Build your retirement savings this year with some helpful tips from Suze Orman.
Financial advisor Suze Orman says that "one of your smartest financial moves this year will be to run a serious maintenance checkup on your retirement saving strategy," and she's right. While 75% of Americans have some retirement savings, many are pessimistic about their chances of retiring on time. Only 40% feel that their retirement savings are on track, according to retirement savings research.
If you don't save enough for retirement, it can lead to serious financial issues. You may need to work longer than you want or retire on a limited income. You also might not be prepared for the costs that come up as you get older, such as healthcare.
How can you make sure you have a sound retirement savings strategy? Orman recently shared her retirement dos and don'ts for 2023. They can help you ensure you're taking the right steps to retire on time.
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Suze Orman's six must-do retirement planning checklist
Here are six retirement savings steps Orman believes everyone should commit to.
- Contribute at least enough to your 401(k) to get the maximum match. When your employer offers a 401(k) match, this is like free money, so it makes sense to maximize it. If you're not maxing this out already, talk to HR, ask how much you need to contribute to get the max match, and start doing that.
- Boost your 401(k) contribution rate by at least 1 percentage point if you're not yet saving at least 10%. Orman says 10% of your salary is the minimum amount you should put in your 401(k), and she says 15% is a smarter target. If you're not putting in 15% yet, raise your contribution by 1% per year until you get there.
- Vow to use half of a raise for retirement. Make the most of a raise by setting aside half of it to increase your retirement contributions. For example, if you get a $6,000-per-year raise, put $3,000 toward your retirement.
- Use the Roth 401(k) if it's offered. Orman likes Roth plans, where you pay taxes on your contributions but get tax-free withdrawals in retirement. Not all employers offer Roth 401(k)s, so if yours doesn't, there's another option.
- Save in a Roth IRA. If you don't have a Roth 401(k) available, you can open a Roth IRA instead. These are available with all top stock brokers.
- Review your mix of stocks and bonds. Unless your 401(k) offers automatic rebalancing or you invest in a target-date fund, you'll need to review the asset allocation. You'll also need to do this with your IRAs.
These are all good tips on saving for retirement. The only ones that are debatable are Orman's recommendations to use a Roth 401(k) or a Roth IRA.
The difference between a traditional IRA and a Roth IRA, as well as traditional and Roth 401(k)s, is when you pay taxes. With a standard IRA or 401(k), contributions are tax deductible. They lower your income taxes the year you make them, and you pay taxes on withdrawals in retirement.
With a Roth IRA or 401(k), contributions aren't tax deductible. They're taxed just like income, but you don't pay taxes when you withdraw money in retirement.
Neither type of retirement plan is necessarily better than the other. It depends on whether you'd prefer tax savings now or later. Keep in mind you can always contribute to both types of plans, too.
One retirement don't
Orman only has one thing she recommends not doing in regard to retirement, but it's a biggie: Don't cash out a penny of your 401(k) if you leave your job.
This is good advice, but it doesn't even need to be so specific. Don't take money out of your 401(k) or your IRA, period. It's a common money mistake, and there are a few major drawbacks to doing so:
- That money won't be growing in your retirement savings anymore, so this cuts down on how much you'll have later.
- If you're younger than 59 1/2, there's a 10% early-withdrawal penalty with 401(k) and IRA plans.
- You'll pay taxes on withdrawals from traditional 401(k)s and IRAs.
You're much better off financially leaving your money in your retirement accounts so it can grow. Making early withdrawals is really only something to consider in an absolute emergency where you have no other options.
When it comes to saving for retirement, Orman provides excellent advice. If you're not following her dos and don'ts already, give them a try this year.
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FAQs
Orman says 10% of your salary is the minimum amount you should put in your 401(k), and she says 15% is a smarter target. If you're not putting in 15% yet, raise your contribution by 1% per year until you get there. Vow to use half of a raise for retirement.
