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Am I On Track For Retirement?

December 09, 2020 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Am I On Track For Retirement?

If adults had a dollar for every time they wondered “Am I on track for retirement?”… we’d all get a lot closer to being on track for retirement.

Finding out if you’re on track for retirement is a personal calculation, built on a number of factors—including an individual’s income, age, retirement goals, and the amount of money already saved.

Deciding when to start saving for retirement can be overwhelming. But it’s always a good idea to take a look at your retirement plan from time to time, and make adjustments based on where you are—and where you want to go.

Understanding Retirement Paths

It can be tough to think about saving up for retirement if you’re still paying back student loans, chipping away at credit card debt, or trying to reduce what you owe before putting money aside for the future.

There are plenty of retirement plan options and different ways to save and invest for the future. Traditionally, retirement plans are seen as long-term investments similar to a simple savings account—with the idea that any money saved or invested today, ideally, won’t be tapped for years and years to come.

Whether you’re looking to check how much money to have already saved for retirement, or are just starting to save for retirement, make sure that you distill down your individual retirement goals. Knowing what you’d like your retirement to look like can help inform decisions about how and when to start saving to pursue those goals.

Here’s an overview of different paths to retirement, including a simple formula to estimate how much you may seek to save up for your future.

When Can I Retire with Full Benefits?

Before diving into one potential retirement savings formula, let’s look at the basics. When does the US government say qualifying people can retire and receive full Social Security benefits? And, at what age can eligible individuals start withdrawing from their retirement accounts without facing penalties?

For Social Security, the rules go by birth year. For example:

•  People born in or before 1937 could have retired with full Social Security benefits at age 65
•  Those born in 1938 could retire at age 65 and two months
•  Those born in 1939 could retire at age 65 and four months

The Social Security Administration’s most recent update states that those born in or after 1960 can retire at age 67 with full benefits. If you retire before 67, you’ll receive a portion of your Social Security benefits. The SSA’s chart offers more detailed information.

Required Minimum Distributions (RMDs)

Beyond Social Security benefits, let’s take a closer look at other kinds of retirement plans. Each type of retirement account has different rules about when money can be taken out:

•  Roth IRA: If an account has existed for at least five years, withdrawals from the Roth IRA account are typically allowed without consequences after age 59½. Taking out money at an earlier age or withdrawing money from a Roth IRA that’s been open for fewer than five years could result in paying penalties and/or income tax on the earnings.
•  Traditional IRA: Withdrawals can be made from ages 59½ to 70 without being penalized.
•  401(k)s: Account holders can typically retire by age 55 and make withdrawals from their 401(k) without receiving a penalty.

There is a little wiggle room, though. Retirement withdrawal rules have exceptions for issues like disability or educational expenses. And, there is an option to withdraw money early and pay taxes or penalties. Receiving Social Security benefits as early as age 62 or as late as 70 are options, but that decision will affect how much money is received per month.

Now that you understand when you can retire with full benefits, consider preparing for retirement by opening an online ira with a SoFi.

What About Retiring Early or Late?

When it comes to Social Security, a recipient will be penalized if they retire before full retirement age. The earlier a person retires, the less they’ll receive in Social Security. Let’s use John Doe as an example and say he was born in 1960, so full retirement age is 67.

If he retires at age 66 and 11 months, he’ll receive 99.4% of Social Security benefits; age 66 and 10 months will get John 98.9%. If he retires on his 62nd birthday, he’ll only receive 70% of earnings. This is the price of receiving Social Security for a longer amount of time.

There is also the option of retiring before age 62, but Social Security benefits won’t kick in until age 62. These are some factors that could be considered when deciding when to retire.

If a person wants to keep working until after full retirement age, they could earn over 100% of their monthly benefits. For example, the Social Security Administration could recalculate benefits to give a recipient credit for previously withheld or reduced benefits.

If retirement is pushed back to age 70 (for someone born in 1960), earnings go up to 124% of monthly benefits. (But no need to calculate further: Social Security benefits stop increasing once a person reaches age 70.)

Now, let’s look at retirement accounts:

•  Roth IRA: If an account holder is at least 59½ and has a Roth IRA that is at least five years old, they can withdraw without taxes or penalties. If the account is less than 5 years old, earnings will be subject to taxes. If the account holder is younger than 59½, their earnings will be subject to taxes and they may face a 10% penalty (unless they’re withdrawing for qualifying reasons including education, first-time home purchase, or medical expenses). Withdrawals equivalent to the principal on the account are tax- and penalty free with a Roth IRA—regardless of age.
•  Traditional IRA: The government will charge a 10% penalty on withdrawals before age 59½. Depending on location, a state penalty tax might also be charged.
•  Traditional IRA or 401(k): Withdrawals must start by age 70½ or account holders face a hefty penalty—the age is 72 if you turn 70 ½ following December 31, 2019.

You can learn more about Required Minimum Distributions (RMDs) on the IRS site.

Are You on Track?

Everyone’s financial situation is different. So, it might make perfect sense for one person to retire at age 62 and another at 55. However, waiting until full retirement age or even age 70 not only gives Social Security more time to accrue—it gives a potential retiree more time to accumulate savings in a nest egg.

So, is working until the age 70 absolutely necessary to earn enough money to live off of after retirement? Or, will there be enough in savings by age 67 or 68? This is where the question “How much do you need to save to retire?” comes in.

