Jan
30
2024
401(k) Catch-Up Contributions: What Are They & How Do They Work?

401(k) Catch-Up Contributions: What Are They & How Do They Work?

By | invest, Investing, Preparing for Retirement | Comments Off on 401(k) Catch-Up Contributions: What Are They & How Do They Work?

Retirement savers age 50 and older get to put extra tax-advantaged money into their 401(k) accounts beyond the standard annual contribution limits. Those additional savings are known as “catch-up contributions.”

If you have a 401(k) at work, taking advantage of catch-up contributions is key to making the most of your plan, especially as retirement approaches. Here’s a closer look at how 401(k) catch-up limits work.

What Is 401(k) Catch-Up?

A 401(k) is a type of defined contribution plan. This means the amount you can withdraw in retirement depends on how much you contribute during your working years, along with any employer matching contributions you may receive, as well as how those funds grow over time.

There are limits on how much employees can contribute to their 401(k) plan each year as well as limits on the total amount that employers can contribute. The regular employee contribution limit is $22,500 for 2023 and $23,000 for 2024. This is the maximum amount you can defer from your paychecks into your plan — unless you’re eligible to make catch-up contributions.

Under Internal Revenue Code Section 414(v), a catch-up contribution is defined as a contribution in excess of the annual elective salary deferral limit. For 2023 and 2024, the 401(k) catch-up contribution limit is $7,500.

That means if you’re eligible to make these contributions, you would need to put a total of $30,000 in your 401(k) in 2023 to max out the account and $30,500 in 2024. That doesn’t include anything your employer matches.

Congress authorized catch-up contributions for retirement plans as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The legislation aimed to help older savers “catch up” and avoid falling short of their retirement goals, so they can better cover typical retirement expenses and enjoy their golden years.

Originally created as a temporary measure, catch-up contributions became a permanent feature of 401(k) and other retirement plans following the passage of the Pension Protection Act in 2006.

Who Is Eligible for 401(k) Catch-Up?

To make catch-up contributions to a 401(k), you must be age 50 or older and enrolled in a plan that allows catch-up contributions, such as a 401(k).

The clock starts ticking the year you turn 50. So even if you don’t turn 50 until December 31, you could still make 401(k) catch-up contributions for that year, assuming your plan follows a standard calendar year.

Making Catch-Up Contributions

If you know that you’re eligible to make 401(k) catch-up contributions, the next step is coordinating those contributions. This is something with which your plan administrator, benefits coordinator, or human resources director can help.

Assuming you’ve maxed out your 401(k) regular contribution limit, you’d have to decide how much more you want to add for catch-up contributions and adjust your elective salary deferrals accordingly. Remember, the regular deadline for making 401(k) contributions each year is December 31.

It’s possible to make catch-up contributions whether you have a traditional 401(k) or a Roth 401(k), as long as your plan allows them. The main difference between these types of plans is tax treatment.

•   You fund a traditional 401(k) with pre-tax dollars, including anything you save through catch-up contributions. That means you’ll pay ordinary income tax on earnings when you withdraw money in retirement.

•   With a Roth 401(k), regular contributions and catch-up contributions use after-tax dollars. This allows you to withdraw earnings tax-free in retirement, which is a valuable benefit if you anticipate being in a higher tax bracket when you retire.

You can also make catch-up contributions to a solo 401(k), a type of 401(k) used by sole proprietorships or business owners who only employ their spouse. This type of plan observes the same annual contribution limits and catch-up contribution limits as employer-sponsored 401(k) plans. You can choose whether your solo 401(k) follows traditional 401(k) rules or Roth 401(k) rules for tax purposes.

401(k) Catch-Up Contribution Limits

Those aged 50 and older can make catch-up contributions not only to their 401(k) accounts, but also to other types of retirement accounts, including 403(b) plans, 457 plans, SIMPLE IRAs, and traditional or Roth IRAs.

