The Wisconsin Bankers Association offers for your use the following consumer education column. Your bank is free to use this as a community column in your local newspaper, a letter to the editor, a press release or in any other way you see fit. The purpose is to give our members an easy-to-use tool for promoting the banking industry to Wisconsin's communities.
Approaching retirement should be an exciting time in your life – you have traveling, spending more time on hobbies, and generally enjoying your golden years to look forward to. However, for many, retirement is a source of stress and anxiety instead. Have you saved enough? Do you need to keep working part-time? How will you pay for unexpected medical bills? Creating a retirement plan early and reviewing it often is key to alleviating some of this stress. Here are a few questions to consider when checking up on your retirement plan:
How much do I need to save?
Experts recommend saving 10 percent of your annual income towards retirement for the first decade of your career. After that, increase your contributions to 15 percent of your annual income. To calculate if you're on track, there are three general benchmarks: 1) by age 35, you should have the equivalent of your annual income in savings; 2) by age 45, aim to have three times your current annual salary saved up; and 3) in your final years in the workforce, you should have at least eight times your final salary in your nest egg.
How much risk am I taking on?
If you haven't reviewed or adjusted your retirement plan in a long time, you could end up losing a big chunk of it. Typically, the younger you are, the riskier the investments in your retirement portfolio. This is because the potential for higher returns outweighs the risk of losing money because you have enough time to make up any losses prior to retiring. As you get closer to exiting the workforce, that balance shifts. Talk with your plan administrator and reassess your risk tolerance every 10 years to ensure that you're not taking on more than is advisable for your situation.
Where should I save?
There is a wide variety of retirement savings vehicles. A few of the most popular are IRAs and 401(k)s. A 401(k) is directed by employers and contributions are deducted from paychecks, before taxes. The account is then taxed when a withdrawal is made. An IRA account is an individual account that provides tax advantages that a regular savings account does not. There are two types of both IRAs and 401(k) plans, Roth and Traditional. The basic difference is when you have to pay the taxes on the account. With a traditional retirement account the taxes are paid when the money is withdrawn. With a Roth account the taxes are paid upfront (when the money is added to the account), making them especially valuable to younger savers.
What will I owe Uncle Sam?
Finally, when evaluating the state of your retirement plan, be sure to factor in your current tax bracket as well as the bracket you expect to be in when you retire. If you're in a lower bracket now, make larger contributions to any Roth accounts you have, since with that type of account the tax is taken out as you pay in. With traditional retirement accounts, taxes are paid when you withdraw. Roth accounts are especially valuable to younger workers, as they are more likely to climb into higher tax brackets as they age, meaning they would owe more in taxes on the same amount of money later in life.
If you're still not sure where you are with your retirement savings, or want to learn how you can start saving more, talk to you banker or financial advisor about your options.
An archive of Consumer Columns is available online at www.wisbank.com/ConsumerColumns.