Calculating The Retirement Formula

To calculate how much money you’ll need for each year of retirement, you can use this formula:

Current income – Anticipated Social Security / 0.04
Let’s cover what goes into this formula and why it’s so commonly used. (A word of warning—the numbers might seem a little sobering).

In 1994, a financial advisor named William P. Bengen drew the conclusion that if retirees withdraw 4% of their nest egg per year and increase that amount to match the rate of inflation, they are unlikely to run out of money during their lifetime.

These days, certain critics say that the 4% rule isn’t entirely accurate across the board, but somewhere in the vicinity of 4% is usually a good idea.

For example, Fidelity’s research shows that if a 30-year retirement is planned and annual spending is expected to be 4% to 5% of savings, adjusting for inflation, there is about a 90% chance of not running out of money.

The exact percentage can depend on the age of retirement and life expectancy. That number changes if a person retires at age 60 and plans a 35-year retirement—about 4.3% could be withdrawn per year to retain that 90% likelihood of financial security.

To break it down, $1 million in savings is a fair number to get through the retirement years. And, yes, that’s a lot of money! But the sooner saving begins, the better chance your money has to grow.

How Much Money Will You Need Each Year in Retirement?

The rule of thumb was once 80% of current income. But that figure assumes an individual’s mortgage is paid off and their income taxes will be lower.

Since a large part of a retirement income could come from withdrawals from retirement plans that give taxable income (aka certain securities, a tax-deferred 401(k) or a traditional IRA), the retiree’s annual tax rate might not go down much during their golden years.

Plus, many people might want to travel or spend money on hobbies in the early years of retirement. And, many might need expensive health care as they live into their 90s and beyond. That means more than a current income might be necessary.

A retiree may be living off money from both Social Security and a personal or employer-backed retirement account. If Social Security is an available option (the notion that it will disappear is one of the top 5 Social Security myths), taking regular Social Security benefit payments could reduce the amount that some individuals need to withdraw from their retirement or savings accounts each year.

Social Security is based on the amount paid in. For example, a person retiring in 2022 who paid the maximum for at least 10 years might expect about $32,000 per year at full retirement (age 67). Someone who paid less than the maximum would get less. Social Security has a calculator to help estimate benefits.

The basic 4% to 5% retirement savings rule noted above takes into account your current income, but it’s hard to know exactly how to calculate how much money you’ll need in the future due to inflation and other unpredictable factors.

With a few pieces of information, though, you can start estimating how much money you may need for retirement in today’s dollars. One formula is to begin with current income, subtract anticipated Social Security benefits, and divide by 0.04. That’ll give you a target retirement number in today’s dollars.

Naturally, since income may increase as one goes further in their chosen career, it’s important to stay up-to-date with your retirement numbers.

Choosing from The Different Types of Retirement Plans

Employer 401(k) or similar plans, is another great place to start investing for retirement. These employer-sponsored plans can earn you money. Some employers opt to match their worker’s contributions—up to, say, 6%.

When it’s available, employees may want to take advantage of this matching payout. Many companies will automatically deduct your retirement contributions from your paycheck (if you request it). By having these payments taken out from your pay, it can help you set a new monthly budget based on earnings after you’ve put money towards your retirement.

If your company does not offer a retirement plan, you can look into an Individual Retirement Account (IRAs). There are two types of IRAs, Traditional and Roth, and to help figure out which one works for you, let’s look at the difference between the two.

•  Roth IRAs invest money that has already been taxed. So, qualifying earnings are generally not taxed once the account matures. While you won’t receive a tax break now on a Roth IRA, qualifying withdrawals in the future are usually not taxed.
•  With a Traditional IRA, the money you contribute is not taxed, but your withdrawals during retirement are taxed as regular income, if certain requirements are met. If you’re not paying a high tax rate currently, usually it can make sense to select a Roth IRA, since you could be in a higher tax bracket when you retire.
•  With a Traditional IRA, there is also a 10% penalty if you take out money before age 59½, and you must start taking the money by 70½. With Roth accounts, the early distribution fee only applies to earnings, not contributions.

Overall, you can usually contribute at least $6,000 per year to an IRA account, but there are some limits depending on your age, marital status, and income. To get a better sense of how much you can contribute, try SoFi’s IRA calculator. Depending on your income and other factors, you might also be able to contribute to both an employer-matched 401(k) and an IRA.

If you are self-employed, you also have access to other retirement plans, with contribution limits that are often higher than an IRA or 401(k), if certain conditions are met. Plus, with some larger companies, unions, military and government employees, you might have a pension plan. Make sure you explore all of your available options for saving for retirement.

The Takeaway

If you wonder if you are not on track for retirement, don’t panic! Plenty of people, especially those with large debt loads, have put off saving for retirement. But it’s never too late to start saving, if you have the means to do so.

You can start small, with even just 1% or 2% of your paycheck going into a retirement account. With some accounts, you can set your contributions to increase yearly. Additionally, while employer-led retirement accounts (like 401(k) plans) typically can take funds directly from your paycheck, in some cases you can schedule other automatic investments, selecting the dollar amount, the date, and the frequency.

Plus, any existing retirement accounts like 401(k) or IRAs can be rolled over to a SoFi Invest® account.

SoFi Invest combines automated investing technology with member access to a human financial advisor. This advisor can offer personal goal planning, helping you to map out a plan and insights on ways to stick with it.

A retirement account with SoFi Invest allows you to save and invest to put your money to work. SoFi members can start investing in their retirement with as little as $1 today—choosing among stocks, ETFs (funds), crypto investment options.

Find out how SoFi Invest might help you to plan for retirement.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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