The IRS determines how much to allow for elective salary deferrals, catch-up contributions, and aggregate employer and employee contributions to retirement accounts, periodically adjusting those amounts for inflation. Here’s how the IRS retirement plan contribution limits for 2023 add up:

Retirement Plan Contribution Limits in 2023
Annual Contribution Catch Up Contribution Total Contribution for 50 and older
Traditional, Roth and solo 401(k) plans; 403(b) and 457 plans $22,500 $7,500 $30,000
Defined Contribution Maximum, including employer contributions $66,000 $7,500 $73,500
SIMPLE IRA $15,000 $3,500 $18,500
Traditional and Roth IRA $6,500 $1,000 $7,500

These amounts only include what you contribute to your plan or, in the case of the defined contribution maximum, what your employer contributes as a match. Any earnings realized from your plan investments don’t count toward your annual or catch-up contribution limits.

Also keep in mind that employer contributions may be subject to your company’s vesting schedule, meaning you don’t own them until you’ve reached certain employment milestones.

💡 Recommended: How to Open Your First IRA

Tax Benefits of Making Catch-Up Contributions

Catch-up contributions to 401(k) retirement savings allow you to save more money in a tax-advantaged way. The additional money you can set aside to “catch up” on your 401(k) progress enables you to save on taxes now, as you won’t pay taxes on the amount you contribute until you withdraw it in retirement. These savings can add up if you’re currently in a high tax bracket, offsetting some of the work of saving extra.

The amount you contribute will also grow tax-deferred, and making catch-up contributions can result in a sizable difference in the size of your 401(k) by the time you retire. Let’s say you start maxing out your 401(k) plus catch-up contributions as soon as you turn 50, continuing that until you retire at age 65. That would be 15 years of thousands of extra dollars saved annually.

Those extra savings, thanks to catch-up contributions, could easily cross into six figures of added retirement savings and help compensate for any earlier lags in saving, such as if you were far off from hitting the suggested 401(k) amount by 30.

Roth 401(k) Catch-Up Contributions

The maximum amount you can contribute to a Roth 401(k) is the same as it is for a traditional 401(k): $22,500 and, if you’re 50 or older, $7,500 in catch-up contributions, as of 2023. For 2024, it is $23,000 and, if you’re 50 or older, $7,500 in catch-up contributions. This means that if you’re age 50 and up, you are able to contribute a total of $30,000 to your Roth 401(k) in 2023 and $30,500 in 2024.

If your employer offers both traditional and Roth 401(k) plans, you may be able to contribute to both, and some may even match Roth 401(k) contributions. Taking advantage of both types of accounts can allow you to diversify your retirement savings, giving you some money that you can withdraw tax-free and another account that’s grown tax-deferred.

However, if you have both types of 401(k) plans, keep in mind while managing your 401(k) that the contribution limit applies across both accounts. In other words, you can’t the maximum amount to each 401(k) — rather, they’d share that limit.

The Takeaway

Putting money into a 401(k) account through payroll deductions is one of the easiest and most effective ways to save money for your retirement. To determine how much you need to put into that account, it helps to know how much you need to save for retirement. If you start early, you may not need to make catch-up contributions. But if you’re 50 or older, taking advantage of 401(k) catch-up contributions is a great way to turbocharge your tax-advantaged retirement savings.

Of course, you can also add to your retirement savings with an IRA. While a 401(k) has its advantages, including automatic savings and a potential employer match, it’s not the only way to grow retirement wealth. If you’re interested in a traditional, Roth, or SEP IRA, you can easily open an IRA account on the SoFi Invest® brokerage platform. If you’re age 50 or older, those accounts will also provide an opportunity for catch-up contributions.

Help grow your nest egg with a SoFi IRA.

FAQ

How does the 401(k) catch-up work?

401(k) catch-up contributions allow you to increase the amount you are allowed to contribute to your 401(k) plan on an annual basis. Available to those aged 50 and older who are enrolled in an eligible plan, these catch-contributions are intended to help older savers meet their retirement goals.

What is the 401(k) catch-up amount in 2023?

For 2023, the 401(k) catch-up contribution limit is $7,500.

Photo credit: iStock/1001Love

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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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Jan
30
2024
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4% Rule for Withdrawals in Retirement

By | invest, Investing, Preparing for Retirement | Comments Off on 4% Rule for Withdrawals in Retirement

After decades of saving for retirement, many new retirees often find themselves facing a new challenge: Determining how much money they can take out of their retirement account each year without running the risk of depleting their nest egg too quickly.

One popular rule of thumb is “the 4% rule.” What is the 4% rule? Learn more about the rule and how it works.

What Is the 4% Rule for Retirement Withdrawals?

The 4% rule suggests that retirees withdraw 4% from their retirement savings the year they retire, and adjust that dollar amount each year going forward for inflation. Based on historical data, the idea is that the 4% rule should allow retirees to cover their expenses for 30 years.

The rule is intended to give retirees some planning guidance about retirement withdrawals. The 4% rule may also help provide them with a sense of how much money they need for retirement.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How to Calculate the 4% Rule

To calculate the 4% rule, add up all of your retirement investments and savings and then withdraw 4% of the total in your first year of retirement. Each year after that, you increase or decrease the amount, based on inflation.

For example, if you have $1 million in retirement savings, you would withdraw 4% of that, or $40,000, in your first year of retirement. If inflation rises 3% the next year, you would increase the amount you withdraw by 3% to $41,200.

Drawbacks of the 4% Rule

While the 4% rule is simple to understand and calculate, it’s also a rigid plan that doesn’t fit every investor’s individual situation. Here are some of the disadvantages of the 4% rule to consider.

It doesn’t allow for flexibility

The 4% rule assumes you will spend the same amount in each year of retirement. It doesn’t make allowances for lifestyle changes or retirement expenses that may be higher or lower from year to year, such as medical bills.

The 4% rule assumes that your retirement will be 30 years

In reality an individual’s retirement may be shorter or longer than 30 years, depending on what age they retire, their health, and so on. If someone’s life expectancy goes beyond 30 years post-retirement they could find themselves running out of money.

It’s based on a specific portfolio composition

The 4% rule applies to a portfolio of 50% stocks and 50% bonds. Portfolios with different investments of varying percentages would likely have different results, depending on that portfolio’s risk level.

It assumes that your retirement savings will last for 30 years

Again, depending on the assets in your portfolio, and how aggressive or conservative your investments have been, your portfolio may not last a full 30 years. Or it could last longer than 30 years. The 4% rule doesn’t adjust for this.

4% may be too conservative

Some financial professionals believe that the 4% rule is too conservative, as long as the U.S. doesn’t experience a significant economic depression. Because of that, retirees may be too frugal with their retirement funds and not necessarily live life as fully as they could.

Others say the rule doesn’t take into account any other sources of income retirees may have, such as Social Security, company pensions, or an inheritance.

How Can I Tailor the 4% Rule to Fit My Needs?

You don’t have to strictly follow the 4% rule. Instead you might choose to use it as as a starting point and then customize your savings from there based on:

•   When you plan to retire: At what age do you expect to stop working and enter retirement? That information will give you an idea about how many years worth of savings you might need. For instance, if you plan to retire early, you may very well need more than 30 years’ worth of retirement savings.

•   The amount you have saved for retirement: How much money you have in your retirement plans will help you determine how much you can withdraw to live on each year and how long those savings might last. Also be sure to factor in your Social Security benefits and any pensions you might have.

•   The kinds of investments you have: Do you have a mix of stocks, bonds, mutual funds, and cash, for instance? The assets you have, how aggressive or conservative they are, and how they are allocated plays an important role in the balance of your portfolio. An investor might want assets that have a higher potential for growth but also a higher risk factor when they are younger, and then switch to a more conservative investment strategy as they get closer to retirement.

•   How much you think you’ll spend each year in retirement: To figure out what your expenses might be each year that you’re retired, factor in such costs as your mortgage or rent, healthcare expenses, transportation (including gas and car maintenance), travel, entertainment, and food. Add everything up to see how much you may need from your retirement savings. That will give you a sense if 4% is too much or not enough, and you can adjust accordingly.


💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

Should You Use the 4% Rule?

The 4% rule can be used as a starting point to determine how much money you might need for retirement. But consider this: You may have certain goals for retirement. You might want to travel. You may want to work part-time. Maybe you want to move into a smaller or bigger house. What matters most is that you plan for the retirement you want to experience.

Given those variations, the 4% rule may make more sense as a guideline than as a hard-and-fast rule.

