8.1.15 Saving for Retirement

Activity symbolActivity: Saving for Retirement

You know that saving for retirement is important, and there are many resources available to tell you how much you should save per paycheck.

[ For many employed people in the U.S., participating in a company’s 401(k) plan with a company match or setting up a Roth IRA with a broker firm is a good first step. ]

Do you know which percentages of pretax income (gross income) many reputable financial advisors recommend to put away for retirement if a client starts to save for retirement in his or her:

(a) Twenties?

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According to financial advisors,

(a) people who start in their twenties should put 15% of their pretax income toward retirement savings,

(b) Thirties?

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(b) people who start in their thirties should save 25% of their pretax dollars for retirement

(c) Forties?

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(c) and people who start in their forties need to put away 35%.

[ Discouraged? Good news: Saving a little is better than not saving at all. And if you work in a job you enjoy, you probably won’t mind working until later in life, which means your savings have a longer time to grow and you won’t rely on them as early. ] Starting later than mid 40s is even more of a challenge as these recommended percentages increase further.

According to this advice, how much should the following people, who are just starting to create their first retirement savings, put into their respective retirement accounts each year? (All yearly incomes given are pretax.)

(i) A 36-year-old groundskeeper earning $25,000 a year.

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(i) The groundskeeper is in his or her thirties, and thus should save 25 percent prefix multiplication of dollar times 25 comma 000 equals 0.25 multiplication dollar times 25 comma 000 equals dollar times 6250 per year. (This would be equation left hand side dollar times 6250 divided by 12 almost equals right hand side dollar times 521 or about $520 a month.)

(ii) A 43-year-old nurse earning $70,000 a year.

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(ii) The nurse is in his or her forties, and thus should save 35 percent prefix multiplication of dollar times 70 comma 000 equals 0.35 multiplication dollar times 70 comma 000 equals dollar times 24 comma 500 per year. (This would be about $2040 a month.)

(iii) A 27-year-old entrepreneur earning $46,000 a year.

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(iii) The entrepreneur is in his or her twenties, and thus should save 15 percent prefix multiplication of dollar times 46 comma 000 equals 0.15 multiplication dollar times 46 comma 000 equals dollar times 6900 per year. (This would be about $575 a month.)

Looking at these percentages, you see why it is a good idea to start paying into a retirement plan or account as soon as you can.