A Basic Guide to Retirement Planning
Getting ready for retirement needs to start early in your career instead of waiting as most people, unfortunately, do to the detriment. When I started with the government over 20 years ago, my first supervisor gave me some of the best advice; I have ever received in the workplace my second week on the job. And that was to sign up and attend a retirement seminar that my agency was sponsoring, and it indeed did more for me and my retirement planning than anything else. Had I waited to attend the seminar when they suggest everything that they discussed would have been years too late to act upon as most recommend these seminars five years from your retirement. Way to late to be effective and do much long-term help in your retirement planning. If your employer does not make these seminars available to you, seek help from a Registered Financial Consultant (RFC).
Save Early and Regularly
One of the biggest keys to retirement is to save as much as you can as early as you can. As I have written about numerous times, it is vital that you save early in your working career as those funds saved early will compound over a possible four decades. And four decades can mean some serious gains in your account. I recommend saving at least 10% to 15% of your pay for retirement purposes. If you do not have an adequately funded emergency fund save 10% towards retirement and 5% towards your emergency fund until it is fully funded and then switch that money to your retirement savings. And if you cannot afford to save 10% save what you can and increase the amount each time you receive a pay raise and you will save more and not miss the raise as you never really saw it reflected in your paycheck.
Maximize Your 401(k)
First, if your employer has a company match always take full advantage of that no matter what. Take the federal government as an example where it matched 1-3% at 100% and percent’s 4-5 at 50%. That means if you save 5% of your check, they will match it with an additional 4% for an instant return on your investment. The goal is to save 10% of your pay before the company match meaning you would save 14% when you combine your 10% and the company’s 4% and that will put you well on your way to a successful retirement. In 2019 you can save up to $19,000 for those under the age of 50 and for those over 50 you are allowed an additional $6,000 in catch up contributions.
Retirement Planning Tax Breaks
If you contribute to your 401(k) through a Traditional variety, you can reduce your taxable income by the amount you contribute that year. So, if you contribute $7,500 and make $75,000 before any other adjustments, your taxable income would be $67,500 just because you made contributions to your retirement account at work. So, if you contribute anywhere near the maximums, you can seriously reduce your taxable income. Then when you make withdrawals in retirement, you will pay ordinary income tax rates on your withdrawals. If you elect to invest in a ROTH 401(k), you will pay the taxes now and enjoy tax-free withdrawals when you retire. ROTH accounts are great to have but seem to make more sense to utilize when you are in lower tax brackets as compared to higher wage earners.
Start an IRA
An IRA is an Individual Retirement Account and is a retirement account outside your workplace and an account which you have more control over. IRA’s offer similar tax advantages are very similar to those of a 401(k). But unlike 401(k)’s there are serious income limitations on who and how you can contribute to an IRA. For more information, seek out a fee-only Registered Financial Consultant on if you qualify for an IRA in addition to your 401(k) at work. For 2019 you can contribute up to $6,000, and like the 401(k) there is a $1,000 catch-up for those over age 50. And when you change employers and switch jobs, you can rollover your 401(k) into an outside IRA to maintain simpler finances. Again, you may want to seek the assistance of a Registered Financial Consultant to ensure you do this correctly and without triggering any penalties and taxes.
Asset Allocation
Asset allocation is vital to the success of any portfolio. When you are younger and just starting your career, most would advise you to invest heavily in equities and not in bonds or fixed-income investments. Equities will grow your portfolio and compound at unbelievable rates and allow you to retire in comfort. As you get closer to retirement, it is natural to want to become more conservative in your investments, and you should switch from a majority equity to some balance that you are comfortable with that includes more fixed income instruments. But at no time should you abandon equities all together as you will need their growth strength even in retirement as that for many lasts almost as long as their working career. Simply put, you will continue to need capital appreciation in your retirement years.
Pension Plans
In today’s workplace, there are not many companies left that are offering traditional pensions to their employees. These are mainly seen in state and federal government jobs and some of the larger, more established companies that have unions. But for the rest of us, this is a retirement tool that will most likely be unavailable to us in our working years. And if you do work for a company that offers a pension there are normally a certain number of years you must work for the company before you become vested in the plan and therefore would receive a pension in retirement. While not as common as they once were, it is important that you are aware that they exist and how you can obtain one or a partial one from your employer.
Social Security
Social Security is an extremely complicated retirement benefit that is highly misunderstood. Yes, anyone who has the work history can claim for their Social Security benefits as early as age 62, but that will reduce your monthly benefit by a significant amount, and that reduction is for the rest of your life. For Baby Boomers, most of you are eligible for full retirement benefits at age 66, meaning if you work an extra four years, you will receive a full monthly benefit for the rest of your life. For Generation X and Millennials, our full retirement age is 67. If you are still working or can live off savings and delay your Social Security until age 70 you will receive an additional 8% per year up to age 70. Meaning if you are a Generation X or Millennial you would get an extra 24% for life by waiting to age 70 to claim your benefits.
Medicare
Medicare is the government’s medical insurance plan for retirees, and you must sign up for the benefit at age 65 or face penalties if you sign up after age 65. Coverage begins the month you turn 65, and you can sign up for the benefit in the seven-month window around your 65th birthday. If you are still working when you turn age 65, you have an eight-month window after you retire to sign up to avoid the penalties. The key here is to make sure you sign up for Medicare when you are 65 or when you retire to have the insurance you paid for your entire working career and relieve many of the health-related costs that you will incur in your retirement years.
If you need any assistance with any of these topics, to feel free to contact a Registered Financial Consultant or me at kirk@kgmeyerpc.com. And as always if you have any personal finance questions, I am always available to answer your questions or provide assistance on a fee-only basis.
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