when it comes to retirement planning, starting early and getting in the habit of contributing regularly to a retirement account can help you be prepared for the future.