The SECURE Act can help you get back on track.
Key Takeaways
- The Rule of 4% helps you estimate the amount of money you can withdraw each year in retirement without depleting your savings.
- The SECURE Act gives taxpayers additional benefits for saving in retirement plans.
- With compounding interest, you earn interest on both the money you’ve saved and the interest you earn. The sooner money is put to work, the sooner it compounds.
Sometimes, saving for the future is an afterthought. There is no shortage of things to spend our money on today: living expenses, food, clothing, family, entertainment, vacations, and even philanthropy. Of course, saving for retirement is a priority we all claim, but so often, it tends to be prioritized after the spending is done.
CPA Justin Fry says a strategy like that won’t prepare most people for a comfortable retirement.
“When it comes to saving, many people save what is left after spending,” Justin says. “Rather than what we should be doing, which is spending what is left after saving.”
Almost 50% of American families have $0 saved for retirement. Four percent saved $500,000-$999,999, and only 3% have over $1,000,000 saved. If you are reading this blog, you are likely among the top 10% of American families with retirement savings.
A Northwestern Mutual survey found that the ideal retirement savings target is $1.46M.
Is that enough? Let’s look at the Rule of 4% to get a general idea.
SAFE WITHDRAWAL RATE
The Rule of 4% is a safe withdrawal rate that helps you estimate the amount of money you can withdraw each year without running out of money, assuming you have your cash in moderate investments and a 30-year retirement window.
Let’s say you have $1.46M saved. That would be $58K a year and $4,866 a month. Is that enough to sustain the lifestyle you envision for your retirement?
You may have other factors in play, like inheritance, different types of retirement assets, or ways to get passive investments, or maybe you don’t. If not, there is Social Security to help bridge the gap, right?
During the Great Depression, President Franklin Roosevelt created the Social Security Administration (SSA) to supplement retirement. It currently provides benefits to over 50 million people and is financed by payroll taxes from over 150 million workers and their employers. On their website, the SSA predicts that in 2035, taxes will only be enough to pay for 76% of scheduled benefits afterward.
“The SSA is making it very clear that Americans need to save for retirement on their own,” says Justin. “That is where the Setting Every Community Up for Retirement Enhancement (SECURE) Act comes in, as a plan to give taxpayers additional benefits for saving in retirement plans.”
INCENTIVE TO SAVE
The SECURE Act started in 2019, offering benefits like removing age limitations on IRA contributions, more flexibility for 529 accounts, and other tax credits for setting up retirement plans. Today, we have the SECURE 2.0 Act which expands on its predecessor with 92 provisions to strengthen incentives for saving for the future. These benefits are in place for all Americans, not just those nearing retirement.
Another incentive to save early? Justin says the biggest reason is compounding interest. Compounding interest is when you earn interest on both the money you’ve saved and the interest you earn. Time is your greatest ally; the sooner money is put to work, the sooner it compounds.
Justin challenges each one of you as you plan for the year ahead:
- Develop or adjust your savings strategy and ensure you comply with and take advantage of SECURE Act provisions.
- Map out your distribution strategy, both with and without inheritances and Social Security.
- Consult an advisor to assist you.
Put together your savings strategy first, then you can spend the rest. Don’t do it the other way around.
Need help to boost your progress? Our advisors would be happy to help you map out your financial future. Reach out for a complimentary consultation.
