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| Monthly Pay | Monthly Contribution | Taxable Pay | Taxes | Take-Home Pay |
|---|---|---|---|---|
| $2,500 | $0 | $2,500 | $700 | $1,800 |
| $2,500 | $100 | $2,400 | $672 | $1,728 |
| 1. Contribution = $100 2. Out-of-Pocket Difference = $72 3. Tax Reduction = $28 |
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As you can see, that $100 actually lowered your taxable income, which resulted in your take home pay being $72 less, not $100. This is the "feel" factor kicking in. Your $100 contribution only feels like $72 — and that $28 is instant tax savings straight into your retirement account.
How much should I invest?
The obvious but honest answer is "as much as you can." The current employee savings limit for a 401(k) is $16,500, and if you are over 50 years of age you can add another $5,500 in catch-up contributions to that amount. Most financial planners would probably advise you to get as close as possible to hitting those limits. If you are not able to invest that much at this time, many financial planners would recommend that you begin saving 10-15% of your income, beginning in your 20's. See the chart below as a general guidance on the amount you should be saving if you have yet to start.
| Age when saving starts | % of salary to save each year |
|---|---|
| 20-29 | 10%-15% |
| 30-39 | 15%-25% |
| 40-45 | 25%-35% |
How much will I need to retire?
That question depends on many factors the crystal ball probably has yet to divulge. Will you have a mortgage? Will you want to travel in retirement? What do you think is your life expectancy? These are the types of questions that can only be answered by you — and many of those questions will change from year to year.
A financial planner will probably tell you, as a general rule, you will need around 80% of your pre-retirement income to live comfortably. That percentage can go up and down depending on debt, health, hobbies, and other factors. The best approach is to make realistic estimates of the day to day expenses and the costs associated with your ideal lifestyle in retirement. When going through this exercise, don't forget to add in expected Social Security income. The chart below gives a general estimate of expected Social Security income based on salary.
Social Security Benefit Estimator
| Current Gross Income | Approximate Percent Replaced by Social Security During Retirement | Estimated Annual Benefit Amount |
|---|---|---|
| $20,000 | 52% | $10,344 |
| $25,000 | 47% | $11,856 |
| $30,000 | 45% | $13,380 |
| $35,000 | 43% | $14,904 |
| $40,000 | 41% | $16,428 |
| $45,000 | 40% | $17,954 |
| $50,000 | 38% | $18,912 |
| $55,000 | 36% | $19,620 |
| $60,000 | 34% | $20,340 |
| $65,000 | 32% | $21,048 |
| $70,000 | 31% | $21,768 |
| $75,000 | 30% | $22,476 |
| $80,000 | 29% | $23,196 |
| $85,000 | 28% | $23,904 |
This table assumes a person who is 42 years old in 2004 will retire at the normal retirement for a person of that age, which is 67 years, as defined by the Social Security Administration. Retiring before the normal retirement age may reduce your benefits. Please note that "gross income" and "estimated benefit" are given in 2004 dollar amounts and that the Social Security benefits are adjusted each year to reflect the rising cost of living. In 2004, the maximum salary that is considered for Social Security purposes is $87,900.