Making those golden years truly golden and relatively worry free, takes some planning that starts ideally with the first job, says the Skimm’s article “9 Retirement Questions from Skimm’rs, Answered.” Let’s see how the road to retirement runs:
Pay off a student loan or contribute to a 401(k)? Start paying off those student loans the moment the grace period ends. If income is tight, make saving a few months’ worth of income a priority, so you can stay on track with loan payments, if you lose your job or change jobs. Once your income is steady and there’s a little breathing room in your budget, then start contributing to the 401(k) plan at work. If your employer matches your contributions, take advantage of that: it’s free money!
I’m 35 and I’ve only got $15,000 saved—what now? At the mid-thirty mark, you’ve still got time to save for retirement. If you have a 401(k), you can put away as much as $19,000 a year for retirement. Save what you can and try to bump it up every year.
How much should I have saved by age 40? One theory is that you should have half of your salary saved in retirement accounts by age 30, twice your salary by age 40, four times your salary by age 50 and six times your salary by age 60. Most Americans don’t hit those numbers, but they are a good goal. One thing to try, is to trim expenses. If you are able to live on less when you are earning income, you may be better prepared for retirement. Many people increase their spending, when their earnings increase. That’s a mistake. Save more now, and you’ll have more retirement savings later.
Want to hit a precise target? If you can get into the habit of saving 10-20% of every dollar you earn once you start working, you’ll be all set when retirement comes. This is one of those good habits that will serve you well throughout life. It will be easier to increase savings, as your paycheck increases.
Is there a good annual retirement salary target? Here’s what most people don’t realize—not everyone spends less in retirement. There’s more free time, and that often means more spending. Health care costs also go up in retirement. You should plan to need anywhere from 70-90% of your current income in retirement.
What about retirement accounts, like IRAs and Roths? A SIMPLE IRA is an employer-sponsored retirement account. Employers are required to contribute on the employee’s behalf, whether or not the employee contributes. These are often used in small businesses or self-employed businesses. A Roth IRA is a retirement account opened by an individual. You must have “earned income” to start one, and the maximum annual contribution is $6,000 in 2019. It is $7,000, if you are over age 50.
Roth or traditional IRA? The answer to this question depends on your income situation. If you’ve just started out in the workforce and have decades of savings in front of you (and if you’re under the IRS income threshold), the Roth may be best. However, if you are in a high income tax bracket and want to defer paying taxes on retirement savings to when you take withdrawals from these accounts, then a traditional IRA is your best choice.
For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Resource: the Skimm (Sep. 16, 2019 “9 Retirement Questions from Skimm’rs, Answered”
Suggested Key Terms: Retirement, IRA, Roth IRA, 401(k), Income Tax