There are a lot of articles out there talking about Baby Boomers leaving the workforce into retirement. If they are anything like my parents, their (sparkly, new) retirement involves a mixture of 401(k), Social Security, Medicare, and pensions.
But the landscape for future generations is significantly different. The opportunities for securing a career with a guaranteed retirement income are rare. Only 17% of private company employees were offered a pension plan in 2018. And experts predict that Social Security will likely see a reduction in paid benefits over the coming years, barring changes designed to improve the financial strength of the program.
So, what can you do to prepare for a retirement where you can live without excess financial worries? Here are four tips to help you plan.
- Start ASAP. When you are 16, 65+ seems like a problem to be tackled by future you. But someone who starts saving $75 per month at 25 is more likely to have a much larger nest egg than someone who begins to save $100 at 35. This difference is created through Compound Interest. Compound Interest is where the interest on deposited money is included in the balance for the calculated interest in the following month. So, if I had $75 in my account, earning an average of 9% return, I would have $81.75 plus another $75 contribution the following month. That $156.75 would then make another 9%, increasing my total earnings to $170.86.
This DOES NOT mean it is too late to start saving. It only means the sooner you start saving, the more you can earn on your money. If you are concerned about meeting your future retirement goals, it is a good idea to speak to a financial expert.
- Invest in an Individual Retirement Account (IRA). IRAs are designed to utilize mutual funds, cash, bonds, stocks, ETFs, real estate, or even small businesses to provide a return on the money contributed. IRAs are flexible in their investment capabilities, allowing you to select funds and manage the level of risk you are taking. However, IRAs do come with some limitations. For 2020, the maximum contribution for single individuals making $124,000 or less and married couples making less than $196,000 per year is $6,000. That number jumps to $7,000 for those who are 50 or older.
There are two types of IRAs available, the Traditional and the Roth. Traditional IRAs are funded with pre-tax dollars, and the money grows tax-deferred. Withdrawals after the age of 59.5 are taxed as income. The Traditional IRA may be a good option if you are reasonably sure that you will be in a lower tax bracket in retirement than you are now, allowing you to keep a larger portion of your invested money.
The Roth IRA is funded with after-tax money and grows tax-free. Funds are tax and penalty-free when withdrawn after the age of 59.5. While collecting money tax-free in retirement may sound appealing, keep in mind that it is only tax-free because your contributions were already taxed.
- Use your 401(k) or other investment accounts. If your employer offers a 401(k), you should take advantage. Unlike IRAs, 401(k) accounts strictly utilize pre-tax dollars invested into mutual funds to grow your money tax-deferred. In some cases, employers will offer a match or specific amount they will help contribute to encouraging employees to use the program. If your employer offers a match, it is a good idea to max it out. In some cases, you can double your contributions.
If you don’t have access to a 401(k), there are many options available. For married couples, the best idea is to open up two Roth IRAs. Even if you only have one income, it is possible to create a spousal IRA. Between those two accounts, you will be able to contribute $12,000 per year to your joint retirement.
If you already have an IRA and do not have a spouse, you may want to take a look at opening a standard investment account. Companies such as Vanguard offer low-fee accounts, access to financial advisors, and guidance on navigating making investments based on your goals. Contributions will be after-tax, and returns will likely be taxed as income.
- Aim to contribute 10% to 15% of your income. This may seem like a lot of money. But experts have adjusted their recommendations in recent years based on the lack of pensions and increased life expectancies. You do not even need to start out at these percentages straight out of the gate. You can work your way up to that amount over time, especially if you have outstanding debts and emergency savings, which need to be addressed first.
Depending on your age, saving for retirement can either be a distant goal or a massive stress. Either way, any amount of money you can start pushing into proper investments will help build your nest egg for the future.