Retirement

Starting Out
When you’re beginning to save for retirement, all the information and options can be confusing. Use this information to get started saving and take full advantage of your best retirement saving asset – time.Saving for Retirement for Beginners
Have you ever said one of these to yourself (or your parents, maybe your grandparents) regarding saving for retirement?
- “I’ll start saving when I make more money.”
- “I don’t even know where to begin.”
- “I have money in my savings account, that’s fine for now.”
- “I can barely pay my bills, how can I set anything aside for retirement?”
When retirement is 30-40 years away, the thought of setting aside money now might seem pointless. It’s one of those things you know you should be doing, but it’s easy to ignore and push off until later.
Time
There’s one big thing you’re ignoring: time. When you have 30-40 years to save, you have 30-40 years for your money to grow and compound. The more time = the more compounding.
To put it simply, compound interest is amazing. Your interest earns interest. This gives you additional earning power and the more time you have, the greater your compound earning potential.
Example:
Greg starts saving for retirement at age 18. He puts $2,000 in an account earning 7% APR. He stops saving when he turns 28. Over the course of ten years, he saved $20,000. But with compound interest, when he retires at age 65, he has $386,718.
Marcia starts saving for retirement at age 31. She puts $2,000 in an account also earning 7% APR. She stops saving when she turns 65 and retires. Over the course of 35 years, she saved $70,000. With compound interest, she has $295,827.
In the example, Greg saves less that Marcia and saves for less time, but ends up with more money (over $90,000 more). That’s compound interest at work. The more time you have, the more compound interest can boost your savings.
Recommendations for Retirement Saving Beginners
Just Start Saving
Maybe you can only afford $20 a month right now. That’s fine. Save $20 a month and work hard to cut other expenses to increase how much you are setting aside for retirement. Another option is to determine a specific dollar amount you want to set aside for retirement and build the rest of your budget around it. For example, you decide to save $200 for retirement each month and that is the first item that is subtracted from your budget. Whatever you decide, just start saving.
Take Advantage of your Workplace Retirement Savings Program
If your workplace offers any kind of retirement saving match, take full advantage of that. For example, if your company offers to match dollar for dollar up to 5%, contribute at least 5% and get the full match. This is an easy way to get more money for your retirement.
Don’t be Afraid of Some Risk
When it comes to investing, you’re going to have to be okay with some risk. While putting money into a savings account is safe, if you’re only getting 0.18% in interest, you’re not maximizing your investment potential. This doesn’t mean you have to go all in and invest like crazy on super risky investments. It means looking at all your options and determining what sort of investments offer a higher possible reward without making you uncomfortable.
Talk with an Expert
Sitting down with an investment advisor may seem like only something people with a lot of money do, but it’s a smart idea no matter how much you have. The goal of your initial meeting should be to come up with a plan for saving for retirement. Be prepared by writing down the questions you have and the topics you want to discuss. If you’re an A+ member, take advantage of a free consultation with one of our A+ Wealth Management advisors.
Save More
Once you’ve started saving, make it a goal to increase the amount you are saving regularly. By evaluating your budget regularly, you can hopefully find ways to increase your retirement saving. The more you can save, the better off you’ll be when it comes time to retire.
Tools to Save for Retirement
When you’re beginning to save for retirement, it can be confusing to remember all the acronyms and names for the different ways to save.
401(k)
Offered through your employer, a 401(k) is a special account to set aside money for retirement. Your employer should provide information to you when you begin working or become eligible to contribute to the 401(k). According to the IRS, typically an employee must be allowed to participate in a qualified retirement plan if they’re 21 and have at least one year of service.
Types of 401(k)s
There are two main types of 401(k)s – a Traditional 401(k) and a Roth 401(k). The primary difference between them is how and when the money you save is taxed.
Money put into a Traditional 401(k) is contributed on a pre-tax basis. This means the contributions can be deducted from your current-year taxes and that you do not pay any taxes on that money in the year you earn it. However, when you take the money out in retirement, the withdrawals are taxed as income.
Money put into a Roth 401(k) is taxed as income in the year you earn it. Then, when you take money out in retirement, the withdrawals are not taxed as income.
Qualifying
To qualify to contribute to a 401(k), you must work for a company that offers a 401(k) plan to employees. Check with your employer on if you qualify if you’re under the age of 21 or haven’t been working there for a year.
Contributions
You will be asked to designate an amount of money you want to be withheld from your income and set aside into your 401(k). This is typically a percentage of your income. Be sure to ask if your employer matches any portion of your contributions. If they do, it’s recommended to contribute enough to get the full match.
For example, if your company matches dollar for dollar up to 6%, you should contribute 6% to ensure you are getting the full match from your employer.
There are annual contribution maximums you will need to be aware of – and the number will depend on your age.
2019 Tax Year | 2020 & 2021 | |
---|---|---|
Standard Contribution | $19,000 | $19,500 |
Catch-Up Provision (for age 50 and older) |
$6,000 | $6,500 |
The IRS determines contribution limits and the most up to date information can be found here.
