That graph shows what most Americans over 65 are doing. Ummm…No. That light blue and orange field needs to grow substantially. We cannot rely on Social Security.
At the tail end of 2010, I became obsessed with when I was going to retire and how I was going to retire. I started really thinking hard about money, how I want to live in the next 10 to 15 years, and the people who aren’t near retirement at my job but have been working the last 30 – 35 years. Retirement is about Time Value of Money, value of money given an amount of interest earned over a given amount of time. Thank you, college degree. I am also looking into Balanced Funds and Broad Based EFTs. I haven’t gotten all the information yet, but you can certainly look into those, as well.
I started tying up some of my money up in various retirement accounts and investments the beginning of the year. For some, I did so by automatically transferring money every two weeks (when I get paid) into my retirement accounts, while others were one-time payments. Figure out what type of spender and saver you are, this typically goes hand-in-hand with the amount of risk you are willing to take. I treat my retirement better than anything else; it’s the only thing I automatically transfer. Each time I save for retirement, the fewer my days are of sitting at this desk or working in any field I pursue.
Questions you should ask:
When would I like to retire?
How will I retire?
What type of lifestyle would I like to have?
How much money do I expect to go up in pay over the years?
What type of passive income would I like to have at retirement?
What type of investor am I? Take this questionnaire.
401K, an employee retirement plan
If you are working at an ethical and pretty stable place, they more than likely offer a retirement plan and will match. THIS IS A GREAT THING. There are so many companies that don’t match because of the economy like mine. If yours does, DO IT AND DO IT BIG. It’s FREE money! Most companies offer 401ks and enroll you automatically. Put in a minimum of what they will match and watch growth. For example, if your company will match you up to 3% on your 401K, Defined Contribution Plan, you need to have at least 3% of your check going into your retirement account. If you can stretch your contribution to 10%, you will be surprised at how much money you accumulate in no time. I did it and it’s awesome. Before I see my money, it’s taken out and it’s tax-free until I withdraw. *woot woot*
Defined Benefit Plan (DBF)
An employer pays the same amount guaranteed for your entire life, depending on how much you made and how long you worked. Some DBFs have 30 years of retirement benefit. No questions asked. Government employees typically receive this type of retirement in exchange for stagnant low wages (some positions *raised eyebrow*). I have not seen much of it in the private sector. I assume there are few companies, if any that still offer Defined Benefit Plans. I can’t name one.
Defined Contribution Plans (DCP)
An employer gives a defined contribution ONLY when the employee is employed. They don’t guarantee a pension payment amount and term at retirement; they are only investing while you work with them.
When the money is gone and your 80, that’s it. THIS IS WHY IT IS SO IMPORTANT TO PLAN CORRECTLY. The result of your retirement account is reliant on contributions and investment earnings. 401K, 457, 403(b) are examples of a DCP.
If you DO NOT have a 401K offering at your job, look into an IRA. Most banks offer IRAs. You will need a contribution to and earned income to begin. Have your Social Security number and the Social Security number of your beneficiaries, in the event anything happens, ready. There are caps on how much you can contribute annually. Last time, I looked it was $5,000 annually.
IRA, an Individual Retirement Account
Two types: Traditional and Roth
There is a $5,000 annual contribution limit, if you’re less than 50 years old on either. Understand the difference between contributions and earnings for tax purposes.
There is no income restriction, but either you or your spouse must have earned income. You only need to have “x” amount of income to contribute. Tax is deferred on the earnings until you take money out, contributions and earnings alike. It’s taxed as Ordinary Income, not capital gains. You have to start taking money out at 70 ½ years of age. If you don’t, the IRS will take a big chunk. If you have a 401k and earn a particular amount of income chances are you don’t qualify for tax deductions. If this is not the case, you might be able to deduct your contributions.
There is an income limit for Roth IRAs and 5 year waiting period. You pay tax up front on your contributions, so withdrawal against your contribution is tax and penalty free. Contributions are not tax deductible, but qualified withdrawals are tax-free. There is no heavy tax on earnings, if you wait. The tax penalty is 10% for unqualified withdrawals. Invest in a ROTH IRA while you’re young, if you do not need the money immediately. You will be penalized for early withdrawal on earnings, before 59 ½ years of age. There are few exceptions. Find them here.
You only need $2,500 or $200 per month to open a ROTH IRA with Fidelty versus competitors at $3,000 or more. Check them out for an IRA
If you move money from a Traditional IRA to a Roth, you will pay taxes. Remember you are switching programs from post-tax to pre-tax. The government is going to get their money. Rollovers have to have a 5 year grace period, as well. When you roll it over, you will need to wait 5 years after the conversion before you can take a qualified withdrawal.
If you Rollover employer retirement funds from an old job into an IRA. You need to transfer the money directly into the IRA account, direct deposit. If you do not, you will be taxed for an unqualified withdrawal.
I love CNN Money Calculators. They have several you would probably be interested in that go beyond retirement. Check this one out related to this post. Retirement Calculator
Keep in mind that you will eventually make more money than you are earning now, so the amount you will need to invest annually to maintain your same lifestyle at retirement will cost you more over the years. More Savings!
Here is an article on how and where to save everyday:
25 Ways You Can Begin Saving