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Rule #1

Start saving early

The sooner you start saving, the more time the money you save has to grow. This is the power of compounding: As the dollars invested earn returns, those returns start earning returns, and so on—year after year. As this graphic shows, it’s even more powerful if you start saving early.

This is hypothetical data and is for illustrative purposes only. Assumptions: 5% annual return and $10,000 annual contributions starting at age 25 versus age 35. Does not account for inflation. Source: Wells Fargo Asset Management (WFAM) Research

Rule #2

Save at a sufficient rate

Our research suggests that a consistent 15% preretirement contribution (which includes any employer contributions) is needed in order to have a standard of living in retirement that’s similar to the one enjoyed before retirement.

What does that mean for your 401(k)?

If your employer matches, for example, 4% of your contribution, you’ll need to contribute the difference, or 11% to reach the 15% preretirement contribution.

How much is enough?

Our research indicates that your target should be to accumulate, by the time you retire, a total retirement account balance that’s 11 times your estimated final preretirement income. Potentially, this amount should replace about 80% of your preretirement income when combined with Social Security.

The checkpoints below will help you gauge your progress toward this goal. They are based on the assumption that a person starts saving 15% of pretax income each year at age 25 and retires at age 65.

Rule #3


When deciding how to invest your retirement savings, the old adage “Don’t put all your eggs in one basket” holds true. Fortunately, target date funds, which are diversified across asset classes, have become the predominant default investment in employer retirement plans. As this graphic illustrates, a target date fund automatically adjusts as retirement draws closer, potentially providing an effective way to maintain a diversified investment portfolio.

This example, for illustrative purposes only, depicts a target date fund composed solely of two asset classes: stocks and bonds. Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.

Rule #4

Stay the course

If you’re changing jobs, you might be tempted to simply withdraw the retirement savings you’ve accumulated, but consider alternatives to cashing out. These include moving the balance into your new employer’s plan, leaving the assets in the previous employer’s plan (if the plan allows), or rolling the assets to an IRA. By keeping those retirement dollars in a tax-advantaged plan, you’ll:

  • Postpone paying income taxes on that amount
  • Avoid any early-withdrawal penalty
  • Enable those savings to continue compounding—undisturbed—on a tax-deferred basis for retirement

Covering unexpected expenses by taking a loan from your 401(k) is another temptation. But when you borrow from your retirement savings, your future contributions end up replacing what was taken out instead of increasing your account balance. To stay on track, you would likely need to decide on an alternate route such as increasing the amount you’re regularly saving and/or delaying retirement.

Rules of thumb

When changing jobs, consider your alternatives to cashing out of your previous employer’s retirement plan. Let that money keep growing, tax deferred, toward your retirement goal.

Consider the impact on your retirement account balance before taking loans from your 401(k).


Getting back on track

If you find your savings falling short, you have options that can help close the savings gap. For information and help regarding tax planning specific to your situation, consult your tax professional.

Save for medical bills and retirement in a health savings account (HSA)*

An HSA is a tax-advantaged medical savings account available to people enrolled in a high-deductible health care plan. It’s potentially a great long-term savings vehicle to supplement your 401(k) savings due to its tax-efficient structure:

  • Contributions to an HSA aren’t taxable
  • Earnings within an HSA account grow tax-free
  • Distributions for qualified expenses aren’t taxed¹

Until age 65, an HSA can only be used, without penalty, to pay for qualified medical expenses. But once you reach 65, this account can be used not just for medical expenses (which would be tax-free withdrawals), but also for anything else you choose to spend it on (taxable as ordinary income).

*If you have an HSA-eligible health insurance plan.
WFAM does not offer HSAs.

Make catch-up contributions

If you’re age 50 or older, you can take advantage of catch-up provisions to contribute more to your 401(k) and HSA plans. In 2019, those age 50 or older can contribute, pretax, an additional $6,000 and $1,000, respectively, to their 401(k) and HSA.

Work longer

Research shows that this is a more powerful method of increasing a person’s standard of living after retirement. For every year that retirement is delayed, reduce your savings target by 0.7 times your final preretirement income.²

Consider after-tax 401(k) contributions, if available

Boost your savings by taking advantage of after-tax contributions, if available, in your employer’s 401(k) plan. Although for 2019 the limit for pretax, tax-deferred contributions is $19,000, the total contribution limit when including after-tax contributions is $56,000.

That won’t reduce your taxable income, but the earnings on after-tax contributions will grow tax-deferred until you take a distribution. You can also convert that money to a Roth 401(k). Here’s the advantage of doing so: Earnings from an after-tax 401(k) are taxable when distributed, but earnings from a Roth are distributed tax-free.

Delay taking Social Security

Working longer is even more powerful when combined with waiting longer to start taking a Social Security benefit. Delaying the start of Social Security benefit payments increases the monthly payment amount by roughly 8% every year, up until you reach age 70.³

1. Employee Benefit Research Institute. “The Triple Tax Advantage of an HSA.” Fast Facts, no. 292
2. Aon. “The Real Deal: 2018 Retirement Income Adequacy.” 2018
3. Social Security Administration


Assumption: This person’s full Social Security retirement benefit starts at age 65. (To learn when you’ll be eligible for your full Social Security retirement benefit, contact the U.S. Social Security Administration [SSA].)

Source: SSA


A new foundation for retirees*

With the decline in employer pension coverage over the last decade or so, employees need to rely on their own savings and Social Security to finance their retirement. Additional income security may come from a range of guaranteed and nonguaranteed solutions that are intended to pensionize some or all of a person’s retirement savings in order to provide a reliable income stream throughout retirement (no matter how long retirement lasts).

From our perspective, the following combination may offer the best opportunity to maximize your spending rate and eliminate the risk of outliving your assets after age 85:

  • A managed drawdown fund that’s designed to pay out a regular income stream until age 85 (with a remaining balance at that age)


  • A deferred income annuity that provides for guaranteed lifetime income after age 85

* If available in your employer’s 401(k) plan.

Annuities are not offered by any WFAM entity. These products are offered by third-party companies, which are not affiliated with WFAM entities. Annuity guarantees are subject to the claims-paying ability of the issuing insurance companies.

This is hypothetical data and is for illustrative purposes only. Source: WFAM, December 2018

A person retires at age 65 with $500,000 and withdraws, according to the 4% spending rule, $20,000 per year.

Let’s assume for the sake of this example that inflation and investment growth offset each other and have no net impact.

In this case, the money would last 25 years. If the retiree lived past age 90, the savings would run out.

This is hypothetical data and is for illustrative purposes only. Source: WFAM, December 2018

Now consider a hypothetical scenario in which the employee could allocate 15% ($75,000) of the $500,000 in savings to secure guaranteed lifetime income, provided by a deferred income annuity, that begins at age 85—and that these payments, combined with Social Security, would provide 80% of the person’s preretirement income.

This would leave the person $425,000 to spread over exactly 20 years of retirement (from age 65 to age 85), after which the guaranteed income would kick in. Between ages 65 and 84, the retiree could take a withdrawal of $21,250 each year (4.25% of the original $500,000 amount).

As in Scenario 1, let’s assume no net impact from investment returns or inflation.

This approach would increase the retiree’s annual income from ages 65 to 85 by $1,250 compared with the 4% withdrawal rate,  a boost of 6.25% in annual spending. Even better: In this scenario, the retiree wouldn’t face the risk of outliving his or her assets.

This approach to planning retirement income guarantees consistent lifetime income after age 85. By doing so, it likely may help retirees feel more confident about the amount of money they can spend annually until they turn 85, enabling them to enjoy their retirement years more fully.

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