Investment Options
The money in the 401(k) is typically put in investments selected or offered by the employer and the 401(k) company. From those pre-selected options, you decide how you want to invest. Some employers offer target date investments, others break their investments up by risk, and some do a combination of both.
Review the investment choices and pick the one(s) you feel most comfortable with.
Key Recommendations
- If your employer offers any type of contribution match, contribute enough to your 401(k) to get the full match.
- Choose investments that reflect how long you have until retirement and your comfort level with risk. The longer you have until retirement, the more risk you should be able to tolerate with regards to your investments.
- Avoid taking money from your 401(k) prior to retirement to avoid penalties, fees, and taxes.
- If you change jobs, make sure you roll over your 401(k) funds from your previous job into an IRA or other retirement account.
403(b)
A 403(b) is almost identical in structure, contribution limits, rules, and restrictions as a 401(k). The main difference is that a 403(b) can only be offered by certain employers – typically non-profits and school districts.
IRAs
Individual Retirement Accounts (IRAs) are another way to save for retirement, but are not offered by employers. You have more freedom in where you open it and how you invest your money. The type of IRA you are eligible to use will depend on your financial situation.
Types of IRAs
The four main types of IRAs are:
Traditional IRA
Traditional IRA | |
---|---|
Overview | Tax-deferred retirement account Contributions go in pre-tax and earnings grow tax-deferred Pay taxes when money is withdrawn in retirement You may be able to deduct contributions from your taxes (if you qualify) |
Qualifying | You (or spouse) earn taxable income and are under age of 70 ½ |
Contribution Limits | $6,000 $7,000 (age 50 or older) |
Taxes | Contributions may be tax deductible depending on income levels and whether you have a workplace retirement account |
Withdrawals | Can take money out whenever, but will pay income taxes and 10% penalty if under age 59 ½ Must start taking money out at age 70 ½ |
Roth IRA
Roth IRA | |
---|---|
Overview | Money goes in after tax Earnings grow tax-free Do not pay taxes when money is withdrawn in retirement |
Qualifying | Earn taxable income – see table below for income requirements |
Contribution Limits | $6,000 $7,000 (age 50 or older) |
Taxes | Withdraw your contributions at any time without penalty Before age 59 ½, can withdraw earnings without penalty for qualifying reason as defined by the IRS |
Withdrawals | No required withdrawals at any age |
Income Requirements for Roth IRA Contributions for 2021
Filing Status | Modified Adjusted Gross Income (MAGI) | Maximum Contribution |
---|---|---|
Married Filing Jointly | Less than $198,000 | $6,000 $7,000 if age 50 or older |
$198,000 – $208,000 | Partial contribution | |
$208,000 or more | Not eligible | |
Married Filing Separately and Lived With Your Spouse During The Year | Less than $10,000 | Partial contribution |
$10,000 or more | Not eligible | |
Single, Head of Household, or Married Filing Separately and Did Not Live With Your Spouse During the Year |
Less than $125,000 | $6,000 $7,000 if age 50 or older |
$125,000 – $140,000 | Partial contribution | |
$140,000 or more | Not eligible |
Simplified Employee Pension (SEP) IRA
- Designed for self-employed individuals or small business owners
- Structure is similar to a Traditional IRA
- Contributions are tax deductible for business owner
- Employees cannot make contributions
- Pay taxes when money is withdrawn in retirement
Savings Incentive Match Plan for Employees (SIMPLE) IRA
- Designed for self-employed individuals or small business owners
- Structure is similar to a Traditional IRA
- Contributions are tax deductible
- Pay taxes when money is withdrawn in retirement
- Employees can make contributions
- Employers required to make contributions – regardless if employee chooses to make contribution
Qualifying, Limits, Taxes and Withdrawal rules will depend on the type of IRA you have. We recommend reviewing the IRS website for SEP IRAs and SIMPLE IRAs.
Investment Options
One of the main advantages of IRAs is the ability to control how the money is invested. You can keep it simple by putting it into a fixed or variable rate investment (like a certificate or savings), or you can choose to invest the funds in mutual funds, stocks, or bonds. The types of investments available will depend on where you open the IRA.
Key Recommendations
- If your employer offers a 401(k) and a contribution match, contribute enough to your 401(k) to get the full match.
- Your individual circumstances will determine if you need a Traditional or Roth IRA, or both. There are advantages to both. We recommend discussing with an investment advisor to determine the best choice for you.
- If you choose to invest in both a Traditional and Roth IRA, make sure you do not go over the max contribution limits as defined by the IRS.
- Choose investments that reflect how long you have until retirement and your comfort level with risk. The longer you have until retirement, the more risk you should be able to tolerate with regards to your investments.
- Avoid taking money from your IRAs prior to retirement to avoid penalties, fees, and taxes.