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February, 2018

A Golden Plan: How To Prepare for Retirement

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A Golden Plan: How To Prepare For Retirement

Retirement is typically the phase of life referred to as a person’s “Golden Years,” but if you haven’t been stashing your money away those years may not be so golden. With so many options floating around for retirement, how can you really know which type of retirement plan is best for you? We’re here to give you a crash-course in the options you should consider at different phases of life, so you can create your own golden plan for retirement.

20-29 Years Old

Welcome to the adult world! When you’re just starting out, it can be very overwhelming trying to sort out finances for the future. You’re probably asking yourself questions like What is a 401(k)? What the heck is an IRA? Tax brackets? You’re in one of those? Who’s FICA and why is he getting all my money? No need to call mom - we’ve got you covered. Here are some options to consider:

Invest in Roth Accounts

There are many different types of retirement options, but employees just starting out should consider Roth accounts since they will more than likely be in a higher tax bracket in their sixties.

Why should that matter though? Unlike most retirement plans, a Roth taxes the deferred wages before they are put in the account - meaning you won’t have to pay taxes on those wages when you withdraw them several decades from now. Roth individual retirement accounts (IRA) and Roth 401(k)s are great ways to start saving for retirement early.

Elect for Full Employer Match

You should at least invest the minimum amount to get your employer’s full match because it can really pay off in the long run. You don’t want to leave free money on the table!

Some quick math: If your pre-tax annual income is $30,000 and you put five percent of that into retirement, you’ve put away $1,500 by the end of the year. However, your company offers a four percent match on top of your five percent, so that’s an additional $1,200 towards retirement - bringing your total retirement savings for the year to $2,700.

You can invest up to $18,000 per year into a 401(k) or 403(b) retirement account as long as you’re under 49 years old, but that can be a large sum for most people starting out - which is why it’s best to put at minimum 5 percent of your wages into retirement savings (PS - a 403(b) is the 401(k) equivalent account for employers with fewer than 100 employees).

How Much Should I have By the Time I'm 30?

It’s suggested that you should have about half of your annual salary saved by the time you’re 30. So if your annual salary is $30,000 when you start out, ideally you should have at least $15,000 in retirement accounts by your 30th birthday.

Understandably, this is a tall order for an age group drowning in student loan debt, but it’s important that you don’t put retirement savings on the back burner. Time is on your side, and the more money that is compounded over a longer period of time helps to grow your retirement savings. After all, $1 saved at the age of 20 is worth $21* by the time you’re 65 years old; that same dollar invested at 30 years old is only worth $10.68 by age 65. Just something to think about!

*based on a 7% annual return rate.

30-39 Years Old

You’ve been at this whole adult thing for a while now. You can now confidently explain to those young little 20-somethings how to be financially stable…then BAM! Marriage, kids, aging parents, college funds, oh my! It’s time for your finances to change - and your retirement savings plan.

YOU’VE GOTTEN THAT RAISE... NOW WHAT?

Chances are, you’re making a little more money than what you were in your 20s; however, your expenses have more than likely increased. Now is not the time to decrease your savings. Instead, gradually increase your savings amount throughout your 30s, starting at the lowest percentage you have to put into a retirement account to get the company’s match, and then increase by one percent every six months to a year.

START THINKING ABOUT COLLEGE

If you have kids, chances are you’ve started thinking about their college expenses. The most common mistake when it comes to saving for the kids’ college fund is that parents tend to use the money they should be putting aside for retirement into the college fund. It’s a bit of a catch-22, but the bottom line is you shouldn’t sacrifice retirement savings for college savings.

Look into 529 plans when it comes time for college savings, and start them as early as possible. Some states even offer tax deductions for funds put in a 529 plan, and many of those earnings can accumulate interest and can be withdrawn tax-free if the expenses are used for education purposes. Which means more money for retirement that doesn’t have to be used to fund college. Whew!

How Much Should I have By the Time I'm 40?

Even though having kids and potentially a mortgage is now a financial situation you have to think about, your 30s are not a time to be slowing down with retirement savings.

It’s suggested a person in their mid-30s have twice their salary saved for retirement; for example, if you’re making $40,000 annually at 35, you should have at least $80,000 in the bank for retirement. By the time you hit your 40th birthday, you should have at least triple your salary saved up to live comfortably in retirement.

40-49 Years Old

Now you’ve definitely gotten the hang of things - financially at least. You may be dealing with teenagers now and college is a looming expense just waiting to happen. But your 40s are your peak earning years, and by now most of your debts are probably paid off. Retirement is something that isn’t as far away as it once was, but you’ve still got some saving to do:

KEEP IT UP

Keep storing money away in any 401(k), 403(b) and/or any IRAs you have. Your minimum goal should be to save 15% of your annual income, which can also include employer matching. The funds you’re setting aside can still compound significantly, so max out contributions any chance you get.

