When we did our taxes a couple years back, we were advised to contribute more to retirement.
She explained to us that it could lower our taxable income and set aside our money for retirement.
We’ve taken her advice and have been contributing towards our retirement.
The problem was we didn’t have a hard core number to work towards. I dug around and found some numbers that gave us a ballpark figure.
If you’re in the same boat,here’s what you need to know to find your number.
Identify Retirement Expenses
If you’re looking for some specific numbers to base your information on, here’s some information from one study done:
The ongoing Georgia State University RETIRE (Retirement Income Replacement) project, conducted for the federal Department of Labor, looks at the income requirements of households before and after retirement at three-year intervals. In 2004, the project found:
A single-earner couple making $30,000 annually needs 84 percent of that income, or $25,200 a year, after retirement.
A $50,000 to $60,000 single-earner couple needs to replace 79 percent of their pre-retirement income, or $39,500 to $47,400 a year.
A two-income couple needs to replace 84 percent of $30,000 a year pre-retirement ($25,200), 77 percent of $50,000 ($38,500) and 78 percent of $90,000 ($70,200).
A $90,000 single-earner couple needs to replace 82 percent of pre-retirement income, or $73,800 a year.
The main difference between the two IRAs has to do with when you’ll be taxed:
Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.
While you may be limited on what you can contribute now, you should plan ahead for when you can increase your deposits.
Developing a Retirement Plan
Now that there’s a general number, the next step is coming up with a plan to actually get started with investing for your own retirement.
Participate in 401(ks)
Like mentioned before, my husband has been regularly contributing to his account at work. Some personal finance experts suggest put 5- 10% of your paycheck. You can always increase the amount as you receive raises and promotions.
If your company an Employee Stock Purchase Program, you may want to consider participating. ESSP allows you to have some of your paycheck deducted to buy your company’s shares at a discount from its market price.
Just remember to be diversified with your retirement fund and not too heavily invested in your company.
Contribute to an IRA
If your job doesn’t offer a 401(k), then you may want to look into opening an IRA. You have many options on starting one.
Banks, brokerages, and credit unions offer IRAs. Some options to look into: