Between mortgage and car payments, family vacations, summer camp and future college expenses, it's no surprise that most of us struggle to save for retirement. A recent survey by the Employee Benefit Research Institute found that only 26% of workers are very confident they will have enough money stashed away to pay for basic living expenses in retirement. So unless your plan is to move in with your kids when they're adults, now is the time to start saving.
A common mistake parents make is thinking they must sacrifice—even if it means racking up debt—in order to provide the best for their kids. After you've paid for the basics, make retirement the priority, says Stuart Ritter, a financial planner with T. Rowe Price. There are many ways to fund an education, including scholarships and student loans. But you'll be hard-pressed to find a bank that's willing to lend even a dime to put toward retirement. In the past, people counted on the value of their home and a monthly check from Social Security. But the recent housing debacle has taught us that real estate doesn't always go up. And many experts agree that future retirees may receive a smaller check from Uncle Sam, says Ritter. That leaves seniors to depend on however much they've stashed away on their own.
The Game Plan
Pay yourself first. Assuming you'll stop working around age 65, you'll need to save 15% of your pretax income to maintain your current lifestyle, says Justin Fulton, a financial planner based in Norfolk, Virginia. If you haven't begun saving, aim to put 20% of your income toward retirement, so review your budget and cut unnecessary expenses.
Once you've set a goal, choose a retirement account with tax benefits. If you have access to an employer-sponsored plan, such as a 401(k), check whether your company offers matching. If it does, take advantage—not doing so is like turning down free money. Arrange for automatic deductions from your paycheck that qualify you for your company's match, which is typically between 2% and 6%, says Fulton. For 2012, the 401(k) employee contribution limit is $17,000. (It's $22,500 for those 50 and older.)
If you qualify, open a Roth Individual Retirement Arrangement (IRA) at a local bank or financial services firm. This option is for married couples filing jointly with modified adjusted gross income (AGI) below $183,000 and for singles earning less than $125,000. You pay all taxes up front (by contributing post-tax dollars), so your money grows tax-free, which is especially good for those who retire in a higher tax bracket. Roth IRAs often offer more investment options than employer-sponsored plans. The rules are also a bit more lax if you need to make a withdrawal. The IRS allows you to invest up to $5,000 a year ($6,000 if you're 50 or older). Consult an accountant if your modified AGI is near the income limits, since you may not be allowed to make a full contribution.
For those fortunate enough to have additional funds, there are two more choices. If a married couple files jointly and one spouse doesn't work outside the home, he or she may qualify for a Spousal IRA. (Ask your accountant if this is an option.) You can also invest in a regular brokerage account.
Good news for the self-employed: You may be able to stockpile even more. Establish a Simplified Employee Pension plan, also known as a SEP IRA, or a solo 401(k). With a SEP IRA, the IRS allows you to set aside and deduct up to 25% of your net self-employment income up to $50,000. A solo 401(k) also lets sole proprietors contribute up to 25% of their income up to $50,000, plus up to $17,000 in employee salary deferral. The rules can be tricky, so consult an accountant to determine which is best for you.
Originally published in the October 2012 issue of Family Circle magazine.