When Should I Increase My Retirement Savings?

When you are a woman in your 20s and 30s, it is advisable to allocate about 15% of your gross salary (including matching employer contributions) into retirement savings in order to replace 50% or more of your salary during retirement. Due to compounded interest, you can actually generate more capital for retirement even if you are currently setting aside very little money. This is because your capital has 30-40 years to grow, generate interest, and then from that interest to generate even more interest.

However, as you move into your 40s and 50s, the advantage of time is lessened. While your money will still generate interest, it will not have several decades in which to grow exponentially. As a result, you will need to contribute significantly more of your gross income.

Most experts agree that if you are in your 50s, you should start calculating how much income you will need during your retirement. The general rule for calculating your retirement income is to multiply how much money you will need to withdraw from your savings account in your first year of retirement and then multiply that number by 25. This "rule of 25" goes by the assumption that you are withdrawing about 4% of your nest egg in your first year of retirement, then increasing the amount each year to account for inflation. For a person who is earning $40,000/year, that equates to a total retirement savings account of at least $1 million.

Most people in their 50s, or even in their 60s, do not have a retirement savings account near $1 million. In fact, according to the Employee Benefit Research Institute (EBRI), the average 401(k) account balance for a worker who is 60 years of age or older is just under $180,000. Complicating this matter further is the fact that women receive 25% less in Social Security benefits than men because of their work history. This occurs because, for every year that you take off to raise a family or to care for an ailing family member, that is another year that the Social Security Administration records as a $0 income year. These $0 income years are averaged in with your positive income years, reducing your average earnings.

Due of this effect, you need to consider Social Security as only 20% - 30% of your final retirement income. You may also need to contribute even more money into your employer's retirement plan at the age of 5o than your male colleagues.

If you are already contributing the maximum allowable amount into your 401(k) plan, consider opening a separate Roth IRA and making the $4,000 maximum contribution to the plan, as well as the additional $1,000 in catch-up contributions due to you being 50 years of age or older. This will help you reach your goal of retiring as planned and with enough retirement savings for the upcoming 25 - 30 years.