Planning for retirement is an inexact science, but plenty of researchers and financial advisers try to provide some guidance.
Here are their suggestions:
Young adults
Save 15 percent. A study this summer by the Center for Retirement Research at Boston College found that a 25-year-old who saved 15 percent of her salary annually could retire at age 62 and replace 70 percent of her pre-retirement income.
If you put away only 10 percent every year, you can take home the same amount of retirement income — you just have to wait until age 65 until you can finish working. (The calculations assume an average annual return of 4 percent, after inflation.)
A 35-year-old with zero retirement savings would have to save 24 percent of his income to retire at 62, and 15 percent of his salary to leave the workforce at age 65.
Take advantage of the employer match. Setting aside 10 percent to 15 percent of your income may seem like a lot of money, but the good news is those figures include any matching contributions you receive from an employer. More than 80 percent of companies with a 401(k) or other retirement plan offer a match.
Make adjustments. What if you stop saving for retirement for a few years, say, because you go back to graduate school or take time off to have children?
A study by Baltimore-based mutual fund company T. Rowe Price found that a worker who had been saving 13 percent of his salary until age 35, but then stops making any retirement contributions for five years, can catch up.
To do so, though, he would have to increase his annual savings rate to 17 percent. (Older workers who take a break have to increase their contributions by considerably more because there is less time for the money to compound and grow.)
Use calculators. Plenty of calculators are available online to help you.
The Vanguard Group, known for its low-cost index mutual funds, offers a simple version at personal.vanguard.com/us/insights/retirement (click on “set your retirement goals”). The calculator estimates how much you’ll have accumulated by age 65, as well as the amount of money you can withdraw each month.
Women’s issues
When it comes to retirement, women face a different set of circumstances. A woman who’s 65 today has a 54 percent chance of living to age 85, compared to a 41 percent chance for a man, said S. Katherine Roy, chief retirement strategist at J.P. Morgan Asset Management.
“Life expectancy tells only half the story,” said Roy. “Plan on the probability of living much longer, perhaps 30-plus years in retirement.” For married couples, there’s a 47 percent chance that one spouse will live to age 90, she said.
Here are some key tips for women:
Learn about risk: “Find an adviser who will help you understand risk,” Roy said. “No one sits down with women and talks to them about the different types of risk.”
Understanding risk also means knowing why you need to invest for the long haul. Long term, the market isn’t as volatile as you may think.
Don’t retire too early: Social Security pays you more if you don’t claim benefits early. This is critical.
Essentially, you have three choices: You can start receiving benefits as early as age 62. You can wait until you reach full retirement age, somewhere from age 65 to 67. Or you can delay as long as age 70. The earlier you start receiving benefits, the less you’ll receive each month. That’s because your benefits are reduced a fraction of a percent for each month before your full retirement age, which is based on the year of your birth.
For every year you delay past your full retirement age, up to age 70, your benefits will rise by 6 percent to 8 percent. If your spouse takes Social Security early, it can hurt you in the long run.
Anticipate your needs: Women also are more likely to need long-term care. Everyone over the age of 50 needs long-term care insurance, according to Erin Botsford, certified financial planner. “We used to say that if they had net worth of more than $5 million, they didn’t need long-term care insurance,” Botsford said. “That’s not the case anymore because the cost of extended care or home health care is so expensive.”
Inflation costs and benefits
While you’re congratulating yourself for the gains in your 401(k) this year, be aware that they might not be enough to cover your retirement expenses.
So concludes recent data from investment firm BlackRock, which calculates indexes that track Americans’ retirement savings against inflation targets, longevity expectations, interest rate changes and other measures.
Median retirement savings among 55-year-olds rose about 16 percent in the year ended Sept. 30 — to $271,620 — but the projected cost of retirement jumped by about 18 percent. Every $1 of future retirement income for those 55-year-olds, based on current life expectancy, takes savings today of more than $15, the company said. A year ago, the figure needed was about $12.
Inflation-based hikes in retirement account savings limits and Social Security benefits released recently for 2015:
Benefit hike: Social Security and Supplemental Security Income beneficiaries get a 1.7 percent inflation bump next year, which translates to about $22 per month for average retirees. Average monthly benefits for retirees are estimated to be $1,328, or $2,176 for couples who are both receiving benefits. Maximum individual benefits for workers retiring at full retirement age in 2015 are $2,663 per month.
Pre-retirees: If you’ve started collecting Social Security benefits and are still working prior to your full retirement age, a portion of benefits are withheld for every dollar you earn above $15,720. In the year you reach full retirement age, the earnings limit is $41,880.
Workplace plans: Contribution limits for 401(k), 403(b) and federal employee plans increase by $500, to $18,000.
Catch-up: Workers 50 and older will be able to boost their accounts at work by $6,000, up from $5,500 this year. Catch-up provisions for IRAs didn’t budge from $1,000 because they aren’t tied to inflation.
Roth IRAs: Income-based phase-outs for making contributions to Roth IRAs, where after-tax money grows and is generally withdrawn tax-free, increase from $183,000 to $193,000 for married couples filing jointly and from $116,000 to $131,000 for singles and heads of household.
Carolyn Bigda and Janet Kidd Stewart of the Chicago Tribune, and Pamela Yip of The Dallas Morning News contributed to this report.
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