What are the new retirement rules for 2023? ›
SECURE Act 2.0 RMD changes
SECURE 2.0 increased the required minimum distribution age to 73 as of January 1, 2023. However, if you turned 72 in 2022, you had to take your first RMD by April 1, 2023. The bump to age 73 is one of several new RMD rules. However, the RMD age eventually moves to 75.
What is the 3 rule in retirement? ›
In some cases, it can decline for months or even years. As a result, some retirees like to use a 3 percent rule instead to reduce their risk further. A 3 percent withdrawal rate works better with larger portfolios. For instance, using the above numbers, a 3 percent rule would mean withdrawing just $22,500 per year.
What is the golden rule for retirement? ›
The golden rule of saving 15% of your pre-tax income for retirement serves as a starting point, but individual circ*mstances and factors must also be considered.
What is the 15 retirement rule? ›
For a successful retirement, you should aim to save at least 15% of your income annually over the course of your career. Saving steadily and increasing your contributions periodically should help you hit that target over time.
What is a comfortable retirement income in 2023? ›
Adjusted for 2023, the U.S. Census reports the median retirement income is $52,575. What makes a “good” retirement income is entirely subjective to your needs and plans. 80% of your pre-retirement income is a good starting guideline.
What is the new law on retirement accounts? ›
Automatic 401(k) enrollment
For retirement plans starting after Dec. 31, 2024, this will no longer be the case. Instead, once employees are eligible, employers will automatically enroll them into a retirement savings plan. The initial contribution must be at least 3% of pretax earnings but not more than 10%.
What is the $1000 a month rule for retirement? ›
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.
What is a good monthly retirement income? ›
Average Monthly Retirement Income
According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
At what age is 401k withdrawal tax free? ›
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.
What is an 80/20 Retirement Plan? An 80/20 retirement plan is a type of retirement plan where you split your retirement savings/ investment in a ratio of 80 to 20 percent, with 80% accounting for low-risk investments and 20% accounting for high-growth stocks.
What is the 4 rule of thumb for retirement? ›
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
What is the best Rule for retirement? ›
The 4% rule is intended to make your retirement savings last for 33 years, and potentially more. This rate of withdrawals means that most of the money used will be the interest and gains on investments, not principal, assuming a reasonably healthy market return.
What is the Biden retirement rule? ›
WASHINGTON – The Biden-Harris administration announced today that the U.S. Department of Labor has finalized its Retirement Security Rule to protect the millions of workers who are saving for retirement diligently and rely on advice from trusted professionals on how to invest their savings.
How long will $400,000 last in retirement? ›
This money will need to last around 40 years to comfortably ensure that you won't outlive your savings. This means you can probably boost your total withdrawals (principal and yield) to around $20,000 per year. This will give you a pre-tax income of almost $36,000 per year.
How do I avoid 20% tax on my 401k withdrawal? ›
One of the easiest ways to lower the amount of taxes you have to pay on 401(k) withdrawals is to convert to a Roth IRA or Roth 401(k). Withdrawals from Roth accounts are not taxed. Some methods allow you to save on taxes but also require you to take out more from your 401(k) than you actually need.
What is the new retirement age in 2023? ›
Let's say you turn 62 in 2023, your full retirement age is 67, and your monthly benefit that starts at full retirement age is $1,000. If you start to get benefits at age 62, we'll reduce your monthly benefit 30% to $700 to account for the longer time you receive benefits. This decrease is usually permanent.
What are the changes to federal retirement in 2023? ›
The earnings limit for people reaching their full retirement age in 2023 will increase to $56,520. For every $3 earned over this limit, Social Security will deduct $1 from benefits. There is no limit on earnings for workers who are full retirement age or older for the entire year.
What is the full retirement age earnings limit for 2023? ›
Starting with the month you reach full retirement age, there is no limit on how much you can earn and still receive your benefits. You work and earn $32,320 ($10,000 more than the $22,320 limit) during the year.
What are the changes in the retirement plan? ›
Highlights of changes for 2024. The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan is increased to $23,000, up from $22,500. The limit on annual contributions to an IRA increased to $7,000, up from $6,500.
