Replenishing your retirement savings account

by Jim Sloan

With the country's unemployment rate stubbornly remaining high, many American consumers may be experiencing gaps in their efforts to build up their retirement savings accounts.

While temporarily halting contributions to a 401(k) plan or some other savings account may be a necessity for some people struggling to pay their monthly bills, those who do should remember that we'll have to play a little catch-up once we resume working and making retirement investments.

Increasing your savings rate

A new study from T. Rowe Price finds that it's easier to get your investments back on track when you're younger because you'll have many more years to bulk up your savings accounts. But even for young people, not doing anything to catch up can be dangerous; all that money you neglected to save may never be compounded and can ultimately leave you short of your retirement goals.

Missing a year or so of retirement investments in your later years may also hurt and could require that you increase your savings rates higher than you would if you were younger. However, not catching up won't hurt your final savings accounts balances as much when you're older.

Either way, if you expect your nest egg to provide half of your retirement income at the age of 65, you will likely have to increase your savings rates after any interruption in your retirement savings.

Breaking down the numbers

If there is a gap in your retirement saving, the question becomes, "How much will I need to save to catch up?"

Assuming you earn $40,000 a year, get a 3 percent raise each year and put 13 percent of your salary - including the employer match - in your retirement savings account, and that those contributions return about 7 percent a year for 40 years, you should be able to retire at 65 with about $500,000, the T. Rowe Price study estimated. But here is what you'll have to do to make up for any gaps in savings:

  • A one-year gap may require you increase your savings rate to 14 percent.
  • A three-year lull might require you boost your savings rate to 15 percent if you're younger than 35, 16 percent if you're 45-55, and 18 percent if you're 55 or older.
  • A five-year hiatus means you should jump to 15 percent if you're 25-35, 17 percent if you're 45-55 and 27 percent if you're older than 55.

Of course, this is all easier said than done, considering that many people who are forced to suspend retirement savings are also forced to dip into their savings--be it a 401(k) account, an online savings account or a certificate of deposit--to pay bills during their unemployment.

T. Rowe Price's numbers are also lofty when you consider that the average worker only contributes 7 to 8 percent to their retirement savings accounts, according to the San Francisco Chronicle.

So it's likely that any boost you give to your savings in an effort to catch up is likely going to have to be combined with other adjustments--working later in life in order to save more, putting off collecting Social Security, and reducing your cost of living, among them.

Another option, the report said, is to establish the best savings rates possible for retirement early on. You can anticipate future gaps early in your career by setting a goal of saving 15 percent of your salary starting at age 25.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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