Adding Retirement to Your Budget
If you're a firm believer in the “pay yourself first” concept, then way to go! It's one of the best ways to reach your ultimate retirement savings goals.
However, if you haven’t started saving for retirement, then it’s easier than you think to create a budget and put “saving for retirement” at the top of the list. Here's a 4-step plan to get going:
- Use the Retirement Planning Calculator to figure out how much money you should be saving each month to reach your goals.
- Review your monthly income and expenses to see where you can cut costs to increase retirement savings.
- If you can’t contribute as much as you’d like, then start with 1 percent of your annual income. Every year, as you get pay raises or reduce your debt, add another 1 percent to your retirement savings plan.
- Pay yourself first through payroll deductions (in an employer-sponsored plan) or make regular contributions to an IRA.
How Does Your Retirement Contribution Affect Your Paycheck?
One great thing about contributing to a pretax retirement plan is that the contribution is taken out of your paycheck before you pay income taxes. That means that you'll pay taxes only on the amount that remains after your retirement plan contribution is made.
For example, suppose your paycheck is $1,500 twice a month—that puts you in the 15 percent federal income tax bracket—and you don't make a contribution to your 401(k):
No state or local taxes are considered in this simple calculation. Actual tax rates will vary depending on state residency, income, number of dependents, etc.
Growing Your Contributions
If you’ve designated that a percentage of your income will go toward an employer-sponsored retirement plan, or you’ve settled on a target for annual IRA contributions, then revisit your contribution amount whenever your financial situation changes. Consider upping your contributions to your employer’s plan or putting more in your IRA at the beginning of every year, during your company’s open enrollment period, or when you:
earn a raise,
pay off a debt,
receive a financial windfall (such as a tax refund, bonus, gift or inheritance), or
reach a financial goal.
Increasing your savings rate as your financial situation improves is nearly painless, and it pays big benefits. Your long-term goal? Aim to make contributions equal to 10 to 15 percent of your annual income—or whatever target you’ve set for yourself—in order to reach your ultimate retirement savings goal.
Retirement Savings Calculator
Use the calculator below to see how increasing your monthly contributions over a set number of years affects the size of your retirement account. The calculator also lets you take into consideration other factors, such as marital status, tax rates and other variables.
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