PAID POST by T.Rowe Price — Five Questions to Ask When Saving for Retirement (2024)

”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 Judith Ward, CFP®, a senior financial planner with T. Rowe Price. “However, by aiming to save at least 15 percent 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 can make a difference in your retirement savings over time.

The T. Rowe Price 15 percent guideline is based on several factors, such as:

• Potential for retirement to last 30 years or longer.
• Inflation resulting in decreased spending power.
• Higher health care costs.

A 15 percent target and wise investment decisions can help your savings generate an income stream in the face of these long-term challenges. Many individuals may set their savings rate through their workplace plan, like a 401(k). Investors can also supplement these savings with a Traditional I.R.A., a Roth I.R.A. or a regular investing account.

However, 15 percent may not be a reasonable rate for everyone. Still, you can start small and work your way up. “We don’t presume that everyone starts saving at our recommended 15 percent of their income immediately upon receiving their first paycheck,” says Roger Young, CFP®, a senior financial planner with T. Rowe Price. “For example, an investor may start saving 6 percent at age 25 and ramps savings up by one percentage point each year until reaching an appropriate level. We found that 15 percent of income per year (including any employer contributions) is an appropriate savings level for many people, but we recommend that higher earners aim beyond 15 percent, mainly because a lower percentage of income will come from Social Security.”

Most important, making wise investment decisions will ultimately have the biggest effect. Simply contributing 15 percent toward any investment may not generate a reliable income stream. But T. Rowe Price can help you devise an asset allocation for your specific needs.

Considering you may spend 30 years or more in retirement, it’s important to have enough set aside so that your money will last. “A quick way to check your progress is to assess how much you’ve saved by certain ages,” Ward says. “We refer to the target levels as savings benchmarks.”

To find your retirement savings benchmark, look for your approximate age and consider how much you’ve saved so far. So, using the benchmark range, having one to one-and-a-half times your annual income saved for retirement by age 35 is a reasonable target. It’s an attainable goal for someone who starts saving at age 25. For example, a 35-year-old earning $60,000 would be on track if she’s saved about $60,000 to $90,000.

These benchmarks assume you’ll depend primarily on personal savings and Social Security benefits in retirement. However, if you are expecting other income sources (e.g., a pension), you may not have to rely as much on your personal savings, so your benchmark would be lower.

The midpoint benchmarks are good starting points, but circ*mstances vary by person. Key factors that affect the savings benchmarks include income and marital status. Depending on your situation, you may want to consider other targets within the ranges. As you're nearing retirement, you’ll want to go beyond general benchmarks and think more carefully about your specific spending needs and income sources.

If it appears you’re falling below the benchmark and you‘re behind on your savings goals, make sure you’re taking advantage of all the savings options available to you.

Consider contributing more than 15 percent of your salary and taking advantage of both an I.R.A. and a taxable account. If you’re 50 or older, your contribution limits for your 401(k) and I.R.A. will be higher than for those under 50.

Here are some other things to consider:

•Make sure you are taking advantage of any company match in your workplace retirement plan.
• If you can increase your savings rate right away, that’s ideal. If not, gradually save more over time.
• If you have a company retirement plan that enables automatic annual contribution increases, sign up.
• If you are struggling to save, many employers offer financial wellness programs or other tools that can help with budgeting and basic finances.

Setting aside savings in a Roth I.R.A. can offer a few distinct benefits over a Traditional I.R.A. Qualified withdrawals from a Roth I.R.A. are tax free in retirement (generally, if you are age 59½ or older and have held the account for at least five years). By comparison, withdrawals from Traditional I.R.A.s generally are taxed as ordinary income. Additionally, Roth I.R.A. contributions can be withdrawn at any time.

Moreover, Roth I.R.A.s aren’t subject to the required minimum distributions (R.M.D.s) that apply to most retirement accounts starting at age 72. So you can let Roth assets benefit from tax-deferred growth for the rest of your life.

“Roth contributions can be a good choice if you don’t expect your tax rate to decrease in retirement or if you already have significant traditional assets and won’t need all of those funds for income,” Young says.

While a Roth is a good choice for many people, it’s not best for everyone. If you’re in your peak earning years, a Traditional I.R.A. may be a better strategy.

When you retire, you might eliminate expenses. As a result, your income from Social Security and the amount you need to draw from retirement accounts likely will be less than what you earn today. So your federal tax bracket could be lower in retirement. In this case, taking the tax deduction now with a traditional contribution may make more sense than the Roth contribution. You’ll help reduce your current taxable income while paying a higher tax rate and then make withdrawals at a potentially lower tax rate later in retirement.

“Keep in mind that your best choice between a Roth I.R.A. and a Traditional I.R.A. may change as you revisit your investment strategy over time,” Young says.

The order in which you contribute to your retirement accounts could help increase future spendable income. When deciding, make sure you don’t miss out on any matching contributions if offered by your employer’s retirement plan. Also, consider taking advantage of a Roth 401(k) if available through your workplace. It offers the same tax benefits as a Roth I.R.A., but has no income-limit requirements.

However, suppose you’ve determined Roth contributions make sense for your situation and you’re eligible to contribute to a Roth I.R.A., but your company doesn’t offer a Roth option in its 401(k) plan. In this case, you can follow this order:

1. Contribute enough to your traditional 401(k) to earn any company match.
2. Contribute to a Roth I.R.A. up to the contribution limit ($6,000 for those under 50 in 2020).
3. Direct any supplemental savings to your traditional 401(k) and/or a taxable account.

“Starting to draw down your savings can be a challenge after years of putting money aside,” Young says. “A strategy that includes a sustainable withdrawal rate and an order for which accounts to draw from can help ensure you make the most of your savings.”

T. Rowe Price suggests the 4 percent guideline as a starting point for a withdrawal strategy. This means that in the first year of retirement, you could consider a withdrawal amount that is 4 percent of your retirement account balance. Every year, reassess the following to adjust your withdrawal amount if needed:
•Your spending needs.
•Portfolio performance.
•Market environment.

Make sure you plan your strategy well before required minimum distributions (R.M.D.s) come into play.

Also, consider your options for Social Security. You can start taking reduced Social Security benefits at age 62, but waiting until your full retirement age will allow you to claim full benefits. And the longer you wait, up to age 70, the higher your annual benefit will 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 (up to age 70) before claiming benefits.