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Basics of Retirement Savings

“Old age insurance” or what we know as Social Security retirement benefits was born in 1935 to help workers fund the short time they typically lived after they stopped working.

Even back then, however, Social Security was only intended to supplement a worker’s savings – not to be anyone’s sole source of retirement income. You need to save money during your working years to help pay for your food, shelter, health care and everything thing else you’ll need – and want – after you stop punching a clock. Social Security will help, but it’s not enough, with the average monthly check being just over $1,300 a month.

Retirement Accounts

To help American workers save for retirement, Congress created different classes of retirement savings vehicles. The most common retirement savings plans are an employer-sponsored 401(k) plan and an Individual Retirement Account (IRA). These basic retirement savings plans make it convenient to save during your working years and help you build wealth over time. In a 401(k) plan, which is sponsored by your employer, contributions come right out of your paycheck, which makes saving easy and automatic. If you have an IRA, you are responsible for determining when and how much to contribute, subject to annual limits.

It pays to save in a retirement account like a 401(k) plan or an IRA. In addition to helping you build wealth over time, you can choose what tax benefit best suits you. The most common choice is to have your contributions taken out pre-tax, meaning you only pay taxes in retirement. Another option is to pay taxes today on “Roth” contributions and enjoy tax-free income when you retire. Because these accounts are intended to help you save for retirement, distributions before age 59½ are discouraged through an additional 10% tax, unless you meet some very specific exceptions.

Small Business Retirement Plans

Providing a retirement plan is one of the best ways business owners can help themselves and their employees save for retirement. With a budget-friendly, easy-to-use 401(k) solution from Ubiquity Retirement + Savings™, business owners and employees enjoy substantial benefits:

  • Reduced taxable income through pre-tax salary contributions
  • Control over when taxes are paid on retirement assets (pre-tax vs. Roth contributions)
  • Access to a broad range of investment options
  • Tax-deferred growth on investments while in the 401(k) plan

How do I build wealth over time?

Building wealth takes time. To give yourself the best chance of accumulating enough assets to fund your retirement, start saving today, save consistently throughout your working years, and let your savings grow until you retire. Start saving in a 401(k) plan if you have one available to you. This is an easy way to make sure you are consistently saving each pay period. If you are already saving in a 401(k) plan, consider increasing that amount each year as you earn more or pay off debt. In addition to helping you save consistently over a long period, most 401(k) plans incentivize employees with employer matching contributions to supplement your savings. Plus, as you’re working to build your savings, they’ll be working for you. Through the process of compounding interest, your account will grow exponentially as your interest earns interest!

Another way to ensure that your savings continue growing over time is to choose investments that carry some degree of risk for a portion of your savings because they also carry a greater chance for higher returns. To help hedge against the risk of investment loss, diversify your investment selections, so you have several types of investments and asset classes with different levels of risk and return.

Basic retirement savings strategy to hit $1 million

To develop your retirement savings strategy, first set a saving goal. To estimate how much money you need to save, consider an online retirement calculator. These tools can help you estimate what your 401(k) balance will be at retirement, based on your current contribution rate, plus any employer matching dollars. This is an important step in determining whether you’re on track to reach your goals or if you need to save more to achieve them. Many people have a goal of saving $1 million dollars for retirement.

Let’s look at some examples of how much you’d have to save to accumulate $1 million in a 401(k).

Assume that:

  • Ellie is 25 years old and has landed her first professional job.
  • She makes $40,000 per year and estimates that she’ll receive a 3% salary increase each year until she retires.

If she saves 10% of her income each year in her employer’s 401(k) plan until she’s age 67, she could have $1,111,897 in her 401(k) for retirement (assuming 3% annual inflation and a 6% annual rate of return). Her retirement savings could be even higher if her employer makes matching contributions to her 401(k) account, or if her income surpasses that 3% increase.

Let’s assume Ellie’s co-worker, Tyler:

  • Doesn’t start saving for retirement until he’s 35.
  • He’s earning $50,000 per year when he starts saving,

Tyler would have to save 16% of his salary every year until age 67 to just break the $1 million mark ($1,065,241) by the time he retires (assuming 3% salary increases, 3% annual inflation, and a 6% annual rate of return).

By starting to save as early as possible, even small amounts compound over time to really add up. Use Ubiquity's calculator to estimate your retirement savings balance using your current savings rate – or see what you could achieve if you made an increase.
Are you on track?

© 2023 Ubiquity Retirement + Savings
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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