Saving for retirement

The U of M has made it easier for you to meet your retirement savings goals by offering a variety of retirement plans.^* The amount you contribute is placed in an account for your personal benefit. You then determine where your contributions are invested within the options offered in your plan.

When you enroll in any of the U of M retirement plans, you enjoy these valuable benefits:

• Pre-tax savings
• Tax-deferred compounding
• Plus, an easy, convenient way to save through payroll deduction!

^*Under the University of Minnesota retirement plans, there are several distinct plans. Your eligibility to participate will vary. This site contains information applicable in varying degrees, to the following plans: the Faculty 401(a) Retirement Plan, the Faculty 403(b) Retirement Plan, the Optional 403(b) Retirement Plan, and the 457 Deferred Compensation Plan.

Federal income taxes are not withheld from the contributions you make to your U of M retirement plan. Federal income taxes are withheld when you withdraw money from your retirement account — for retirement or other pre-retirement withdrawals. For example, Melissa earns $30,000 per year. Her marginal federal tax rate is 28% and her state and local taxes add up to another 4%. Melissa contributes $1,000 a year to her retirement plan. That reduces her taxable income to $29,000. But it also cuts her income taxes by $320 (32% of $1,000).* *Your tax savings will vary according to your tax bracket and contribution rate. » Return to top

This chart is hypothetical and used for illustrative purposes only.

When you save through a taxable account — like a savings account — interest is currently taxable as ordinary income, which can take a huge bite out of your savings over the years. But if you’re saving through your U of M retirement plan, earnings grow tax-deferred until you receive the money from the plan. Tax-deferred compounding means your account balance grows much faster because all of your earnings are reinvested without being reduced by current income taxes. The chart shown here illustrates the power of tax-deferred compounding. It compares $250 per month contributed to a tax-deferred retirement savings plan account to the same amount contributed to a taxable investment. It also assumes an 8% return, 4% annual wage increases with taxes withdrawn each month from the taxable account, and no withdrawals from the tax deferred account. Amounts received from the tax-deferred account are taxable when distributed. As you can see, over time, tax-deferred compounding can make a dramatic difference. » Return to top

This chart is hypothetical and used for illustrative purposes only. Rates of return will vary over time. Contributions allocated to variable investment choices can lose value and may be worth more or less than originally invested when redeemed.

It’s like paying yourself first — before you pay the other bills!

Time is an important factor for any retirement saver. The longer you wait to start saving under your plan, the harder it will be to accumulate enough money to ensure your financial security in retirement. When you start early, earnings on contributions have more time to compound — that is, earn money on previous investment earnings. Plus, saving gradually over many years is easier than trying to save a lot in a shorter time period later in your career. In the chart shown here, our first saver, Melissa started a savings program at age 21 in her retirement plan by contributing $1,000. She continued to do so for the next 10 years, contributing $10,000 in total. Her coworker, Jim (our second saver in the chart), waited until age 31 to get serious about his retirement savings program. He contributed $34,000 over a period of 34 years until he retired at age 65. Both savers earned 10% annual return. Even though Melissa stopped contributing to the plan after 10 years, at age 65 she was delighted to find out that her retirement account was worth $447,880 after investment gains. On the other hand, Jim’s retirement account was worth only $270,024 even though he actually contributed more. The reason is clear — getting started early gives your money more of a chance to work for you! » Return to top

This chart is hypothetical and used for illustrative purposes only. Rates of return will vary over time. Contributions allocated to variable investment choices can lose value and may be worth more or less than originally invested when redeemed.

Estimate your retirement income need

The amount of money you’ll need for your retirement depends in large part on two factors: the number of years you’ll spend in retirement and your anticipated standard of living during retirement. With today’s life expectancies, you may spend 20 years or more in retirement. And, with the rising cost of living, funding your retirement can be expensive.

So how much will you need in retirement? Many financial professionals suggest you’ll need at least 70%-80% of your pre-retirement income to maintain your current standard of living. It’s generally assumed that a person's income during retirement doesn’t need to be as high as his or her pre-retirement income. Why? Many living costs will decrease during retirement, including housing and clothing. On the other hand, some expenses will typically increase, such as travel and hobbies.

Another important consideration is health care. Longer life can mean greater chances of medical problems in retirement. Medicare and Medicaid are government programs that can provide some help, but they may not cover everything -- including long-term care. Although, you may never need long-term care, a 2005 study by the U.S. Department of Health and Human Services says that people who reach age 65 will likely have a 40 percent chance of entering a nursing home at some point in their life. And, about 10 percent of the people who enter a nursing home will stay there five years or more. On average, nursing home costs can easily amount to $50,000 or more per year.

Know what to expect when your retirement day arrives -- estimate your expenses in retirement so you can plan accordingly.