Retirement wealth inequality in the United States is high. In fact, the gap between black and white households would be even wider if not for Social Security. A recent study found that black households had only 46 percent of the average retirement wealth of their white counterparts. In addition, Hispanic households had 20 percent of the typical non-Social Security retirement wealth. Interestingly, these disparities did not improve over the course of the HRS cohorts from 1992 to 2010, despite a decline in retirement wealth among white households in their fifties and sixties.
Simple formula for retirement wealth
The simple formula for retirement wealth requires you to have an estimate of your current income. Subtract your estimated Social Security benefits from that amount. Then multiply that figure by 100. This will give you a target amount for your retirement savings. While inflation and tax rates are out of your control, your retirement savings amount remains within your control.
The percentage required for financial independence in retirement will vary with age and life expectancy, but as a general rule of thumb, you should have at least 4% of your annual income saved. This is also known as the Safety Margin. This is a generous figure. Those with middle-class incomes can save 10% of their income. That’s only $5k, but it’s better than the average these days.
Social Security
Social Security retirement wealth is calculated based on the discount rates of government bonds and life tables. However, estimating the wealth of a household whose members are in the labor force requires much more complex calculations, as it is essential to know how workers’ earnings trajectories will change over time. To address this issue, researchers like Guvenen and colleagues have simulated the earnings trajectories of workers.
Generally, the combined ratio of employer-sponsored retirement wealth to total income is nearly flat in the first two wealth quartiles, while it is much lower in the third. This Perks is due to the taxable maximum of Social Security benefits and the limits on employer-provided pension benefits.
401(k) plans
401(k) plans can be beneficial for building retirement wealth. They allow employees to contribute a portion of their paycheck toward retirement, thereby lowering their taxable income. However, employees should pay attention to their 401(k) plan contributions. Contributions to traditional 401(k) plans are taxed when they are withdrawn, so it is important to max out the amount you can contribute each year.
401(k) plans provide several types of investment choices, including mutual funds and ETFs. Employees can choose the type of investments they want to invest in based on their age and target retirement date. Younger employees may choose a higher percentage of stocks while older workers may want to invest more in bonds.
Roth IRAs
When you contribute money to a Roth IRA, it is tax-free and grows tax-deferred. When you reach retirement age, you can withdraw the money without paying taxes on it. If you work past retirement age, you can also contribute to a Roth IRA, as long as you earn a certain income.
If you plan to withdraw money from your Roth IRA before retirement, you should only do so if you absolutely need it. It’s best to keep contributions to a minimum and avoid taking out earnings because you could incur taxes and penalties if you do so. In addition, you may not want to take money from your Roth IRA until you are 59 1/2 years old, because then you might have to pay taxes and penalties on the money.
Permanent life insurance
Permanent life insurance is a great way to protect your financial future and provide a source of income in retirement. These policies accumulate cash value that is tax-deferred. The cash value is separate from the death benefit, the amount of money your beneficiary will receive if you die. Even if you choose to cancel the policy, the cash value remains.
When purchasing permanent life insurance, you should consider your needs and your goals. Term life insurance is relatively inexpensive and covers the needs of young people, while permanent life insurance will provide financial security to your family for the rest of your life. Both types of insurance provide a death benefit to beneficiaries in the event of your death.