3 Paths to Optimal Retirement Savings, Based on Your Salary

No matter how much money you make, you need to save some of it for retirement. Social Security alone replaces only around 40% of pre-retirement earnings, which isn’t sufficient when experts recommend replacing at least 80%. While it may be hard to invest for the future, doing so is crucial to avoid a major financial shortfall as a retiree.

Fortunately, three Motley Fool retirement experts have suggestions for optimizing your retirement savings regardless of your income level. Here are three paths to building the nest egg you’ll need for your later years, depending on how much you earn.

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$20,000: Take advantage of the saver’s credit

Christy Bieber: For lower-income Americans, saving for retirement can be especially difficult because there are so many pressing expenses you have to worry about today. Fortunately, the government provides some extra help to make it easier for you to invest for your future — and you should take full advantage of it.

This extra assistance comes in the form of the saver’s credit. It entitles you to a tax credit worth up to 50% of the eligible amount you contribute to a qualifying retirement savings account such as a 401(k) or a traditional or Roth IRA (individual retirement account). Single filers are eligible for this credit on up to $2,000 in contributions, while joint filers can claim it on up to $4,000. That means the credit is worth up to $1,000 for single filers and $2,000 for married joint filers.

Putting money into these retirement accounts also comes with tax breaks outside of the saver’s credit. Contributions to a 401(k) and traditional IRA are deductible in the year you make them. That means you wouldn’t actually have to reduce your take-home income by $2,000 or $4,000 to qualify for the full credit.

If you’re in the 12% tax bracket and you make a $2,000 contribution, you save the 12% tax on that amount so it only costs you $1,760 — although you’d get the full $2,000 to earn the saver’s credit.

The specific amount you get back from the saver’s credit varies depending on your income level, but the full 50% is available for incomes up to $19,750 for single filers and $39,500 for married joint filers. That means most people who earn under $20,000 can get the full amount. And, remember, tax credits reduce your tax bill on a dollar-for-dollar basis so they are more valuable than deductions.

This credit is free money to help you build a brighter future after leaving the workforce. If you’re earning under $20,000, do everything you can to claim it so you can maximize your chances of having enough for your later years.

$40,000: Max out your IRA

Maurie Backman: You may be well aware that Social Security won’t provide enough income for you to retire on. Rather, you’ll need to save a sizable portion of your salary to ensure that you have enough money to pay for your senior living expenses.

The old convention was to save 10% of your salary for retirement. But based on the ever-increasing cost of living, these days, it pays to do a bit better. In fact, it’s a good idea to try to set aside 15% of your income or more for retirement. And so, if you earn $40,000 a year, maxing out an IRA is a good bet.

If your goal is to sock away 15% of your earnings, that brings you to a yearly savings goal of $6,000. And that aligns perfectly with today’s IRA maximum contributions for workers under 50 (for workers 50 and over, the limit increases from $6,000 to $7,000).

What might your total savings look like if you sock away $6,000 a year in an IRA? Well, if you make that annual contribution over a 30-year period, and your investments in your IRA generate an average annual 8% return (which is a little bit below the stock market’s average), you’ll end up with about $680,000. That’s a really nice way to supplement the income you’ll collect from Social Security.

Of course, IRA contribution limits could rise over time, as could your salary. Keep aiming to save a proportionate amount so you’re able to retire comfortably like you deserve to.

$100,000: Max out your 401(k)

Katie Brockman: The more you’re earning, the more you should be saving for retirement. If you’re earning $100,000 or more per year, your goal should be to max out as many of your retirement accounts as possible.

You can invest up to $6,000 per year in a traditional or Roth IRA (plus an extra $1,000 per year in catch-up contributions if you’re age 50 or older), so that should be your first priority. If you also have access to a 401(k) through your employer, see if you can max that out as well.

For 2021, the most you can contribute to a 401(k) is $19,500 per year (plus an additional $6,500 per year for those age 50 and older). Between a 401(k) and an IRA, you can save up to $25,500 per year (or $33,000 per year with catch-up contributions) by maxing out both types of accounts.

If you can’t afford to max out all of your retirement accounts, that’s OK. But still aim to save as much as you can.

Most experts recommend setting aside at least 10% to 15% of your salary toward retirement. So if you’re earning $100,000 per year, try to save at least $10,000 to $15,000 each year in your retirement fund.

If you’re struggling to save anything at all, try to at least contribute enough to earn any employer matching 401(k) contributions you may be entitled to. Matching contributions from your employer are essentially free money, so if you’re not saving at least enough to earn the full match, you’re missing out on easy cash.

The $16,728 Social Security bonus most retirees completely overlook

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