The purpose of planning for retirement, for most of us, is to insure that we have the resources (health care, cash flow, housing, social connections, etc) to pursue those things that will provide us a sense of security and fulfillment, throughout life.
In today’s public/private sector work environment, the risks of retirement have been shifted onto the individual. Whether they are a public servant, self-employed, or work for a private employer, a significant portion of retirement is based on personal choices of whether to participate, and at what level.
Because of this, the employer, how much is earned, the degree to which one can take advantage of choices offered, and a personal sense of discipline, will drastically shape the retirement picture.
When it comes to planning for retirement there are endless options one can explore. Let’s begin with some basic assumptions:
· It is never to early to think about the long game of financial retirement planning.
· It is never too late to evaluate choices, and the options still available.
Early in life:
Start saving today. Once you have set aside fall back funds (3+ months of “needs”), begin saving for your goals. Is it a house, a car, an opportunity to pursue a dream? Building up funds for your goals will keep you from making the cardinal mistake of raiding retirement funds to pay for a “want”.
Make the most of your retirement choices. While the choices available to you will dictate what this means, there are some basic guidelines.
1. Don’t leave money on the table. If your employer will match funds, then contribute enough to ensure the matching.
2. Get the maximum from your benefits. Group insurance rates (disability, life, health), Stock grants and participation plans, health care options (i.e. If a high deductible health plan is the right fit for you then a Health Savings Account has the potential to provide creative flexibility for making health care choices down the road), etc.
3. When you leave your employer, do not cash out your accounts. The accounts are held through a separate custodian, and you continue to have access to viewing your accounts. You can transfer the account to a new custodian later. In the meantime treat a retirement account as a black box that you do not have access to until retirement.
4. If you meet the income caps, consider a Roth IRA1,2.
a. After 5 years of ownership, and age 59 ½, the withdrawals are tax free (They will not contribute to the tax determination of your social security).
b. You never have to pull the money out if you don’t need it (tremendous planning benefit).
c. Potential tax free income that can be passed on to an heir.
d. You can contribute as along as you have earned income.
5. If you have too much income, a non-deductible IRA contribution and a Roth conversion may make sense for you.
6. The math works in your favor.
a. If you pay 21 cents in tax for every extra dollar you earn and keep , then each dollar you put in your qualified work account (401k/403b/457/SEP/SIMPLE/TSP/etc) only cost you 79 cents (what you would have received if it was taxable income instead). An instant 21% return by delaying the tax!!!
b. If it is a Roth, you invest the 79 cents and then avoid any taxation at retirement (you must maintain the account for 5 years and be 59 ½ ), and for a bonus - you do not have to report the income against your social security income. Perhaps avoiding federal tax all together after retirement.
c. Compounding your earnings makes your dollars earn more dollars. Then those dollars go on earning even more dollars. It adds up!!
Later in life:
Regardless of where you are at against your target, keep saving.
1. After age 50, you can make catch up contributions to retirement accounts that can really boost your savings. Amounts vary by account type.
2. If you have not acquired a pension or other annuity type income, and have not saved enough, then consider if converting a qualified account to a Roth Conversion IRA makes sense. You will need to be able to pay the tax on the amount you convert. Then if you are retiring with only a Roth and your Social Security (no other income) there is a good chance you will graduate from paying federal income tax.
3. You need to apply for Medicare 3 months + your 65th birthday. If you do not have an account with Social Security, log in and set it up - https://www.ssa.gov/ .
Whether you save in an IRA, 401/3/57, TSP, state retirement fund, Roth, CD’s, assets, or your savings account (to name but a few), will depend on what is available to you and your personal preferences. The important things is to start saving.
Remember, no one is looking out for you but yourself. You have to take ownership of your choices, regardless of your stage of life. When you decide you are ready, come in from the financial cold and let’s discuss how you can adjust your savings/retirement to better position yourself for your hard earned retirement.