Providing for income in retirement

How much will you need to save?

Since Social Security represents only a portion of your income in retirement, you’ll need to provide for the rest, somewhere between 60% and 100% of your final working year’s salary. Everyone’s situation is different, so it may be a wise move to work with a financial professional who can help you determine just how much you’ll need.

The tax benefits of saving for retirement

By using investment vehicles such as workplace-sponsored plans or individual retirement accounts (IRAs), you can put off paying taxes on your earnings until you are retired and potentially in a lower tax bracket.

  • If you made a $100 monthly contribution in a tax-deferred account over 30 years, you could grow your nest egg to $150,030.
  • If you made the same contribution in a taxable account, it would amount to only $102,000.

That's a difference of almost $50,000 just because you didn't have to pay taxes up front.1  Of course, you'll have to pay taxes on earnings and deductible contributions to a traditional 401(k) when you withdraw the money, but you may be in a lower tax bracket when you retire.

Another key benefit of participating in a retirement account is that your contributions may be made pre-tax (i.e., tax deductible), helping reduce current tax bills. Let’s assume that you make $2,000 a month and contribute $200 to your employer-sponsored retirement plan. That would lower your income to $1,800, reducing your taxes from $500 to $450.2

The power of compounding

To generate 60% or more of your salary 30 or 40 years from now, you don’t have to save 60% today. You can start small and benefit from the power of compounding.

The idea behind compounding is simple -- when your investment earns money, this amount is reinvested in your account and potentially generates more earnings. Over time, this process can increase the growth potential of your original investment. If your earnings are reinvested for a long enough period, compounding can reduce some of the pressure on you to invest greater amounts as you approach retirement.

These hypothetical examples assume an 8% annual interest rate compounded monthly. It's also assumed that the investor pays a 25% marginal tax rate on the gross investment earnings each year (i.e., the assumed gross return of 8% per year, compounded monthly, is reduced by 25%). The comparison makes no allowance for the potential impact of reduced long-term capital gains and qualified dividend tax rates, nor of the potential tax exemption for some municipal bonds held in taxable accounts. Hypothetical results are for illustrative purposes only and are not indicative of the performance of any particular investment or financial product. Your results will vary.

2 This example assumes a 25% marginal tax rate and does not take account of any potential negative bracket creep (i.e., seeing one’s marginal tax rate reduced due to the impact of the reduction of taxable income).

IMPORTANT NOTE: AXA believes that education is a key step toward addressing your financial goals, and we've designed this material to serve simply as an informational and educational resource. Accordingly, this article does not offer or constitute investment advice and makes no direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Your needs, goals and circumstances are unique, and they require the individualized attention of your financial professional. But for now, take some time just to learn more.

Please be advised that this article is not intended as legal or tax advice.  Accordingly, any tax information provided in this article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.  The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.

AXA Equitable Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through AXA Advisors, LLC, (member FINRA, SIPC).  AXA Equitable Life Insurance Company and AXA Advisors are affiliated and do not provide tax or legal advice.

GE-128031 (08/2017)

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