In Your 30s or 40s -- Are You Saving Enough?
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Learn when to start saving for retirement.
If you worry that you're not contributing enough for your future, here are some steps to help you ramp up.

From the Merrill Edge Minute e-Newsletter.
Key Points
  • Your retirement could span 30 years or more since people are living longer than ever.
  • You may need a nest egg big enough to replace 80% to 100% of your present annual income for each year of retirement.
  • Start your strategy by imagining the life you want after you retire.
  • Try stretching your budget to increase your contributions, and consider using a diversified group of account types.
  • Get our tip sheet 5 Steps to Saving More for Retirement Now

If you're in your 30s or 40s, life can be hectic: a constant juggle of career, family and everyday chores, not to mention competing demands for your money. You may be saving for a new car while paying off a mortgage and putting away money for a child's education. And at the same time, you hear reports that many Americans haven't saved enough to retire, and there's that nagging voice in the back of your mind asking: How much should I be saving for retirement?

You may be faithfully contributing to an IRA or a workplace retirement plan, like a 401(k). It feels great, but believe it or not, it may not be enough. Put bluntly: Even if you're contributing a big chunk of your paycheck each month, there's a chance that you won't have enough money for the retirement you want.

While you still have plenty of working years ahead, it's important to evaluate your retirement strategy to make sure you consider a mix of account types — not just a single workplace or an individual account — and that you're contributing enough to each one.

First, paint a picture of your retirement

So how do you figure out whether you're on track? Start with considering what you want your retired life to look like, says Debra Greenberg, director, IRA product management at Merrill Lynch. That may feel hard to do when retirement is 30 years away, but ask yourself a few basic questions:

  • Is extensive travel in your plans? Do you dream of spending winters in a sunny climate?
  • Do you imagine working into your 70s?
  • Is your ability to support aging parents or help send a child to college important?

Consider your long-term health outlook, too: You may not think about this much in your 30s or 40s, but after age 65, you may face as much as $200,000 in out-of-pocket health care expenses, according to a 2013 study from the Employee Benefit Research Institute. (You can take steps today to prepare for retirement health care costs and help secure the amount you'll need to save.)

As a rough estimate and, "depending on your goals, you may want to assume that you need a nest egg big enough to replace 80% to 100% of present annual income for each year of retirement," suggests Greenberg. And since people are living longer than ever, you could be looking at 30 years or more of retired life.

"Depending on your goals, you may want to assume that you need a nest egg big enough to replace 80% to 100% of present annual income for each year of retirement." — Debra Greenberg, director, IRA product management at Merrill Lynch

"Having a specific goal for your retirement nest egg can help you keep a balanced approach among all of your financial objectives," says Greenberg, since you'll have a better understanding of how much you need to put away each month to achieve your goals. "You'll know whether you need to contribute more, invest differently, or make adjustments to the retirement you envision."

Next, consider stretching to increase your contributions

Once you have an idea of your goal, where should you begin? Some experts suggest setting aside at least 10% of your pretax income, but that's just a rule of thumb. For instance, say you're earning $100,000 a year and putting away 10% of your salary. Do a little math and you'll see that if you start saving at that rate at age 35, you may yield about $22,000 per year in retirement income starting at age 65.1, 2 To reach the retirement goal of 80% to 100% income replacement, you may want to consider bumping up your contributions. (See additional scenarios in the chart below.)

The good news is that for most people, retirement accounts aren't their only source of retirement income; you'll likely have income from Social Security, maybe a pension or income from part-time or consulting work. But if you intend for investments to make up the bulk of your retirement income, the key is to start ramping up now. Even increasing your retirement contributions 1% or 2% a year — just a few dollars a paycheck — can make a big difference after three decades.

Discover how to save for retirement in your 30s.

With all of your current expenses, finding more money to put towards retirement can seem daunting. It may even be a stretch for you. But even small savings from paring back a few indulgences here and there can make a big difference in how much you have for retirement.

Start the impact of investing an additional $25 per week for retirement

* Assumes four weekly contributions per month at an annual rate of return of 6%, compounded monthly for the stated number of years. Prices for goods based on 2014 U.S. averages assume $1.38/cup of brewed coffee, $10/lunch eaten out, $1.45/bottle of water.

To make the stretch easier, consider making it automatic. You've probably heard the phrase "pay yourself first." Make your savings automatic each month and you'll have the opportunity to potentially grow your nest egg without having to constantly make transfers, Greenberg says. The Merrill Edge® Automated Funding Service is an easy way to make sure you invest on a regular basis with contributions to your Merrill Edge® IRA from another account. Once your contribution is in your Merrill Edge account, you can also automate your investment selection into specific funds.1

When money comes directly out of your checking account to be invested, you're not tempted to spend it on something else. "If you save early and often, you'll have a better chance of affording the retirement you'd like," Greenberg notes.