Recommended: How Much Retirement Money Should I Have at 40?

The Takeaway

The 4% rule represents a percentage that retirees can withdraw from their savings annually and theoretically have their savings last a minimum of 30 years. For example, someone following this rule could withdraw $20,000 a year from a $500,000 retirement account balance.

However, the 4% rule has limitations. It’s a rigid strategy that doesn’t take factors like lifestyle changes into consideration. It assumes that your retirement will last 30 years, and it’s based on a specific portfolio allocation. A more flexible plan may be better suited to your needs.

Having flexibility in planning for withdrawals in retirement means saving as much as possible first. A starting place for many people is their workplace 401(k), but that’s not the only way you can save for retirement. For instance, those who don’t have access to a workplace retirement account might want to open an IRA or a retirement savings plan for the self-employed to invest for their future.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How long will money last using the 4% rule?

The intention of the 4% rule is to make retirement savings last for approximately 30 years. How long your money may last will depend on your specific financial and lifestyle situation.

Does the 4% rule work for early retirement?

The 4% rule is based on a retirement age of 65. If you retire early, you may have more years to spend in retirement and your financial needs will likely be different.

Does the 4% rule preserve capital?

With the 4% rule, the idea is to withdraw 4% of your total funds and allow the remaining money in the account to keep growing. Because the withdrawals would at least partly consist of dividends and interest on savings, the amount withdrawn each year would not come totally out of the principal balance.

Is the 4% Rule Too Conservative?

Some financial professionals say the 4% rule is too conservative, and that retirees may be too frugal with their retirement funds and not live as comfortable a life as they could. Others say withdrawing 4% of retirement funds could be too much because the rule doesn’t take into account any other sources of income retirees may have.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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Nov
29
2023

2024 Gas Cost Trip Calculator Table with Examples

By | Family Finances, relay, Tools & Calculators | Comments Off on 2024 Gas Cost Trip Calculator Table with Examples

Thinking about taking a road trip? The rising cost of gas might put a dent in your budget if you’re not careful. But how much will you spend on gas for a trip? What should your budget be?

Using a trip cost calculator can help you determine what you are likely to spend filling up your tank on a longer trip. Then you can use that information to decide whether it’s more cost-effective to drive, take a train or bus, or fly.

Let’s look not only at a gasoline cost trip calculator table, but also why you should calculate how much you’ll spend on gas and how you can save money filling up at the pump.

Why Use a Gas Cost Trip Estimator

You may think nothing of filling up your gas tank every few weeks when you’re only driving to work and the store. But consider how much gas you’d use for a trip from, let’s say, San Diego to New York City. With gas prices on the rise, understanding what it will cost you to fuel up for an entire trip can help you better budget your expenses.

Using a gas trip cost calculator can help you figure out how much of your entire trip budget will be dedicated to fueling up.


💡 Quick Tip: Online tools make tracking your spending a breeze: You can easily set up budgets, then get instant updates on your progress, spot upcoming bills, analyze your spending habits, and more.

How to Calculate Your Gas Cost Trip

To figure out how much gas will cost for a road trip, you can, of course, use a trip cost calculator. You’ll need to input basic details, like your type of car (different sizes and types of cars burn gas at different rates) and your route, and the calculator can estimate with real-time gas prices.

But a simple method is to look at your route and the total distance in miles, and divide this number by the number of miles per gallon your vehicle gets. (You can check your owner’s manual to find this out if you don’t already know). This will tell you the number of gallons of gas you’ll need for the entire trip.

Now you’ll need to know the price of gas so you can multiply it times the number of gallons you need. Since gas prices by state may vary wildly, you might take an average of prices found in five places along the way. Tools like Gas Buddy let you search for gas prices in a given city, so you can use this for research.

Gas Cost Trip Calculator Table
Let’s use the process I outlined above to illustrate how you can be your own gas calculator for trip costs.

