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Our industry over about the last 25 years has been making meaningful strides toward improving the prospects for a secure retirement for millions of Americans. Retirement savers have benefited from innovations in 401(k) plan design, including autoenrollment, autoescalation, single-fund options, and Roth conversions. Vanguard has tracked the benefits of these advancements among our retirement plan participants and seen record-high participation and contribution rates, as well as a growing proportion of participants in target-date funds and advised solutions.1
For those approaching retirement, financial wellness decisions such as when to retire, when to claim Social Security, and how to navigate health care choices and costs—including Medicare—can feel daunting. Financial education and personalized advice continue to be a wise option for many. But whatever your situation, National Retirement Security Week serves as a great reminder about three basic rules of thumb.
Three retirement rules of thumb . . . and more
Save 12%–15% of income for retirement. This is a good guideline, as this range represents both contributions and any employer match. If you’re saving more, that's great—keep it up. If you can, make sure you’re investing at least enough to get a company match. Start out by saving as much as you’re able and then increase the amount each year. Many employer-sponsored retirement plans offer an autoescalation feature that increases your savings rate yearly, usually by 1 to 2 percentage points.
Max out on tax-advantaged accounts. In addition to a 401(k) and other employer-sponsored retirement plans, you can contribute at least $6,000 annually to an individual retirement account. And IRA owners age 50 and older can make a catchup contribution of up to $1,000, for a total maximum contribution of $7,000 per year.2 Many investors don’t invest the maximum, and over a 30-year savings horizon, this potentially can mean lost savings in the tens of thousands of dollars.
It’s also important to decide which type of IRA—Roth or traditional—is best. For many young investors in particular, a Roth account is superior. Although Roth investors don’t get a tax deduction on their contributions, the many years of tax-free compounded growth will likely far outweigh the initial tax break that comes with traditional IRA contributions. But for older investors in their peak earning years, a traditional IRA might be a better option.
One also might consider a Health Savings Account (HSA) as an “off-label” retirement account. HSAs offer a triple tax advantage: Contributions may be 100% percent tax-deductible, all interest earned is tax-deferred, and withdrawals are tax-free for eligible medical expenses (i.e., deductibles, copays, prescriptions, vision care, and dental care). So if you are in a high-deductible medical plan with an HSA, make full use of it. Ideally, if you can pay for current medical expenses out of pocket, your account can compound tax-free.
Don’t forget about asset allocation. Choosing investments isn’t a one-size-fits-all decision. But certain broad principles apply to setting an asset allocation. People early in their career are investing to get to retirement, so they have a long time horizon. That’s a good thing, as they have plenty of time to ride out temporary downturns in account balances, as many of us have been experiencing in the current bear market. Simply put, a longer horizon means you may be able to afford to take more risk in hopes of getting higher returns.
Those closer to retirement have less time to wait for the market to bounce back. In this case, an asset mix with lower risk might be a better option. But be careful not to be too conservative. Investors should plan for a 30-year retirement horizon, so accounts need to keep growing so they can last long after a person leaves the workforce.
Regardless of age and risk tolerance, retirees should be concerned about at least keeping pace with the long-term effects of inflation, so it’s important to consider a healthy allocation to a globally diversified stock portfolio. Options range from customizing portfolios to taking advantage of professionally managed target-date or balanced funds.
Consider personalized financial advice
Retirement is clearly a top priority for most investors. But the reality is that most of us are juggling multiple savings goals. These may include paying for college or a home or budgeting for a secure lifestyle.
Working with a trusted financial professional can help investors make financial planning trade-offs when navigating household retirement decisions. For those approaching retirement, an advisor can help with some of the most challenging financial wellness decisions such as when to retire, when to claim Social Security, and how to navigate health care choices and costs, including Medicare.
So whether you knew about National Retirement Security Week, are in the midst of a participant education campaign, or just learned of the event, use it to make sure your retirement savings plan is in a good spot.
1 Vanguard, How America Saves 2022.
2 For 2022, the total contribution you make to all of your traditional and Roth IRAs can't be more than $6,000 ($7,000 if you’re 50 or older), or your taxable compensation for the year if it’s less than the $6,000/$7,000 contribution limit.
- All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
- Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
- Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.
- Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
- We recommend that you consult a tax or financial advisor about your individual situation.