Ideally, you want to make your choice based on three considerations: retirement income needs, years until retirement and current budget. Remember, you can only change your contribution rate under certain circumstances.
To come up with a target retirement income, it’s standard practice to estimate 80 percent of what you believe your income will be five to 10 years before you retire.
How It Works
If you believe you’ll be making $50,000 annually by the time you’re ready to retire, you might estimate needing $40,000 per year to maintain your standard of living in retirement ($50,000 x 80% = $40,000).
There are tools available to help you determine the impact and benefits of different contribution rates.
- Take-Home Pay Estimator – Estimates the effect of the six contribution rates on your take-home pay.
- Retirement Savings Calculator – Calculates the monthly amount you should be setting aside today in order to reach your retirement goals.
- Disbursement Calculator – Estimates what an ending account balance will pay monthly during retirement, given an estimated growth rate and your contributions to the plan.
- Benefit Estimator – Estimate your defined benefit, using Self-Estimate Worksheets.
Here’s one way you might use these tools:
- Estimate your salary at retirement. You may want to have both a high and low estimate.
- Use the Self-Estimate Worksheets to create an estimate of the defined benefit (guaranteed) portion of your account.
- Use the retirement savings or disbursement calculator to estimate your defined contribution payment.
Do the defined benefit and the defined contribution equal 80 percent of your estimated salary at retirement? If it’s less than 80 percent, consider:
- Choosing a higher contribution rate (use the take-home pay estimator to see the effect of different rates on your current budget).
- Starting a voluntary retirement or personal investment account to make up the difference such as the state’s Deferred Compensation Program (DCP). You can join for as little as $30 per month, increase or stop your deferrals whenever you choose, and help build your retirement portfolio.