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Consider setting a goal to accumulate a retirement nest-egg of about 15 times your annual income
How much do I need for retirement?
That is a question we ask ourselves often. What you will eventually need for retirement will depend on many factors including the economy, interest rates, what your future fixed expenses are, and your health situation, just to name a few. Unfortunately, you’ll never really know what you’ll need in retirement until you get a better handle on what your golden years will look like. If you are 20 or 30 years away from retirement now, that may be difficult to envision.
But regardless of what the future holds it is important that you set retirement goals early so you not only have something to strive for, but are in a better position to make adjustments when a clearer picture of your retirement emerges later in life. With so much still unknown, consider setting a goal for your retirement nest-egg of about 15 times your current salary.
Let’s do some math
During retirement, if you were to take growth as retirement income – without withdrawing from your nest-egg principal – you may have a better chance of having both money to meet your retirement needs, and a potential legacy for your loved ones.
For discussion purposes, if we assume an annual rate of growth of 5% each year on your nest egg, a corresponding mathematical equation could be: (Income X 15) X .05 = (Income x .75). Using this formula, and regardless of what your income may be, a 5% return (.05 in above equation) on your nest-egg of 15 times your income would equal about 75% of your current gross income.
And any growth in value – which you could take as retirement income– is in addition to any other sources of retirement income you may have, including Social Security, pensions, or part-time and freelance work.
Eventually, your retirement nest-egg will be made up of many different assets including your savings and investments, real estate or other tangible assets, and tax qualified savings vehicles like individual retirement accounts (IRAs) or employer sponsored retirement plans (401k’s).
If your employer does offer a 401k (or similar plan), this is often the best way for you to get started building your nest-egg. In most instances, your contributions to a 401k are tax deductible and thereafter grow tax deferred. You’ll also enjoy long term compound interest and in some cases, an employer match.
Another option to consider is an IRA, either a traditional IRA or a Roth IRA. With a traditional IRA, your contributions may be tax-deductible, and earnings in the account grow tax-deferred until you start taking withdrawals. With a Roth IRA, your contributions are made with after-tax money, so they are not tax-deductible, but earnings grow tax-deferred and withdrawals are tax-free, if certain conditions are met.
Both types of IRAs are a great way to supplement any employer-sponsored retirement plan you may have as well as let you gain access to a wider choice of professionally managed investments.
The sooner you begin contributing to a 401k or IRA and building your retirement nest-egg, the faster - and larger - your retirement funds could grow. Conversely, the longer you wait, the harder it will be to catch up. Talk with your MassMutual financial professional today and get started building your retirement nest-egg.