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Are You Saving Enough For Retirement?

Last week, a chart was circulating the internet helping to illustrate how much you should have saved for retirement based on your age (See Below).

Like many rules of thumb, it can serve as a guide but it lacks several key assumptions. It doesn’t factor in pensions, annuities or real estate. The biggest flaw deals with a term called replacement income, this chart assumes that you will be able to live off of about 80% of your pre-retirement income. You would only know that if you dug into the research that is mentioned in the footnotes.

And in our experience, how much income a retiree needs to live on each year varies greatly.

This chart is probably most helpful for younger savers (50 years and less) and who do not expect much in the way of a pension and have no idea what their retirement income needs will be.

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Case Study: Tapping into Retirement During an Emergency

Recently we worked with a client who needed about $50,000 for an emergency expense. He was in a bind and didn’t have much in his checking or savings accounts. His only option, he thought, was to tap his IRA.

As we explained to the client, there are a lot of drawbacks to using IRA funds before retirement:

  1. If taken out early, the client would be subject to income tax (maybe 20%) plus a 10% IRS penalty. A $50,000 withdrawal would trigger $15,000 in taxes and penalties. The client would end up with only $35,000 after taxes.
  2. There are very few hardship distributions allowed in an IRA.
  3. There is almost no way to put the money back into the IRA after it has been taken out.

As a solution, we advised the client to look to their 401(k) with their employer. Specifically we advised the client to borrow money from their 401(k). With this arrangement it does not trigger income taxes and there’s no penalty, but it has to be repaid in 5 years and the client has to pay interest, in addition to many other restrictions.

We almost always advise against taking retirement money in any way (including borrowing from a 401(k)). But in this case, the client was in a real tough bind and this became the only sensible option.