Name: How to Save Enough to Retire After a 60-Year Career
Uploaded: 2023-09-20T21:51:00Z
Duration: 10 min 25 s
Description: People currently in their 20s are likely facing a 60-year career because of longevity and rising living costs. In the second episode of our series, we explore the importance of beginning the retirement-saving process early, and how accounts like a 401(k) and an IRA can help people maximize their saving efforts. Illustration: Pablo Delcan

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People currently in their 20s are likely facing a 60-year career because of longevity and rising living costs. In the second episode of our series, we explore the importance of beginning the retirement-saving process early, and how accounts like a 401(k) and an IRA can help people maximize their saving efforts. Illustration: Pablo Delcan

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How to Save Enough to Retire After a 60-Year Career

This is a special edition of "Your Money Briefing" for Wednesday, September 20th. I'm J.R Whalen for the "Wall Street Journal". For ages a typical career timeline has looked like this. You join the workforce in your twenties work for 40 years and retire at about 65. But if you're younger than say 30, odds are you'll be living a longer, healthier life. And what you thought would be a 40 year career or maybe even less, could wind up being a 60 year career. So what does that extra longevity mean financially for people who might not be retiring until their eighties or even nineties? You might think living longer and working longer means you'll have an extra few years of income, even more time to save. Problem solved right? Well, it's complicated. It's actually to your benefit if you start saving early even if you'll have an extra long career. I spoke with WSJ retirement reporter Anne Tergesen about this.

The sooner you start saving the better. You have more years of saving in front of you. Even if you could just put aside a small amount, every dollar you put away earlier compounds and grows for more years. So it's got a lot of power behind it.

It's what financial advisors call compounding interest. And if you're working longer, your money has the ability to grow even more. But to start saving up for that extra long career you have to know the different options. So, here's a quick refresher on some of the major alternatives. The key terms are 401K, an individual retirement account, or IRA. Here's Anne again.

So 401Ks are typically retirement plans that companies sponsor and IRAs are typically what you can kind of save on your own. There are a couple differences, but the key one is that with a 401K, you can usually save much more.

How much more? Well, the IRS sets a cap on how much anyone can contribute to their 401K in a given year. And that cap can change depending on the age of the person and the year. For example, in 2023, the IRS cap and how much a person under the age of 50 can put into their 401K each year is $22,500.

With an IRA, it's $6,500. If you're 50 and older, the limits go up a little bit but that's typically that you can save a lot more with a 401K than an IRA.

Then there's the question of when your money is taxed. For a traditional 401K or a traditional IRA the money goes into your account before it gets taxed, meaning you'll take the hit when you pull the money out. But in a Roth 401K and a Roth IRA account the money is taxed before it goes into the account.

So with a Roth, you're paying taxes upfront on the money that you contribute, but the money grows tax free and you're entitled to take it out tax free.

And this can be really useful if you're looking at a longer career, more time for that money to grow.

Typically, as a rule of thumb, younger people who are in low tax brackets do much better to use a Roth. They pay taxes now, but they're in a low tax bracket. And then in the future, when they're in retirement the idea is that they're likely to be in a higher tax bracket, but the money's sitting in their account and it's tax free.

But don't rule out the power of a traditional 401K over a 60 year career. Lots of employers offer matches to your 401K account just like mine did early in my career. That's free money. Surya Kolluri is the head of the financial research group TIAA Institute. Before that, he spent 16 years at Bank of America where he was the managing director of the retirement research and insights team. He suggests thinking about 401Ks long term.

So let's say a company offers 5% match. So if somebody can set aside 5% of their income and enjoy the 5% match that the company provides, we're already talking about 10% and that adds up over a period of time. So this is not a huge percentage of their total salary but an amount that is probably affordable. Thinking about it in those increments is gonna be pretty powerful.

So how should your retirement goals and your contributions change over a longer career? Many retirement plans have that built in.

There is a term that we call escalate or auto escalate. So if one can start at a point where it is affordable, one can manage it. As one progresses in their career and presumably as their compensation changes if they can think about adjusting it accordingly, make it a 6% or a 7%, increasing that amount can be pretty beneficial.

