When rent/mortgage, food, debt, kids, and life circumstances are just occurring and all want money right now, retirement can feel so far away and take a backburner as far as priorities. However, saving for retirement sooner, even if a small amount is a win. Retirement isn’t all or nothing, it’s about building momentum. If your employer offers a match then payroll deducting enough to get the full match can usually be worth it, even when cash is tight. The standard is to save 15%-20% of gross income and general rule of thumb checkpoints are 1x salary saved by age 30, 3x salary saved by age 40, and 6x salary saved by age 50, but the right amount varies based on your personal situation and goals. You may need less saved up if you have a pension, significant rental income, a business you can sell, or part-time work in retirement. Keep in mind that life has seasons and you’re not behind because you’re surviving. Some years are about building, while others are about just staying afloat. You can increase later when expenses ease up.
The core difference between traditional 401k and Roth 401k is when you pay taxes. Traditional 401k contributions are pre-tax, lower your taxable income today, and you pay ordinary income tax when you withdraw in retirement. Best if you’re in a higher tax bracket now than you expect in retirement, you want tax relief today (cash flow matters), and you expect retirement income to be lower or similar than today. Roth 401k contributions are after tax, so no tax breaks today, but qualified withdrawals in retirement are 100% tax free. Best if you’re early or mid-career and expect higher income later, you believe tax rates will rise over time, and you want tax-free income flexibility in retirement. Lean traditional 401k contributions if income is high and lean Roth 401k contributions if income is moderate and likely to grow. If you’re unsure, splitting contributions could be a great solution/option.
Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) // Equitable Network, LLC. Equitable Advisors and its affiliates and associates have no affiliation with Morristown Magazine or its publisher. Equitable Network, LLC. Equitable Advisors and its associates and affiliates do not provide tax or accounting advice or services. PPG- 8760870.1 (02/26) (Exp.02/30)
