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National 401(k) Day Takeaways: Saving for Retirement in Today’s Economy

Today’s economy is handing out good news and bad news. The bad news – higher interest rates are raising costs for borrowers. The good news – higher interest rates also mean higher yields for savers. And right in the middle are investment accounts, such as 401(k)s, which may be more volatile due to the ups and downs of the market.

September 9, 2022, was National 401(k) Day, designated annually on the Friday after Labor Day as a day to focus on retirement planning and preparation. For anyone interested in saving for their financial future, it’s time to check in on your nest egg and ask yourself, “Is it where it should be?”

First Florida Investment Services offers a few tips to help you understand the benefit of a 401(k), what investing could look like today, a guideline of where you should be in your saving journey, and three rules of thumb for investing.

401(k) Explained and How to Get Started

A 401(k) is a retirement savings plan offered by employers that have several tax advantages for the saver. The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer typically matches at least part of the contribution, if not all of it (depending on how the plan was initially established).

Two types of 401(k) plans are Traditional and Roth. With traditional plans, contributions are pre-taxed, meaning the saver gets the benefit of reducing their taxable income, but when they withdraw at retirement, the money is taxed. Roth plans are contributions made with after-taxed income. After retirement age, withdrawals can be made tax-free on the funds invested and their growth.

If you have the opportunity to participate in a 401(k) plan with your employer, jump on it. Not all employers offer 401(k) plans. According to a study by the US Census Bureau, only 14 percent of US employers offer a 401(k) through their company.

Suppose your employer doesn’t offer a 401(k). You can invest in a similar retirement account within a Traditional or Roth Individual Retirement Account (IRA) with your local credit union or by using another financial institution.

What Investing Could Look Like Today

Retirement accounts, like 401(k)s and other accounts, should be viewed over long lengths of time and properly balanced against what’s going on in the market. For example, Federal Reserve officials raised the interest rate this summer for the fourth time this year, with the last increase being three-quarters of a percentage point. These rising costs apply pressure to monthly budgets, but if possible, the key is not forgoing your contributions to your retirement accounts despite potential volatility.

Consider your 401(k) an asset like any other. For instance, if your home temporarily fluxed in price, you wouldn’t immediately sell or move without significant consideration. The same goes for your retirement accounts. Also, keep in mind that the yields on savings accounts are going up in today’s environment, so if you can afford to put a little away in savings, now is the time. 

Saving Benchmarks

Investing 15 percent of income annually (including employer contributions) is an appropriate savings goal. Here are several benchmarks provided by the retirement-plan provider, Fidelity:

  • By age 30, you should have the equivalent of your salary saved
  • By age 40, you should have three times your salary saved
  • By age 50, you should have six times your salary saved
  • By age 60, you should have eight times your salary saved
  • By age 67, you should have ten times your salary saved

For any benchmark to be useful, it needs to be realistic. Setting the target too low can lead to a false sense of confidence. Setting it too high can discourage you from doing anything. But the main idea to remember is that it’s important to make steady progress toward saving, regardless of age or income. You are essentially paying yourself, so don’t consider this an expense!

Three Rules of Thumb for Retirement Savings Strategy

  1. Invest Early. Investment success is more about “time in” the market than “timing” the market.

  2. Invest Enough. While saving or investing 15 percent of your income is your best savings strategy, investing 10 percent should be the minimum. That may be five percent of your salary, with five percent matched by your employer. However, you can start lower if necessary and then ramp up as your circumstances and expenses change. For example, you may have more to invest once your kids leave the nest or if your income increases.

  3. Invest Appropriately. Younger investors can take more risks because they have more time to build upon their investments or recover from market corrections. In comparison, older investors should become more conservative as they near retirement.

 

Source: First Florida Investment Services*

*This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. First Florida Credit Union and First Florida Investment Services are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using First Florida Investment Services, and may also be employees of First Florida Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of First Florida Credit Union or First Florida Investment Services. Securities and insurance offered through LPL or its affiliates are:

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