Life has gotten complicated: with the dysfunction and debacles in Washington, the constant loom of interest rates rising, the unemployment numbers hovering and personal/business stress at an all time high, saving for retirement has seemed to have taken a back seat to fear, saving for college, and just keeping our head above water. I seem to be speaking with more people than ever about their fears surrounding supporting themselves at the time of retirement, or if they will be able to retire at all and support themselves in some manner similar to their current standard of living. While everybody is different, there is a commonality: you won’t have a nest egg if you don’t save. There is no question that life gets in the way: but if you don’t prepare, you will work ‘till the day you die, or work will ultimate kill you. Since we don’t want to see that happen, let’s take a look at some of the basic keys to retirement savings success. Let’s tackle company plans first:
Life gets in the way. Welcome to the club- we all have obstacles thrown in our path every day. The simple fact is, if you let it get in the way of saving, you will never have the funds to retire. If you want an illustration of this fact, just think of an elder you know who is just getting by, or not quite getting by. Simply put, you have the power to avert this disaster- now is the time to take control.
I can’t afford to put money away now. You can’t afford not to. Once the calendar year passes, it’s gone. You can’t go back. You can’t get the deduction…not to mention the 8th wonder wonder of the world- compounding. If you don’t put a dollar away today, you may not have multiples of that dollar later. Set your plan and stick with it- you’ll find a way to manage.
I have a 401(k) but don’t understand it. Consult with the HR person of your company, or call your Certified Financial Planner™ for help with the ins and outs of your plan. At the very least be sure to contribute up to the maximum of their match…where else can you get an immediate 100% return on your contribution? Find out how long it takes for you to be fully vested in your employers contribution (vesting is the amount of time it takes to go from employer ownership to employee ownership of the employer contribution).
How do I pick the investments? There are so many! Setting your retirement plan portfolio is not like the commercials for the old Ronko Rotisserie™: you don’t set it and forget it! It’s your money, and it’s up to you to make changes in the investment options when necessary. Economics and the markets are a constantly evolving machine: it’s your job to watch over your money and make changes when necessary. The company is prohibited from giving you investment advice, so don’t ask. I also suggest you don’t ask the person sitting next to you: he or she knows no more than you (or less), and may have very different goals, objectives or risk tolerance. Investment philosophy is a very personal thing- there is no right or wrong, but own your responsibility to watch over your money and your future. Again, if you are stuck, give your Certified Financial Planner™ or advisor a call- that’s what they are there for.
How much will I need to retire? Only you know the answer to this. Well in advance of your retirement (5-10 years) you should be doing projections as to how much it cost you to live now, and what it will cost in the future. Granted, it’s only an educated guess, but at least it helps to keep you on the path. Better to have too much at the time of retirement than not enough!
Let’s take a look at those that don’t work for a company that offers a 401(k) or other retirement plans. If you are self employed and have not started your own company pension plan like a Simple or SEP plan, now is the time. Each has its own ramifications and use, so be sure to consult with an advisor who is up to date on the applicable rules, regulations and suitability pertaining to each of the programs offered. These plans offer the opportunity to contribute more than a traditional IRA or Roth, and are designed for the small business owner to have a pension plan with a minimal amount of administration.
Traditional IRA. They’ve been around for a long time, and for the current year, they allow you to contribute up to $5500 per year, $6500 if you are over age 50. The deduction is taken in the current year which reduces your gross income in the current year. This will lighten your tax load in the year of contribution, and make your accountant very happy for you! The taxes are payable down the road at retirement as ordinary income.
Roth IRA- Same rules as above, but the contributions are made with after tax dollars, meaning that you pay the taxes in the year you earned the money, but the earnings are tax free at withdrawal.
As in the Traditional IRA you must be 59 ½ to withdraw without penalties but the contribution must have been there for a minimum of 5 years. Money in a Roth is not subject to the required Minimum Distribution at age 70 ½ which may be desirable in your estate and financial planning.
The above is not meant to be construed as investment advice: just a quick primer and reminder how important it is to keep on track with your retirement saving. My intention is to make you aware that you can do it, and retire at some time to live the Life of Riley. Wasn’t that the plan in the first place?
Hope you had a wonderfully ghoulish Halloween, and are looking forward to a Happy Thanksgiving... I know I am! My best to you and all those you love. Let the holidays commence!!!