For many working-class Americans, retirement savings is based on how much they’ve contributed to their 401(k) plans. There is no magic amount to aim for, it’s based on personal needs and lifestyle. Establishing financial benchmarks along the way can be a challenge because of the number of factors to consider. Where do you plan on living? What kind of lifestyle do you expect? And at what age do you plan to retire?
A 401(k) is a defined contribution retirement plan. Many employers offer plans where employees can contribute a percentage of their paycheck tax-free toward their retirement. The plan provider then invests the contribution into a number of different funds where your retirement savings can begin to grow. When you retire, you can begin making withdrawals. But that money will then be taxable.
Where you choose to retire will be one of the most crucial factors! When deciding how much to contribute to a 401(k), one needs to ask themselves if they want to retire in Hawaii or a state with a lower cost of living. The cost of living in most big cities like New York and Los Angeles are much higher than in more remote locations like Montana or New Hampshire. This lower cost of living could allow you to make the most of your retirement income.
Another location-based factor is taxes. Some states have no income tax at all, whereas others can drastically reduce the amount of disposable income you have by up to 8%. Property tax is another factor, because although states like Texas have no income tax on the amount you can withdraw from your 401(k), they have exceptionally high property taxes.
The age at which you retire will be another factor you need to consider. With all the advancements in modern medicine, people are living longer than ever. If you can live to age 90 and choose to retire at 65, you will need to have 25 years’ worth of savings for the lifestyle you’ve chosen. And if you work a low stress job, you may choose to gradually dip your toe into the retirement pool. This could give you a few more years for your retirement account to grow, as well as lower the years you will be solely reliant on your retirement income.
So, the question that begs to be answered is how much does one needs to retire? You may want to check every few years from ages 30-60 to see if you’re on track. The average American only has around $13,000 saved in their 30’s (when they should have $50,000 saved). By age 40, you should have three times your annual salary, and by age 60 you should have eight times your annual salary.
When all is said and done, the key to retirement is to begin planning as early as possible. Think about the key factors that will most affect your lifestyle and always plan on detours on the road to retirement. If your employer matches your 401K contribution, you should always contribute the maximum they match. Planning is the key, and you should seek out a reputable financial advisor who can help you live the way you want to in your golden years.
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