Retirement, what’s that? Many Americans fear having to work far into those fabled golden years because they haven’t save enough. The decline of pensions and the rise of defined-contribution plans have shifted the lion’s share of responsibility for retirement savings to individuals. And the evidence is strong that most households are finding it very hard to a) save enough, and b) allocate those savings appropriately.
Data from the Federal Reserve’s 2010 Survey of Consumer Finances show that the average retirement account balance for a working-age household is $3,000 and $12,000 for near-retirement households. Nearly 45% of working-age households do not own assets in a retirement account, and retirement account assets are heavily concentrated in higher-income households.
So how much should we be saving, anyway? NerdWallet surveyed 100 financial advisors to hear what they had to say. The results are clear: 60% of financial advisors advocate saving at least 10% of your salary in your 401(k).
So let’s say you dutifully put 10% away in your 401(k). What are some other things you should watch out for?
Thomas Lampert, CFP® of Brighton, Michigan cautions folks without emergency funds:
“Not having an emergency fund and too high of a consumer debt servicing level. It is important to limit the consumer debt …I’ve seen many hurt by saving into the 401k but having no emergency fund or having too much debt and they end up paying what we call the “stupid tax” by cashing in on the 401k to pay off debt or to meet an “emergency”. “
Roger Gainer, ChFC of Mill Valley, CA warns of possible tax implications:
“Watch out for contributions beyond the match. Except for folks in the highest tax brackets, most will pay more in tax when they withdraw than when they contributed”
Debbie Gallant, CFP® of Gaithersburg, MD encourages a holistic view of “investment”:
“Don’t forget that investing in human capital (a college education, or starting your own business) might be a better investment when you’re young, than contributing to a 401(k)”
NOTE: Income refers to after-tax income