Now, diversify your account types

One account type alone is probably not enough to get you where you want to be. Having multiple account types allows you to contribute beyond the IRS limits on 401(k)s or IRAs, and has the added benefit of providing varied tax treatments of your withdrawals. So how do you figure out the right mix for you?

Experts agree that if you have a workplace 401(k) plan, at a minimum it's a good idea to contribute at least enough to earn any company match that's offered — it's free money. Contributions to traditional 401(k)s have the added benefit of reducing your current taxable income.

If your investment options with your employer 401(k) are limited, or your employer doesn't offer a 401(k), consider either a traditional IRA or Roth IRA, which both offer tax-free growth. IRAs may also be good options if you've already contributed the maximum amount to your 401(k) plan.

Annual contribution limits
Make a goal to ramp up your retirement contributions over time to reach the maximum contribution limit.

Maximum contributions for 2015 and 2016

Contributors younger than age 50
401(k)s = $18,000 IRAs* = $5,500

For contributors age 50 and older**, the maximum annual 401(K) contribution is $24,000 and the maximum contribution for IRAs is $6,500.

Please consult your tax advisor. The contribution deadline in 2015 for IRAs is 4/18/16 and the contribution deadline for 401(k)s is 12/31/15. In 2016 the IRA contribution deadline is 4/17/2017 and 12/31/2016 for 401(k)s. You generally have until April 15 of each year to make your contribution for the previous year. If April 15 falls on a weekend or a holiday, the deadline is typically the next business day.

*A traditional IRA also offers tax deductible contributions, if you are eligible.

** You are treated as being age 50 or older if you will turn age 50 or older at any point during the calendar year.

With a Roth IRA, you won't pay federal tax on your withdrawals when you take them at retirement, so long as they're taken as a qualified distribution. This can be a big benefit if you believe your tax bracket in retirement will be higher than it is now. With a traditional IRA, you may be eligible for a tax deduction now, but you'll be taxed when you withdraw the assets later. This can be a big benefit if you believe your tax bracket in retirement will be lower than it is now.

Another important difference between the two: Roth IRA income eligibility limits determine who can qualify for a new account (excludes conversions), while traditional IRAs are open to anyone with earned income. Only tax deductibility of traditional IRAs is limited by income. Use our IRA Selector Tool to find out which IRA could be right for you, bearing in mind that some people prefer to have both types to hedge bets on future tax rates.

General investing accounts
Don't forget about a general investing, or brokerage, account. You may not think of it as a retirement account like an IRA or 401(k), but a brokerage account:

  • May offer the benefit of a broader array of investment options than your workplace retirement accounts do.
  • Has the added advantage of allowing you to access your money at any time — not just after age 59½. So you can earmark funds for retirement but access them sooner if you absolutely have to.
  • Does not have an IRS limit on the amount of money you can invest. However, you won't have the tax advantages of investing in a 401(k) or IRA.

Pursuing multiple financial goals usually involves trade-offs, and retirement planning is no exception. When it comes to prioritizing financial goals, remember: There are no loans for retirement. Saving and investing enough for retirement may be a tough juggle, but if you create a budget, cut back on discretionary expenses and automate your contributions the results may surprise you. "Most people find that saving more is easier than they expected," Greenberg says. The most important thing is to put time on your side and take action today.

Next Steps

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1 Assumptions for "Is this enough money for you to live on in retirement?" chart: (a) Initial wage of $100,000 and annual contribution amounts increase annually at a 2.5% rate of inflation. (b) Contributions start at age 35, and investor is continuously employed and makes designated contributions until age 65, when it's assumed that the investor retires. (c) Contributions earn 6% rate of return (net of fees). (d) The maximum IRS contribution limits continue at 2014 levels from age 35 through 65, including additional catch-up contributions beginning at age 50.

Mortality assumptions
This estimate accounts for longevity risk, as measured by the Society of Actuaries Annuity 2000 Mortality Table, which is the latest available. The estimate is based on analysis by Merrill Lynch Wealth Management using the Society of Actuaries Annuity 2000 Mortality Table.

2 Please keep in mind that an automatic investment plan does not ensure a profit or protect against loss in declining markets. Such a plan involves continuous investment in securities regardless of fluctuating price levels; investors should carefully consider their financial ability to continue their purchases through periods of fluctuating price levels.