Distance from San Diego to NYC 2,760 miles
Miles per gallon 22
2,760/22 125 gallons
Average gas price:

•   San Diego: $4.57

•   Albuquerque: $3.09

•   Saint Louis: $2.82

•   Indianapolis: $2.99

•   Philadelphia: $2.93

 Average: $3.28
125 gallons x $3.28 $410 gas budget

As you can see, it would cost about $410 for gas for the entire trip. Of course, this is based on an average cost of gas, and prices will fluctuate over time and in different towns and cities.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

Examples of Gas Cost Trips

Let’s look at a few other examples of trips and how much they would cost in gas.

Distance from Los Angeles to Seattle 1,335 miles
Miles per gallon 22
1,335/22 61 gallons
Average gas price:

•   Los Angeles: $4.44

•   Stockton: $4.45

•   Sacramento: $4.99

•   Medford: $4.05

•   Portland: $4.99

Average: $4.58
61 gallons x $4.58 $279 gas budget
Phoenix to Dallas 1,067 miles
Miles per gallon 22
1.067/22 48.5
Average gas price:

•   Phoenix: $3.13

•   Benson: $3.61

•   Deming: $3.45

•   Fort Stockton: $3.15

•   Abilene: $2.79

Average: $3.23
48.5 gallons x $3.23 $157

Reasons to Calculate Your Gas Cost

So why should you bother using a road trip cost calculator? Well, most people don’t have unlimited funds when it comes to taking a road trip, so for starters, it can help you see how much you’d spend. You might decide it’s not worth driving if the cost exceeds what you’d pay for a flight, bus, or train ride.

Even if you’re not planning a big trip, looking at how much it costs to drive on a tank of gas can be helpful for maintaining your month-to-month budget. Once you understand how much you’re spending on gas, you might explore how to improve gas mileage to get more bang for your buck or you might limit how often you drive to save money.

Tips on How to Save on Gas Money

Speaking of saving money, let’s look at how to save money on gas.

Plan Where You’ll Fuel Up

If you’re planning a road trip, use a tool that shows you exactly where the cheapest gas can be found. You might be able to save $.10 or more a gallon simply by planning ahead. There are even some trip fuel cost calculators that will help you plan where to stop based on gas prices.

Consider How You Pay

There are different types of credit cards that can help you save at the pump. Branded gas credit cards often offer rewards that will shave off a few cents per gallon or give you a bonus after you’ve charged a certain amount of purchases.

You might also consider a cash back credit card that gives you cash or credits for your purchases once you’ve hit a certain threshold.

Look into Alternative Transportation

You may be quick to rely on cars to get around, but there are often other overlooked methods of transportation to consider. Whether it’s a bus, train, Uber, or plane, you might be able to save money by leaving your car at home.

You can also cut your gas costs by splitting them with a friend.

Another way to stick to your travel budget? A money tracker app, which can help you keep tabs on where your money is going while you’re on the road.

Only Use Premium if Necessary

Most cars run just fine on regular unleaded gas, which can be significantly cheaper per gallon than premium versions, especially if you’re on a long trip. Check your car manufacturer’s recommendations to see if you can use regular unleaded gas.

Drive an Empty Car

The heavier your car is, the more gas it burns. So if you’ve been lugging around something heavy unnecessarily, consider leaving the load at home before you drive.

Who Should Save Money on Gas

The real question is, who shouldn’t save money on gas? We could all benefit by keeping a little extra cash in our pockets.

That said, if you’re planning a long road trip, you’ll probably want to explore ways to improve gas mileage and to save on gas. Also if you have a long commute to work, you might be spending more on gas than necessary.

The Takeaway

Paying attention to how much gas costs, particularly for a road trip or long commute, is just smart financial planning. Whether you use an online version or crunch the numbers on a piece of paper, a gas trip cost calculator can help you figure out how much you may want to budget for fill-ups.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

How do I calculate gas cost for a trip?

To calculate gas for a long road trip, divide the number of miles of the route by the miles per gallon your car gets. This is the number of gallons you’ll need to drive the distance. Then, average the cost of gas on your route and multiply this times the number of gallons to get the total cost of gas for your trip.

How much would 1 mile of gas cost?

Divide the cost per gallon by the number of miles per gallon your car will go. For example, if you pay $3.99 per gallon and your car gets 22 miles per gallon, driving one mile would cost about $.18.

How do you calculate fuel to destination?

