The choices you make during your working years and at the beginning of retirement affect how comfortably you will live in old age. Here are some retirement decisions that will have a big impact later on in your retirement years:
When you start saving. Beginning to save for retirement at a young age makes it much easier to save enough to retire comfortably. If you save $5,000 per year in a 401(k) beginning at age 25 and earn a 6 percent annual return on your investments, you would reach age 65 with a nest egg of $798,741. If you begin saving $5,000 per year at age 40 and earn the same return, you'll hit age 65 with just $283,161. In fact, even if you save $10,000 per year beginning at age 40, you'll still end up with significantly less money ($566,315) than if you started saving $5,000 per year in your mid-20s. "If you're younger, you should start right away because the value of compound interest is huge," says Walter Romatowski, a certified financial planner for Castellan Financial Advisors in Palo Alto, Calif.
Whether you get a 401(k) match. Employer contributions to your retirement account make it much easier to amass a bigger nest egg. A 30-year-old employee earning a $50,000 salary who saves $5,000 per year and gets a 3 percent 401(k) match will accumulate $747,662 by age 65, assuming 6 percent annual investment returns. An employee who saves the same amount without getting an employer match would retire with just $575,125. "If your employer has some sort of retirement plan, make sure you save at least enough to get the match," Romatowski says.
Cashing out your 401(k). Cashing out your 401(k) plan, even once over the course of your career, can result in a significantly smaller nest egg in retirement. For example, a worker who consistently saves 6 percent of his pay in a 401(k) plan and gets a 3 percent employer match between ages 21 and 65, but cashes out his 401(k) plan once at age 35 would have $183,618 less in retirement than someone who never cashed out a 401(k), according to Government Accountability Office calculations. "We assume that the individual resumes employment immediately following the job separation and continues his or her own and matching contributions at the same level without interruption," according to the GAO report. "Any interruption in 401(k) contributions – such as unemployment or a waiting period before an individual can participate – would further reduce the 401(k) account balance at age 65." Traditional 401(k) withdrawals before age 55 are subject to an early withdrawal penalty and income tax, which further reduces your retirement savings. "Cash-outs can be especially damaging if taken later in a career when a participant has less time to recover the losses," the GAO found.
The age you collect Social Security. While you can start Social Security payments as early as age 62, you won't get the full amount you have earned until your full retirement age. The full retirement age is 66 for most baby boomers and 67 for everyone born in 1960 or later. A worker born in 1965 who signs up for Social Security at age 62 will get monthly payments that are 30 percent smaller than if he or she waits until age 67 to begin collecting payments. "If you sign up before age 66 or your full retirement age, it is discounted, and you are basically shortchanging yourself of getting the full benefit that you earned. That discount carries through your entire life until you die," says Brent Neiser, a certified financial planner and a senior director at the National Endowment for Financial Education in Denver. Checks further increase by 8 percent for each year you delay claiming up until age 70. "Try to make your Social Security payment as large as possible when you claim it because you are going to have this lasting payment over time," Neiser says. After age 70, there is no additional benefit for waiting to claim Social Security.