If you’re not investing at least 15% of your income annually in retirement, you could be falling behind the curve. Don’t start slowing down your savings contributions just yet!

INVEST IN OTHER IRAS

If you were smart over the past few decades and invested in a Roth IRA (or any IRA really), then good for you! But if you did invest in a Roth IRA, you may be at the point where you are no longer eligible for one. If you haven’t looked into a traditional IRA yet, now may be a good time to do so.

The max you can contribute to a traditional IRA is $4,000 a year, and the contributions are tax-free (until you decide to withdraw the funds). Anyone is eligible to open a traditional IRA if they make more than $52,000 annually but less than $62,000 for single filers; if you’re filing joint married, the annual income ranges from $83,000 to $103,000.

How Much Should I have By the Time I'm 50?

The average savings for 44 to 49 year-olds is about $81,000, according to the Economic Policy Institute (EPI). These experts also agree you should have about six times your annual salary saved up for retirement by the time you’re 50; seven times your annual salary by the time you’re 55. The average American will earn about $50,000 by their mid-50s, which means there should be at least $350,000 saved up by that time.

50-59 Years Old

Retirement is looming, and you’re at a point where you need to seriously look at how much you’ve saved over the last few decades. Now that the kids are (mostly) off your payroll, you can use that extra income to invest in your future.

CATCH UP CONTRIBUTIONS

Starting at 50, employees’ retirement contribution limits are raised; this is called a catch-up provision. You can save an extra $6,500 per year in your 401(k), and an additional $1,000 in your IRA account.

Take advantage of the catch-up contributions. Talk to your plan administrator to see what your company’s retirement plan offers for catch-up contributions, what the requirements are, and any other questions you may have.

THINKING ABOUT EARLY RETIREMENT?

If you can retire early - good for you! However, there are two important birthdays to consider:

  • 55th Birthday – You can start withdrawing from your current employer’s 401(k) without paying the usual 10% early withdrawal penalty. However, if you choose to roll your 401(k) into an IRA, the funds will be subjected to early withdrawal fees for the next four and a half years.
  • 59 ½th Birthday – Six months after your 59th birthday, you are able to withdraw your 401(k) or traditional IRA funds penalty-free; however, these funds will be subject to income taxes. Any Roth IRA funds will not be taxed, as they were contributed after-tax.

HOW MUCH SHOULD I HAVE BY THE TIME I’M 60, OR BY THE TIME I RETIRE?

The EPI states the average family has around $160,000 saved for retirement. Though most experts suggest people have $1 Million saved up, that isn’t a realistic number for most working Americans - even if they do have decades to save. Meeting with a financial advisor to figure out how much you’ll need in retirement can help find the realistic number that works for you.

60+ Years Old

It’s been a long road, but you’ve finally made it to the Golden Years! Don’t be in such a rush to cash out just yet, though. There are still a few things you need to keep in mind when it comes to withdrawing from your retirement accounts:

DON’T STOP COUNTING BIRTHDAYS JUST YET

When it comes to retirement, birthdays become just as important as when you were a kid. Here are a few key ones to keep in mind during retirement:

  • 62 Years Old: You are eligible to start drawing Social Security; however, if you’re still working, the Social Security Administration will deduct $1 for every $2 a person earns above the annual limit.
  • 65-67 Years Old: You can qualify for Medicare three months before your sixty-fifth birthday; you can also receive 100% of your Social Security benefits, depending on your birth year. Persons born after 1960 need to be sixty-seven to reach full eligibility for Social Security and are no longer affected should you decide to keep working.
  • 69 ½ Years Old: You can begin pulling from 401(k) and IRAs without penalty.
  • 70 Years Old: Your Social Security benefit will increase by 8 percent for every birthday up to your seventieth.
  • 70 ½ Years Old: Required minimum distributions (RMDs) for 401(k)s and/or traditional IRAs begin.

BUDGETING TIPS

Be sure to budget appropriately when it comes to withdrawing your funds during retirement. As much as 70% of your retirement funds can be eaten up by taxes, so you need to have a serious planning session with yourself and/or spouse. One golden nugget of advice when it comes to drawing from your retirement accounts, though: don’t draw from all of your accounts at once. Start pulling from taxable accounts first, and leave the Roths for as long as possible, as they don’t typically have RMDs.

A Few Last-Minute Tips

No matter what your age or stage of life, investing in retirement is one of the most important things you can do to secure your future. You want to make sure the retirement nest egg you’re nurturing is golden, not rotten later down the road:

  • Review your budget annually, and again if you get a pay cut/raise to be sure you’re doing what’s best for you.
  • Set up automatic withdrawals from your paycheck - you can’t spend what you never had, right?
  • Read the fine print for any plans you’re considering, and reach out to your HR manager if something isn’t clear to you.

Remember, this timeline is meant to provide information for setting your retirement goals - but ultimately you should meet with a financial advisor to determine what’s best for your financial future.

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