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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.

 

This is not meant to be investment advice. We recommend talking with an investment advisor for more specific information and recommendations.

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 Tax Year
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 2019

Filing Status Modified Adjusted Gross Income (MAGI) Maximum Contribution
Married Filing Jointly Less than $193,000 $6,000
$7,000 if age 50 or older
  $193,000 – $203,000 Partial contribution
  $203,000 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 $122,000 $6,000
$7,000 if age 50 or older
  $122,000 – $137,000 Partial contribution
  $137,000 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.
This should not be viewed as tax advice or investing advice. We recommend talking with a tax advisor or investment advisor for more information.

Investment Options

Once you have a retirement account established, you need to decide how you want to invest your money. There are a variety of options that each come with their own risk and reward. How you choose to invest will depend heavily on the time frame you have and your risk tolerance.

Long Run

When you’re starting out investing for retirement, keep in mind that you are doing this for the long-run. This means that while there might be fluctuations in prices of stocks or mutual funds day-to-day, you’re thinking about longer time periods – like years and years.

Risk vs. Reward

When investing, there is always some element of risk involved. However, in general, the riskier the investment, the higher the potential reward and the lower the risk, the lower the potential reward.

Risk tolerance is different for every individual. Some people can handle more risk when it comes to their investments. Your risk tolerance will depend on your personality, but should also depend on your time frame. In general, the closer you are to retirement, the less risky you should be with your investments.

Diversification

“Don’t put all your eggs in one basket” is a very simplified definition of diversification. When investing your money, you want to make sure it’s spread out to spread out the risk. For example, if you invested all of your money in ABC Company and the next day, they go bankrupt, you’ve lost all your money.

Diversifying helps ensure that one bad day or year in a particular industry or for a particular company doesn’t cause you to lose all your money.

Income Investments

Income investments are designed to give you income. They tend to be lower risk than growth investments, but have their place in any retirement plan.

Bonds

Bonds include saving, government, corporate, and municipal bonds. With a bond, you are essentially lending your money to the government, a corporation, a city/state, and in return, they are going to pay you back, plus interest.

In general, bonds tend to be a lower risk investment, but it depends on the type of bond and where it’s invested. For example, if you’re buying a bond from a company, that might be more risky than buying one from the Federal Government.

Savings Accounts

A savings account is a very safe place to put money but generally pays very little interest. However, it does provide quick and easy access to cash, if needed.

When picking a savings account, make sure the financial is federally insured in case of loss. For credit unions, they should be insured by the National Credit Union Administration (NCUA). For banks, it’s the Federal Deposit Insurance Corporation (FDIC).

Share Certificates

Share Certificates are similar to savings accounts in that they are very safe, but because of their structure, they typically pay a higher interest rate than a savings account. With a certificate, you are agreeing not to withdraw your money for a set period of time. Because of this, you are paid a higher rate of interest.

As with savings accounts, make sure the financial institution is federally insured in case of loss. Credit unions should be insured by the NCUA and banks should be insured by the FDIC. 

Growth Investments

When you invest in growth investments such as stocks or mutual funds, you are purchasing them in hopes that their value goes up over time. Over longer periods of time, growth investments tend to earn higher returns than income investments. However, they also tend to come with higher levels of risk.

Stocks

Stocks are one of the most common types of growth investments. When you purchase a share of stock, you are purchasing a piece of ownership in a company. The more pieces of ownership you have, the more control you have of that company.

With stocks, you can make money one of two ways: dividends or appreciation.

Dividends are typically paid by more established companies and the amount you receive depends on the number of shares you own. For example, if you own 10 shares of ABC Company and they pay a $0.50 dividend, you will receive $5.

Appreciation is when the price per share rises above what you paid for it. For example, one year ago, you bought 10 shares of ABC Company for $10 each. Now, each share is going for $50. The value of your shares has increased by $40 each. However, you do not actually make any money or receive any benefit of this increase until you sell your shares.

Investing in stocks typically provides a higher return, but they have a higher risk. If the company goes broke or has a bad day, you could see your stock values decrease significantly. There’s no guarantee of return and the prices will fluctuate for a variety of reasons.

If you decide to invest in stocks, make sure you do your research into the company. Look at their historical stock data – how much has the price fluctuated over the past year? The past five years? What are investors and experts saying about the company? Make sure you know what you’re investing in and be prepared for fluctuations and price changes.

Mutual Funds

Mutual funds are a collection of stocks and other investments put into a fund. Investors are then able to purchase shares of the mutual fund rather than buying individual shares of each of those companies. They are typically ran by a fund manager who makes the decisions on what to buy and sell, and how much of each investment to purchase.

Mutual funds are a great way to invest as they are typically more affordable than buying individual shares of each company. They also tend to be less risky because they’re more diversified than just buying shares in one company. There’s a wide variety of mutual funds to invest in and many have a much lower initial cost to invest.

 

This is not meant to be investment advice. We recommend talking with an investment advisor for more specific information and recommendations.


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