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Retirement Planning April 2023


Just One Percent More Can Make a Big Difference

• Consistently saving just 1% more for retirement may turn into meaningful retirement income over time.
• Compounding your 401(k), Traditional IRA, Roth IRA, returns even at one percent more each year over long periods of time can make a meaningful difference in retirement income. Does your retirement portfolio strategy emphasize enough “Growth” or is it overly focused on capital preservation?

Simple retirement planning actions today, taken early enough, can make the difference in your retirement income. For instance, just contributing one percent more into a tax-advantaged retirement account like a 401(k), or an IRA could make a difference in your lifestyle in retirement.

While one percent is a small percentage of your annual earnings today, after 20 years or longer it can make a significant difference in your retirement funds available for retirement income. That's because the longer you invest in a tax deferred account that grows the greater the compounding effect of “money making money” in your account. It’s like a small snowball rolling down a hill accumulating even more snow as it turns. Your contributions buy shares in an investment that pays you dividends, interest, and capital gains. Your additional contributions buy even more shares paying even more dividends, interest, and capital gains. And all your earnings are reinvested tax free to accumulate even more shares of investments that do the same! Over time small sums could become larger sums. For example, earning $70,000 a year, age 45, increasing weekly contribution by $14, an increase in your contribution of 1% and by retirement you could have an additional $42,925 in retirement income. *

To have a higher confidence level that you may have enough retirement funds to retire with the standard of living you currently have consider saving 15% each year at least. Fidelity Investments ran the numbers and determined that aiming to save 15% of income toward retirement annually—which includes any matching contributions or profit sharing an employer may make to a workplace retirement account like a 401(k) can help ensure that you can maintain your lifestyle in retirement. Starting early, saving regularly, maxing out your 401(k) contribution or contributing enough to fully benefit from company matching, increases the amount you save thereby increasing your confidence level that you may have enough to retire on time and once.

What does a 1% difference in your retirement account’s compounded annualized growth rate make to your retirement income?

Below is a simple hypothetical analysis that assumes you’re age 40, with a $150,000 in retirement funds, current tax rate 24%, retirement tax rate 22%, retire at age 67, retire for 23 years, pre-retirement return is 7%, 5% return in retirement, inflation is 3%, $22,500 2023 employee contribution made each year until retirement increasing your contribution by inflation rate each year. The results show that your retirement savings are estimated to provide $7,075 per month at retirement after taxes and inflation (in today's dollars).

Same assumptions however your retirement funds compound at one percentage point more on average each year. Your retirement savings are estimated to provide $8,487 per month at retirement after taxes and inflation (in today's dollars).

Bottom line: Over 23 years of retirement, returning one percent more on a compounded annualized growth rate, provides in total $389,712 more in retirement income in today’s dollars!

It’s important that you have a portfolio strategy that is suitable for your circumstances and goals. Moreover, that’s it professionally managed by an experienced manager. Investors cannot afford to miss out on the gains provided by Bull markets. Please contact Aspetuck Investment Adviser if you would like help with retirement planning and investment management.

Maxing out 401(k) Contributions but still want to contribute more to retirement fund?

The good news is that you can contribute to an IRA even if you also contribute to a 401(k) at work. There are certain limitations you should consider so contact an Aspetuck Investment Adviser to discuss your situation. You can save in a tax-advantaged account like a Schwab IRA. Contact an Aspetuck Investment Adviser to determine which type of IRA is right for you.

*Approximation based on a 1% increase in contribution rate. Continued employment from current age to retirement age, 67. Hypothetical assumes you are exactly your current age (in whole number of years) and will retire on your birthday at your retirement age. The number of years of savings equals retirement age minus current age. The nominal investment growth rate is assumed to be 5.5%. Hypothetical nominal salary growth rate is assumed to be 4% (2.5% inflation + 1.5% real salary growth rate). All accumulated retirement savings amounts are shown in future (nominal) dollars. This assumes no loans or withdrawals are taken throughout the current age to retirement age. Your own plan account may earn more or less than this example and income taxes will be due when you withdraw from your account. Investing in this manner does not ensure a profit or guarantee against a loss in declining markets.

Source of calculation: KJE Computer Solutions, Inc. Information is not intended to provide investment advice. No guarantee their applicability or accuracy regarding your individual circumstances. All examples are hypothetical and are for illustrative purposes. Investing involves risk, including the risk of loss. There is no guarantee your goal will be achieved or of a profit. This information is intended to be educational and is not tailored to the investment needs of any specific investor. Information provided in, and presentation of, this document is for informational and educational purposes only and are not a recommendation to take any particular action, or any action at all, nor an offer or solicitation to buy or sell any securities or services presented. It is not investment advice. Aspetuck Financial Management does not provide legal or tax advice. Before making any investment decisions, you should consult with your own professional advisers and consider all of the particular facts and circumstances of your individual situation. Aspetuck Financial Management and its representatives may have a conflict of interest in the products or services mentioned in these materials because they have received compensation, directly or indirectly, in connection with the investment services. Before investing consider the exchange traded products' investment objectives, risks, charges, and expenses. Contact Aspetuck Financial Management or go online to CMS 401(k) website for plan participants for a prospectus or a summary prospectus, if available, containing this information. Please read it carefully.
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