Build Your Retirement Future Now
Published on March 5, 2015
Americans are shouldering a greater share of responsibility for their retirement income security. One way that smart investors can do their part is by aiming to contribute 15 percent of their salary into a retirement plan—and the sooner, the better. This will enable investors to grow their savings even more through compounding.
For those workers whose employers offer employer-sponsored plans such as 401(k)s, the traditional three percent of their salary contribution that they have been allocating through an automatic enrollment feature is not enough.
That’s because life has changed as have employer-sponsored retirement benefits. Company pensions are becoming a thing of the past and employers are cutting health care plans for retirees. Therefore, this low percentage will not do even if the worker qualifies for a matching contribution from their employer.
And, for those self-employed workers with retirement savings options such as the Solo 401(k) — and the SEP IRA and SIMPLE IRA for entrepreneurs who may or may not have employees—three percent of salary contributions are not enough to build a healthy retirement nest egg.
Calculating your retirement wealth needs
The magic number of 15 percent is based on recent research that includes Wade D. Pfau, professor of retirement income at The American College. According to his Retirement Wealth Accumulation Index, a 35-year-old worker who plans to retire at 65 should contribute 15 percent of his/her salary to retirement savings.
Based on Pfau’s calculations, it’s not where a person ends (retires) but where he/she starts that counts. Investors who are 40 years away from retirement can contribute less—there’s that wonderful compounding effect—and those who are closer to retirement age need to save at a higher rate.
Yes, it’s hard to find the extra dollars to go from three to 15 percent—even with an employer match program. But investors need to use all the tools in the shed. Employees can get the most of their company’s retirement benefit plans by maxing out 401(k) or SIMPLE IRA contributions. They can use a combination of auto-enrollment and auto-escalation as well as contribution matches and profit-sharing programs.
Auto-escalation programs can automatically increase contributions by one percent each year and make the process relatively painless. Making small changes can make Americans retirement-ready now. To prepare even more aggressively, many people are thinking about self-directing their retirement investments.
What other tools are available to build your retirement future?
Financially savvy investors can build their retirement savings by including alternative investments in a self-directed IRA (Traditional or Roth), a self-directed SIMPLE IRA (for employers and employees) or a self-directed SEP IRA for the self-employed. It’s a strategy that can build retirement wealth more aggressively by allowing individuals to invest in what they already know and understand.
Self-directed retirement plans can include nontraditional assets not allowed within typical retirement plans—such as real estate, mortgages and other loans, private hedge funds, precious metals, limited partnerships, commercial paper and notes and more.
At Next Generation Trust Services, our professionals can answer your questions about self-directed retirement plans or get you started on becoming more retirement-ready today, while our transaction specialists ensure you are investing within IRS guidelines. Since we do not give investment advice, we strongly recommend you consult your trusted financial advisors about your investments and any tax implications they have for your unique situation.