Now’s the time to review your retirement savings strategy

It’s a good time to take stock of your retirement savings strategy. Are you saving enough to cover your retirement needs? The answer depends on many factors, including your expected living expenses, bucket list items (such as travel and hobbies) and potential medical and long-term care costs.

Also be aware that many employers have embraced “auto-enrollment” and It's important to factor inflation into your savings plan. For example, the median annual U.S. household income is $62,000 today. If that's your targeted retirement income and you expect to retire in 25 years, you'll need approximately $130,000 annually to have the same purchasing power (assuming a 3-percent annual rate of inflation).“auto-increase” as a way to help employees who fail to enroll in their company 401(k) plans or who don’t contribute enough to their retirement plans. These provisions often coincide with the company’s open enrollment period.

Minimize the Guesswork

Opportunities during the year are limited — including open enrollment season or a major change in your personal circumstances — for employees to make changes to their health care benefits. But most companies allow you to update your retirement plan contributions throughout the year.

When deciding how much to contribute each pay period, many employees pick a round number, like 10 percent of their paycheck. But this isn’t a one-size-fits-all decision, and it may fluctuate over time. You’ll periodically need to review your contribution level and adjust it for major life changes, such as the birth of a child, a period of unemployment or a windfall from the lottery.

Start the process by estimating your desired retirement income. Do you want to maintain your current lifestyle or downsize certain items, such as housing and clothing budgets? Other expenses — like retirement contributions and childcare costs — typically disappear during retirement. On the flip side, medical care and travel expenses generally rise as you (and your spouse if you’re married) get older. Your retirement plan provider’s website may offer online modeling tools to help with this exercise.

It’s important to factor inflation into your savings plan. For example, the median annual U.S. household income is $62,000 today. If that’s your targeted retirement income and you expect to retire in 25 years, you’ll need approximately $130,000 annually to have the same purchasing power (assuming a 3-percent annual rate of inflation).

How to Reach Your Target

Next, estimate how much of your targeted annual retirement income will be funded by Social Security and other sources of income. Continuing with the previous example, let’s suppose you estimate that your annual income from these other sources will be $65,000. That means your retirement savings will need to provide the remainder ($130,000 – $65,000 = $65,000).

So, how big will your “nest egg” need to be when you retire? If you want to receive $65,000 per year for 30 years, The choice between contributing to a traditional 401(k) vs. a Roth 401(k) largely comes down to when you want to take the tax hit on your retirement savings — now or when you retire. you’ll need to have about $1 million in your account when you retire, assuming a 5-percent annual rate of return during retirement. (This calculation is somewhat oversimplified. You might want to receive more than $65,000 per year to account for inflation during retirement.)

The size of your desired retirement nest egg can be used to estimate the amount you should be setting aside in your 401(k) today. Another key factor is your current age. The younger you are, the less you’ll need to contribute to reach your goal.

For example, if you’re currently 40 years old and just starting to accumulate a $1 million retirement nest egg, you’ll need to put $1,234 per month into your retirement savings account, assuming a 7-percent rate of return (compounded monthly) and a retirement age of 65. But, if you’re 25, you’ll need to set aside only $381 per month to reach your target under the same assumptions.

What if you already have a retirement nest egg started? Let’s assume you’re currently 40 years old, and you already have $100,000 in your 401(k). In this case, you’ll need to put $528 per month into your retirement savings account to reach your $1 million target, assuming a 7-percent rate of return (compounded monthly) and a retirement age of 65.

Thanks to the power of compounding (earning investment returns on your investment returns), if you’re relatively young and set aside as much as you can, you’ll probably do well.

If your employer provides a matching contribution based on a percentage of what you contribute, it would reduce your monthly out-of-pocket contribution. Financial necessity often dictates that younger people start out with a relatively modest contribution rate and increase it over time. But, if you’re able to save aggressively when you’re young, thanks to compounding you might be able to ease off on your savings rate when you get older.

You will also need to carefully consider deductible investment expenses. The professionals at Sol Schwartz & Associates can help you sort through all of these issues. We offer a wide range of specialized services and solutions that meet the requirements of significant businesses as well as financially successful families, individuals, professionals and entrepreneurs. Our team is deeply experienced in working with complex situations, sophisticated structures and challenging demands that require an exceptional level of knowledge and analytical thinking far beyond simply plugging in numbers and filling out forms. We can be reached at 210.384.8000.