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How to plan for retirement

Retirement Couple on a Bench Looking at the Ocean-2272306_960_720It’s never too early to start saving for retirement. Compound interest will help your savings grow over the years, so the earlier you start saving, the better.

When you’re job hunting, be sure to compare the types of retirement savings plans offered, if any. Most companies no longer offer traditional pensions, which guarantee a monthly income in retirement and place the investment risk on the plan provider.

Instead, they provide a match to employee savings in a 401(k), which places the investment risk on individual employees, asking them to choose their own retirement investments with no guaranteed benefits. 

A 401(k) is a tax deferred account, meaning taxes are paid when you withdraw money. If you withdraw money before age 59½, you’ll pay a penalty. You can contribute up to $19,00 a year. You’ll have a specific number of investments to choose from in your employer’s plan.

An individual retirement account or IRA also is a tax deferred account, but it isn’t tied to an employer. You’ll get to choose from a wide array of investments. You can contribute up to $6,000 a year. Early withdrawal also will result in a penalty.

The two main types of IRAs are traditional and Roth. Traditional IRA contributions are tax-deductible for the year you make the contribution and withdrawals in retirement are taxed. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free.

Be aware that when you reach age 70½ you’ll be required to take a minimum annual distribution from your 401(k) and your traditional IRA. The federal government doesn’t want retirees to hoard their money, so the required minimum distribution means it will get some tax money every year. If you don’t take it, you’ll get a hefty fine.

Almost half of Americans approaching retirement have nothing saved in a 401(k) or other individual account, according to the General Accounting Office.

Two in five of these households did have access to a traditional pension. However, 29 percent of older Americans had neither a pension nor any assets in a 401(k) or IRA account.

That’s pretty grim because, unlike my parents who lived on their Social Security during the 1970s, you can’t live on your Social Security these days.

How much money do you need for retirement? Financial advisors often recommend $1 to $1.5 million dollars or 10 to 15 times your current income.

To get an idea of your living costs in retirement, you’ll need to tract your current expenditures. The usual recommendation is you’ll need 70 to 80 percent of preretirement income. However, some financial planners are now recommending 100 percent for the first 10 years of retirement because many retirees continue to spent as much as they made before retirement for activities such as travel.

If you haven’t save as much as you’d like, don’t give up. Your savings can double in the last decade before you retire. You also can cut expenses such as downsizing to a smaller home, selling one car, and keeping travel costs low.

There are retirement calculators to help you with your planning. See the Forbes article “Five Excellent Retirement Calculators (And All Are Free)” for possibilities.


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