Over time it does add up. But when will it be enough to retire?

So much depends on things that are hard to predict. How long are you gonna live and where are you gonna live?

People closer to retirement typically have a pretty good idea of how much they're gonna spend. But...

For younger people this is kind of a theoretical exercise and estimation. But the idea is that you sort of estimate how much you might need to spend and you figure that you're gonna need to have that amount of money multiplied by as much as 30, 35 years depending on what age you're gonna retire at. You need to assume you're probably gonna live into your nineties.

The magic number that gets thrown around for what to save up for retirement is often $1 million. But in a changing economy and over the course of a longer life, is that enough? Well turns out, that million dollar figure was never really meant to be a one size fits all target.

I would very much shy away from rule of thumb dollar figures like that.

A million dollars is just a benchmark that a lot of people have in their heads. They think a millionaire is wealthy. Financial services companies will use that as a point of illustration just because it's a nice round clear number.

Oh, and that tapping on your shoulder, that's the long arm of inflation. Even modest inflation of just 2% a year can add up when it's compounded over 60 years. Plus your out-of-pocket healthcare costs tend to ramp up as you get older, making it hard to budget for. But what if you realize you've fallen behind on saving? With a longer career, there's more time to course correct, right? Yeah. In fact, the rules for retirement accounts have some cushioning built in for that.

Folks can set aside X number of dollars, but once one reaches age 50, they can set aside extra. And in fact, under the newly passed regulations that amount has been increased. So in addition to what is being allowed, people can put extra money into their retirement accounts.

It's called a catch-up contribution. Skip the sports car for now. Put that extra money in a safe place like your retirement account so you have it to spend in your later years. But even if you diligently save for decades, working for longer also means not touching that savings for longer. Hands off that 401K and hold off on dipping into your Social Security for as long as you can.

The value, if you can, of deferring or delaying Social Security is huge 'cause that's an annual income that's guaranteed to last as long as you, and if you can maximize that income, that's helpful. So the value in that is that for every year that you delay, your Social security benefits get adjusted upwards as much as 8% per year. Given the fact that younger people today are likely to live longer, there's a huge value in locking in the highest Social Security you can because that's an income that's gonna continue for as long as you live at a higher level.

Now, that's a bridge that people set to live these longer lives will have to cross once they get there. But for people at the beginning of their careers Surya Kolluri suggests that there may be another option entirely, something other than saving for most of your life and then spending it down all at once.

So if you think about when Social Security was passed and compared to life expectations today, we have been afforded what one might call a longevity bonus.

That is a few bonus years to do with as you choose.

Now, the question is, do we wanna take this longevity bonus and stick it at the end of our lives? Or do we wanna take that longevity bonus and use it effectively throughout our lives? Maybe take sabbaticals, maybe think about change in careers. So what one has in terms of education to age 22 or 27 may not be viable when one is 50 or 65 and continue to think about working. So take those longevity bonus years and spread it throughout. That's from a career management perspective. And from a financial perspective, think about that saving and having that compounding work for you so that it lasts into your longer years.

A change in careers, a change in education. There's more to the 60 year career than just the money. Next Wednesday, we'll look at the fits and starts that could come with a 60 year career and the new skills you'll likely need along the way.

Advisor: I don't think that young workers truly know what they're in for, because for so many, the working world is a new experience. But it's hard to imagine in concrete terms doing anything for 60 years.

Until then, that's it for "Your Money Briefing". Today's show is produced by Ariana Osperu. It was mixed by Michael Lavalle. I'm your host, J.R. Whalen. Jonathan Sanders is our booking producer. Our supervising producer is Melanie Roy. Aisha Al Muslim is our development producer. Scott Salaway and Chris Sensley are our deputy editors. And Philana Patterson is the "Wall Street Journal's" head of news audio. We'll be back with a new episode tomorrow. Thanks for listening.

WSJ's Your Money Briefing podcast is your personal-finance and career checklist. Finance reporters and experts break down complicated money questions every weekday to help you make better decisions about managing your money. 