To calculate how much fuel you’ll need to get to your destination, divide the number of miles of the remaining route by the miles per gallon your car gets. Then, average the cost of gas on your route and multiply this times the number of gallons to get the total cost of gas for your trip.

Photo credit: iStock/georgeclerk

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Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Nov
22
2023

Average Retirement Savings By Age

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Average Retirement Savings By Age

The average American has less than $90,000 in retirement savings, as of mid-2023. That’s far below what many people will likely need, and many Americans aren’t really sure what sorts of goalposts or milestones they should be striving for by certain ages when it comes to saving for retirement.

It can be helpful to see how one compares to others in their age range. Averages can help investors see if they are on track to retire when they plan to. While each person is different in terms of their personal retirement goals, lifestyle, ability to save, and projected expenses, setting goals and benchmarks can help an individual figure out how much to save and where to put money for retirement.

Key Points

•   The average American has less than $90,000 in retirement savings, which is less than what many people will likely need.

•   Retirement savings vary by age group, with average savings increasing as people get older.

•   By age 30, it’s generally recommended to save an amount equal to annual salary, and by age 40, three to four times annual salary.

•   By age 50, it’s advised to have six times annual salary saved, and by age 60, eight times.

•   Most Americans aren’t saving enough for retirement, and it’s important to create a retirement plan and consider personal goals and financial responsibilities.

Average Retirement Savings By Age

Below is a breakdown of retirement savings by age group, ranging from people in their 20s to people in their 70s.

Age Group

 Average Retirement Savings
20s $35,800
30s $67,400
40s $77,400
50s $110,900
60s $112,500
70s $113,900

Average Retirement Savings in Your 30s: $67,400

Most Americans in their 20s and 30s haven’t reached their peak earning years, and many might be paying off student loans, and saving up to buy a house or have kids. Retirement isn’t always top of mind. But the earlier people can figure out which retirement plan is right for you and commit to actually starting a retirement savings plan, the more they will benefit from compound interest over time.

Recommended: How to Save for Retirement at 30

Average Retirement Savings in Your 40s: $77,400

Since most people are making more money at this age than they ever have, it can be tempting to spend it on fancy vacations, cars, and other things. Many people also have mortgages, families, and other big-ticket expenses during this time in their lives as well.

But those who put that money towards retirement may be able to reach their goals early and retire relatively young.

For men, these are peak earning years, as they tend to continue increasing their earnings until age 55. Women tend to reach their peak earnings much younger at age 44. Either way, retirement savings should be top of mind for people in this age group.

Average Retirement Savings in Your 50s: $110,900

At this age, some Americans are on track to reach their retirement goals, while others are far off. There are still ways to catch up, such as cutting unnecessary expenses, moving to a smaller home, or putting any additional pay, income, or bonuses into retirement accounts.

Average Retirement Savings in Your 60s: $112,500

Although the goal for many is to retire at around 60, many Americans have to keep working since they don’t have enough savings. In some cases, people plan on working at this stage of life anyway, so it’s not a bad thing. A lot of people work during retirement, although some do so out of necessity.

Ideally, working in later years of life is a choice and not a necessity. After this age, people tend to be spending rather than saving, so the average retirement savings amounts decline.

Retirement contributions tend to increase as people age partly because they are earning more and partly because they are thinking about retirement more.

Ideal Retirement Savings Amounts by Age

Because the cost and standard of living varies so greatly, there aren’t clear dollar figure amounts that each age group should aim to have saved for retirement. But there are suggested guidelines.

•  By age 30: It’s generally recommended that people save an amount equal to their annual salary by the time they reach age 30. That may not be a realistic goal for many people, but it can be a general guideline or goal to aspire to.

  One way to achieve this is to save 10-15% of one’s gross income starting in their 20s. Some employers will match retirement contributions if employees save a certain amount each month, so it’s a good idea to contribute at least that much to take advantage of what is essentially free money.

•  By age 40: It’s recommended that investors have three to four times their annual salary saved by age 40.

•  By age 50: Investors are typically advised to have six times their salary saved by age 50.

•  By age 60: It’s recommended that investors have eight times their salary saved by age 60.

•  By age 67: Investors are typically advised to have ten times their salary saved by age 67. For example, if a 67 year old makes $75,000 per year, they should have $750,000 saved.

