Paul Tarins, RICP®,WMCP®,CSRIC™
A study recently showed that 80% of Americans are worried about their ability to save enough money for a comfortable, sustainable retirement. While that may or may not surprise you, this statistic makes one thing very clear: more information and education needs to be made available about retirement.
This is a key phase of life, and the planning you do now can make or break your ability to retire in peace. Here are a few tips on what you can do right now to ensure that you’re able to get yourself the retirement you deserve.
#1: Better understand your retirement needs
The average person spends over 20 years in retirement. Best practices when constructing a retirement income plan may be a 30-year time horizon. When you retire in your early 60’s and have a history of longevity in your family 30 years is very realistic. That is a minimum of two decades of your life that you probably want to spend relaxing and enjoying the life you have built for yourself. To achieve this, it is necessary to gather your thoughts and develop a complete understanding of what you want out of your retirement and what you need to do in order to achieve those goals.
In order to maintain a consistent standard of living after you reach retirement, the Department of Labor recommends planning to live on 70-90% of your pre-retirement income. You probably don’t want to drastically change your standards of comfort and happiness once you retire, so for that reason it’s important to plan ahead. Have you saved enough to maintain your life? If not, it’s a good idea to start thinking about that process today.
#2: Contribute to a 401(k)
One great opportunity to save for retirement is to enroll in a 401(k) plan through your employer.
401(k) plans are employer-sponsored retirement accounts. They give employees the opportunity to contribute a certain percentage of their pre-tax income to the account. The money in the account is taxed less than the rest of your income, meaning that, if you can hold off on touching that money, you end up with more money than you would have if you had put it all into a different type of savings account.
Under some plans, contributions to the 401(k) account can be matched by the employer, creating even more security for your retirement.
401(k) accounts are a highly recommended method of saving for retirement, yet according to the Department of Labor, as of 2018, almost 30% of private industry workers had access to a 401(k) plan and yet were not participating.
If your employer offers options such as a 401(k) to you, there’s no time like the present to start pursuing that. Compound interest grows steadily over time, meaning that the sooner you begin, the better off you’ll be in the future. Thus, beginning to invest in your future today is better than starting in a year.
#3: No 401(k)? Utilize an IRA
However, 401(k)s are not offered by every employer or to every position, meaning that they’re not available to every worker. But even if you find that you’re ineligible for a 401(k), you still have some options, such as IRA.
IRA stands for Individual Retirement Account. There are two main types of IRA, which differ mainly in how they are taxed. These are:
- Traditional IRA: A traditional IRA means you’re contributing money tax-deferred to your retirement account. When you withdraw in retirement, you will need to pay taxes on the withdrawals. Because the money is contributed tax-deferred, it lowers your current year’s adjustable gross income.
- Roth IRA: Alternatively, a Roth IRA means your contributions are made with after-tax dollars. When you make withdrawals in retirement, they will be tax-free (because they were already taxed when deposited into the account).
You can put up to $6,000 a year into an IRA or $7,000 if you are 50 or older. You’ll want to choose between a traditional IRA or a Roth IRA. The difference will be the tax advantages. A traditional IRA means you’re contributing money tax-deferred to your retirement account. When you withdraw in retirement, you will need to pay taxes on the withdrawals. Because the money is contributed tax-deferred, it lowers your current year’s adjustable gross income.
If you find yourself choosing between the two different types of IRA, it’s important to consider what your fiscal needs are at the present moment, and what they will be in the future. Would you prefer to save on taxes now, or later? This is a big question you must ask yourself when deciding on an IRA.
Either way, IRAs offer a simple way to save for retirement. You can simplify them even further by setting up automatic deductions with your financial institution, making it so that you don’t even need to think about the process.
Compound interest accumulates steadily over time. This means that the earlier you start saving, the more your money will grow toward retirement. Plus, money contributed to a traditional 401(k) or IRA is tax-deferred, which makes it an appealing option for those looking to lower their tax obligation right away.
#4: Don’t touch your retirement savings
This is a big one. As tempting as the dollars you’ve put into your savings may be, it’s important to leave them alone.
By withdrawing from your retirement savings now, you lose valuable principal and interest that could have been income in retirement. That interest adds up, after all.
Additionally, you may lose valuable tax benefits and pay a tax penalty for withdrawing early. If you change jobs, make sure that you leave your savings in your current retirement plan. Or, you can roll them over to an IRA or to your new employer’s retirement plan.
#5: Ask your employer about pension plans
While pension plans are no longer commonly offered by employers, these are still a good option if you’re lucky enough to have access to one.
A pension plan is a retirement plan that an employer is required to contribute to. Some pension plans also have options for employee contributions, which may or may not be matched by the employer up to a certain dollar amount or percentage.
Does your employer offer a traditional pension plan? Even though many companies no longer offer one, check to make sure. If they do, see if you’re covered. Before you change jobs, find out what will happen to your pension benefit. If your spouse has a pension plan, you may be covered through theirs as well.
Pension plans are a great boon to employees because they’re guaranteed by the employer. There are two main types of pension plan. These are:
- Defined Benefit Plan: Under this type of plan, the employee is guaranteed a set amount by the employer upon their retirement, regardless of the performance of the associated investment pool.
- Defined Contribution Plan: With this alternative type of plan, the employer contributes to the pension in amounts generally devised as a match to a certain percentage or amount of contribution made by the employee. With these, the final benefit received by the employee depends on the performance of the underlying investment portfolio.
Defined contribution plans are generally more favorable to employers, as they let the company off the hook should the investments go sour. However, a pension of any kind can be a great benefit to employees hoping to eventually retire, regardless of whether it’s defined by benefit or by contribution.
#6: Talk to your financial advisor
One of the most impactful things you can do for your future retirement is work with a financial planner who is familiar with your situation. They can provide you with realistic expectations, savings goals and investment advice based on your tolerance for risk. Be open and honest in your discussions and express your fears or anxieties regarding your future retirement.
When it comes to your retirement, it’s important that you’re knowledgeable, confident and diligent in your planning efforts. If you are used to living a particular lifestyle and want to continue doing it once you are no longer working, planning ahead is critical. And if you are unsure where to start, speak with a trusted financial advisor to find what works best for you and your unique situation.
Retirement is a big step, and you want to make sure you’re going down the right path. It’s important that you be able to maintain a high quality of life in your later years—you’ve earned it! So start thinking ahead, and plan out the finances you’ll need to have the best retirement you possibly can.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.