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What percentage of my income should I save for retirement?

I'm 32 and am just now beginning to save for retirement. I have a 401(k) through my work, and they match my contributions, so I'm leaning toward this 401k rather than an IRA, but this may not be the best way to go.

Feb 06, 2012 by Mark from Cleveland, OH in  |  Flag
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7 votes
Blair duQuesnay Level 14

The answer to how much depends on several factors, including the age at which you want to retire, the income you need in retirement, and the expected return of your retirement investment portfolio. However, it is likely a much larger percentage than you would expect. If your employer matches your contributions to a 401k, you should definitely start saving in the 401k plan first. You employer's match most likely has a limit (i.e. 50 cents on every dollar up to 6% of your salary). At a minimum, your goal should be to take full advantage of the match. For 2012, you may defer up to $17,000 of your income into the 401k plan. Since you are covered by a retirement plan at work, your contributions to an IRA may not be tax deductible. The IRS has published income limits here (http://www.irs.gov/retirement/participant/article/0,,id=188235,00.html). If you max out on your contributions to your 401k, you may want to make additional contributions to an IRA as well. For 2012, your maximum contribution to an IRA is $5,000. If you make nondeductible IRA contributions, be sure to have your CPA file the correct forms with your tax return to keep track of those contributions. You don't want to pay tax on those dollars twice! Lastly, consider the benefits of saving additional money in a regular, taxable account. You won't get a tax break now, but you also won't have to pay taxes or penalties to withdraw the funds later. You can set up a separate savings account at your bank or open an investment account at Vanguard or Fidelity. There are no maximum contribution limits to a personal, taxable account. Bottom line, save as much as you possibly can. And, if you want to know a more exact amount, contact a local fee-only financial planner who can help you with a personalized retirement cash flow plan.

Comment   |  Flag   |  Feb 06, 2012 from Metairie, LA

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Mark, if you have the ability to do so, I recommend saving 10%-15% of your earnings every year. If you can do more, great. As others here have noted, maxing out the MATCH on your 401k is first priority. If there is a Roth option in your 401k, you would be well advised to put your contributions there. If you have funds available beyond that, then I recommend the Roth IRA. I generally prefer to see a moderate investment blend. The old adage to be aggressive while you're young is hard to stick with in a year like 2008 when the markets are tanking. A moderate portfolio will be easier to live with, and you'll find that you get better compounding than with a more volatile investment mix. A great book on the subject is Dr. Craig Israelsen's "7Twelve: A Portfolio with a Plan", which you can find on Amazon.

Please be mindful that these recommendations are for your retirement planning, and do not necessarily encompass other shorter term goals you may have. Always remember, the more you save now, the more options you will have later. Use that as your filter for spending and saving decisions. Another rule of thumb to help you is to spend money only on things you are passionate about, and be an absolute cheapskate regarding everything else.

Best of luck to you.

Comment   |  Flag   |  Feb 07, 2012 from Arvada, CO

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Jim Blankenship Level 17

Mark -

You should definitely contribute at least enough to your 401(k) to achieve the match money from your employer. After that, it depends on your situation: if tax reduction is important at this stage, you might contribute up to the maximum in your 401(k); but it's also a good idea to contribute the maximum to a Roth IRA (assuming you are eligible). I'd suggest putting enough into the 401(k) to get the match, then putting your next $5,000 of retirement savings contributions ($6,000 if you're over age 50) into a Roth IRA. Then if you still have room in your budget for savings (and you've already established an emergency fund!), you can continue contributing to the 401(k) account up to the annual maximum.

If you're married and your spouse works, she should be doing the same with her retirement accounts as well. If she doesn't work outside the home, you can contribute to a Roth IRA on her behalf, up to the annual limit - as long as your income supports doing so.

Hope this helps!


Comment   |  Flag   |  Feb 06, 2012 from New Berlin, IL

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I would add that you can still make a contribution to a 2011 IRA until April 15th (or the next business day if the 15th falls on a weekend). If you currently have extra savings in a taxable account, consider making a 2011 IRA contribution so that you do not lose the annual allowance, but only if you believe you will be able to save more than the maximum 401k match. Good luck.

Comment   |  Flag   |  Feb 06, 2012 from San Francisco, CA

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