Is Anyone Saving Enough for Retirement?

Despite the above recommendations, most Americans don’t have nearly these amounts in their retirement accounts. A significant portion of Americans don’t have any retirement savings at all — and that includes Americans who are near retirement age.

So, while some people are saving enough for retirement, a lot of people aren’t. Social Security may not be enough for a lot of people to make ends meet, either.

Social Security and Your Retirement

It’s more important than ever to create a retirement plan and stick to it, because America is facing a retirement crisis. Social Security was designed to help people pay their expenses during retirement, but it currently pays less than half of the average retiree’s monthly expenses. As of mid-2023, the average Social Security payment is around $1,800 per month.

Best Ways to Save for Retirement

It can be stressful to feel behind on saving for retirement, but it’s never too late to start.

There are several ways to save for retirement — but a good place to start, if you haven’t already, is by creating a budget to track expenses. This allows you to see where your money is going and identify categories of spending that could be reduced, with the money redirected to a retirement savings account.

Some retirement plans also have catch up options for those who start late — typically, individuals older than 50 can contribute extra funds to their retirement accounts.

No matter how much you put aside for retirement, or whether you contribute to a traditional IRA or a Roth IRA, a 401(k) or an after-tax investment account, a good strategy is to automate savings. With automated savings, the money is deducted from your paycheck or your bank account automatically — making it easy to forget that the money was ever in the account in the first place.

The Takeaway

The average American has less than $90,000 in retirement savings, though the number varies depending on age groups and other factors. Knowing how much others in your age group are saving for retirement can help give you a sense of comparison, but it’s important to remember that most Americans aren’t saving enough.

There are a number of different formulas, calculations, and rules of thumb to help individuals figure out how much money they’ll need in retirement. While these figures can be helpful, it’s also important to take personal goals, financial responsibilities, and lifestyle into consideration.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Nov
22
2023

What Is the Age for Early Retirement for Social Security?

By | Life & Career, Preparing for Retirement, relay | Comments Off on What Is the Age for Early Retirement for Social Security?

Throughout your working career, you pay employment taxes that help fund Social Security, which provides income when you retire. In 2023, nearly 67 million people will receive Social Security benefits, collectively totaling more than $1 trillion.

There are strict rules about when you can claim Social Security benefits. You can start collecting retirement benefits as early as age 62, but if you can delay claiming your benefits, your monthly benefit amount can continue growing until you reach age 70.

Learn more about Social Security benefits, early retirement age, and the advantages and disadvantages of filing for your benefits early and late.

Key Points

•   Social Security benefits provide income for retirees, with the amount depending on their earnings and the age at which benefits are claimed.

•   The full retirement age (FRA) for Social Security benefits varies based on the year of birth.

•   Benefits can be claimed as early as age 62, but the monthly amount is reduced compared to claiming at FRA.

•   Delaying benefits past FRA can increase the monthly amount through delayed retirement credits, up to a certain point.

•   It’s important to consider shortand long-term financial needs before deciding when to claim Social Security benefits.

What Are Social Security Benefits?

Social Security is a social insurance program created in 1935 to pay workers an income once they retired at age 65 or older. When people talk about Social Security benefits, they’re referring to a monthly payment that replaces a portion of a worker’s pre-retirement income.

The amount you receive depends on how much you earned and paid in Social Security taxes during the 35 highest-earning years of your career. Generally speaking, the higher your income, the bigger your monthly check will be — up to a point. Also important is the age at which you claim benefits. Typically, the later you receive benefits, the higher your monthly check will be.

Note that retirees aren’t the only ones who are eligible for Social Security benefits. People with qualifying disabilities, surviving spouses of workers who have died, and dependent beneficiaries may also qualify for benefits.

Recommended: When Will Social Security Run Out?

At What Age Can You Collect Social Security?

When the Social Security program began, the full retirement age (FRA) was 65, and that’s still what many in the U.S. think of as the average retirement age. However, as life expectancy in the U.S. has increased, the Social Security Administration (SSA) has adjusted the FRA accordingly.

The chart below illustrates FRA by year of birth.

