The world of retirement has changed. With the decline of company pensions and the uncertain future of Social Security, Americans must exercise greater control over their own financial futures with careful planning. Despite this fact, the terrain of retirement remains murky and unexplored for many of us. According to the Department of Labor, fewer than half of Americans have calculated how much they need to save for retirement, and 30% of private sector employees with access to a defined contribution plan do not participate in it. If you have put off planning for your retirement longer than you should, you are far from alone. Taking steps now will allow you to make the most of the working years still ahead and help you to develop a vision of how you will live when they have passed.
Start saving now.
The first priority is be to have an emergency fund, which should be sufficient to cover at least three months of expenses in case of an interruption in income. Also, be sure to quickly pay off any high-interest debts, which can drain your income and limit the amount you can contribute each month to your retirement savings. Once these goals have been accomplished, a good first step is to begin making regular contributions to one or more retirement accounts.
If your employer offers a retirement plan, such as a 401(k), take advantage of it. Any contributions you make are tax-deferred, so your tax bill will be lower while you are working and allocating a portion of your paycheck to the retirement account. If possible, contribute enough to receive the maximum employer contribution so the money you set aside can have the greatest possible impact.
If you don’t have access to an employer-sponsored account, or if you already get the maximum employer contribution out of your 401(k), consider opening an Individual Retirement Account (IRA). If you are below age 70 ½ and fall within IRS income limits, then you can choose between either a traditional or a Roth IRA. You may contribute up to $5,500 per year to either type of retirement account, and an additional $1,000 if you are at least 50 years old.
The main difference between a traditional and a Roth IRA is the way they are taxed. Contributions to a traditional IRA are made pre-tax, and distributions are taxed upon withdrawal. Roth IRA contributions are not tax-deductible, but qualified withdrawals are tax-free. Which is the best choice for you will depend upon your individual circumstances, including your current and projected income and what other investments you already have.
Whatever retirement accounts you decide to fund, commit to making regular contributions. Set savings goals, stick to them, and reevaluate them periodically. If you have more disposable income a few years down the road, you can start contributing more. Avoid making early withdrawals if at all possible. In many cases, you will incur fees and tax penalties in addition to the loss of compounding interest that the funds could have been earning if you had left them in place.
Understand your needs.
The Department of Labor estimates that most Americans will need at least 70% of their working income in order to maintain their standard of living in retirement, and those with lower income will need 90% or more. Start thinking about what you will want and need in your retirement years so you know what kind of savings goals you need to be setting to live the way you wish.
Get professional advice.
Different types of retirement accounts and investments have different rules and tax consequences. The help of a qualified professional is invaluable in navigating these complex waters. Always ask about a financial advisor’s professional background and education. It is helpful to find someone who specializes in both tax and investment, since this type of professional can provide knowledgeable investment advice while also working to minimize your tax obligation.
Boelman Shaw Capital Partners provides a full range of financial consulting services, including retirement and other investment planning, tax services, and insurance. Contact us today for help getting your retirement on track.
Material discussed herein is meant for general illustration and/or informational purposes only. Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.