Liz Weston, Published February 03 2014
Money Talk: Retirement savings: How much, how important
A: Saving 10 percent for retirement is often considered a minimum for those who start saving in their 20s. The older you are when you begin, the more you’d need to save to match the nest egg you would have accumulated with an earlier start. That means saving 15 to 20 percent if you start in your 30s; 25 to 30 percent if you start in your 40s; and 40 percent of your income, or more, if you don’t start until your 50s.
Clearly, the wind is at your back when you start saving young. It starts blowing pretty hard in your face if you wait.
If you can’t carve out a huge chunk of your income for retirement, though, you shouldn’t despair. Save what you can, as anything you put aside will help supplement your Social Security checks. You may find that your expenses drop substantially in retirement, so you won’t need to replace as much income as you think.
Another technique for coping with a late start is to work longer. That gives you longer to save, but it also allows your savings – and your Social Security benefits – more time to grow. You will be able to claim early Social Security benefits at 62, but you’ll be locking in a smaller check for life. It’s usually better to wait until your full retirement age, 67, to begin benefits, since each year your wait adds nearly 7 percent to your check. If you wait three more years, until age 70, your check would grow by 8 percent each year.
Q: My son is 52 years old and has been unemployed for three years. He has been forced to withdraw money from his 401(k) and pay early withdrawal penalties on it to pay his mortgage and other bills. Is there such a thing as a hardship exception to avoid this tax bill?
A: There’s a way to avoid the 10 percent federal penalty, but not income tax, on early withdrawals from retirement accounts when someone is younger than 59½ (the usual age when penalties end). The distributions must be made as part of a series of “substantially equal periodic payments” made using that person’s life expectancy. When these distributions are taken from a qualified retirement plan, such as a 401(k), the person making them must be “separated from service” – in other words, not employed by the company offering the plan.
Your son wouldn’t be able to withdraw big chunks of his savings, however. Someone his age who has a $100,000 balance in a retirement plan could take out about $3,000 per year without penalty. Revenue Ruling 2002-62, available on the IRS site, lists the methods people can use to determine these periodic payments. It would be smart to have a tax pro review his calculations.
Q: I regularly read about people in your column who don’t feel the need for an emergency fund, or think they only need a small one. This is one of the many issues that make me glad that my husband takes care of the finances. We are both professionals with graduate degrees who, for different reasons, were once unemployed for three months at the same time. Because we had a healthy emergency fund, we kept up with our bills with only minimal belt-tightening. If I had been in charge we would have had to flee the country to escape our creditors! That’s an exaggeration, but you get my point.
A: Kudos to your husband for being prudent, and to you for cooperating with him.
For most families, growing a fat emergency fund must take a backseat to more important priorities, such as saving for retirement and paying off toxic debt, including credit cards. As soon as they’re able to add to their emergency savings, though, they should do so. The average duration of unemployment stretched over five months after the recent recession. Although you may be able to live off credit cards and lines of credit, using cash is obviously better – and having that fat emergency fund can help you sleep better at night.
Liz Weston is the author of “Deal with Your Debt.” Questions may be sent her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.