If You Were Born In Your Full Retirement Age Is
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Recommended: At What Age Should You File for Social Security?

What Is the Early Retirement Age for Social Security?

You can choose to claim retirement benefits as early as age 62. However, SSA will reduce your benefit by about 0.5% for every month you receive benefits before your FRA. For example, if your full retirement age is 67 and you file for Social Security benefits when you’re 62, you’d receive around 70% of your benefit.

On the other hand, if you wait to claim benefits after your FRA, you’ll accrue delayed retirement credits. This increases your benefit a certain percentage for every month you delay after your FRA. For example, if your full retirement age is 67 and you delay receiving benefits until age 70, you’ll get 124% of your monthly benefits. Note that the benefit increase stops when you turn 70.

Recommended: When Can I Retire? This Formula Will Help You Know

Can You Claim Social Security While You’re Still Working?

When you claim your Social Security benefits, the SSA considers you retired. However, you can continue working after retirement and receiving benefits at the same time, though they may be limited.

If you’re younger than FRA for the entire year, the SSA will deduct $1 from your payment for every $2 you earn above an annual limit. In 2023, that limit is $21,240. In the year you reach full retirement age, the SSA will begin deducting $1 for every $3 you make above a different earnings limit — $56,520 in 2023.

No matter their work history, your spouse has the option to claim Social Security benefits based on your work record. That benefit can be up to 50% of your primary insurance amount, which is the benefit you’d receive at FRA. Your spouse can begin receiving spousal benefits at age 62, but they will receive a reduced benefit.

Pros and Cons of Claiming Social Security Early

The main advantage of filing for Social Security early is that you’ll have access to retirement funds sooner. This can be a boon to individuals who need extra money to get by each month. To help you maximize every last dollar, consider using a spending app to create budgets, track spending, and monitor bills.

The main disadvantage of filing early is that you may permanently reduce your monthly benefit amount. This could be a factor to keep in mind as you determine whether you’re on track for retirement.

So how do you decide when to file for your benefits? Consider your “break-even point.” This is the age at which receiving a delayed higher benefit outweighs claiming benefits earlier.

Here’s an example of how that works. Let’s say your FRA is 67 and your annual benefit is $24,000. If you claim your benefit at age 62, your benefit drops to $16,800 a year. If you delay until age 70, your benefit would be $29,760 a year.

By adding up each year’s worth of benefits and comparing them across different potential retirement ages, you find your break-even point. So in that last example, claiming your benefit at FRA breaks even with early filing at age 78. If you expect to live until this age or longer, you may consider filing for Social Security at full retirement age. Delaying until age 70 breaks even with claiming at FRA at age 82. So if you expect to live until 82 or longer, you may consider delaying your benefits.

Recommended: How Can I Retire Early?

The Takeaway

Social Security is an important source of guaranteed income during retirement and can help ensure you can cover recurring expenses like housing payments and utilities. Your monthly payment amount is determined by how much you’ve earned during your working career and the age at which you claim Social Security benefits. You’re eligible to receive your full benefits when you reach full retirement age (FRA). If you file before then, the monthly payment will be reduced. If you file later, your monthly payment can increase, up to a point. Consider your short- and long-term financial needs carefully before deciding when to claim Social Security.

Whether you’re planning to continue working past your FRA or are preparing for retirement, using a money tracker app can help you manage your overall spending and saving. The SoFi app connects all of your accounts in one convenient dashboard. From there, you can see all of your balances, spending breakdowns, and credit score monitoring, plus you can get other valuable financial insights.

Stay up to date on your finances by seeing exactly how your money comes and goes.

FAQ

Can I take Social Security at age 55?

You cannot claim Social Security benefits at age 55. The earliest you can file for benefits is age 62.

What happens to my Social Security if I retire at 55?

If you retire at 55, you will have to wait seven years, until age 62, before you are eligible to claim early Social Security benefits. Retiring early may also affect the size of your benefit if you are leaving work in your top-earning years.

What is the average Social Security benefit at age 62?

The average monthly Social Security retirement benefit in 2023 is about $1,827 for those filing at full retirement age. Filing early at age 62 would reduce that benefit by 30% to $1,278.90.

Photo credit: iStock/svetikd

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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