Retirement Planning

Saving for Retirement

According to The U.S. Department of Labor, less than half of us have figured out how much money we'll need in retirement. Considering the average person spends about 20 years in retirement, it's a good idea to do the math and figure out how much you need to save now so that you'll be taken care of when you're ready to retire.

Retirement Planning

Take advantage of retirement savings plans through your employer if they are available. If not, find a financial advisor and start contributing to your own retirement plan. CNN offers a great resource to help you figure out how much you'll need and what you need to save each month. There are a variety of options available to you for saving.

Saving early has more advantages for you over time. If you start putting money away early in your 20s and 30s, you will already have a sizeable amount saved by your 40s. The person putting away money for the first time in their 40s will never be able to catch up to the amount that someone who started saving earlier has been able to grow.

Everyone has different retirement needs, but we all have basic expenses to plan for after we stop working. You need to plan for home maintenance, medical care, basic living expenses, reliable transportation, and any other items you plan to do in retirement like traveling or buying an RV or boat to enjoy. Setting money aside now will help you be less stressed in your retirement years and live the life you want.

There are far better options for saving money for retirement than stuffing money into your mattress or using a traditional savings account at the bank. Many employers offer retirement savings options but others don't. If you're self-employed, it's important for you to be saving for retirement as well. Social Security automatically saves a portion of your income, but it's not wise to count on just that amount to help you in your retirement years.

If you have several retirement accounts from previous employers, you may want to consider combining them together into one account. It's easier to manage, and your money will grow faster in one account rather than in several places. Make sure to do your homework before transferring your assets. Learn about the benefits and drawbacks of transferring your money. There may be tax consequences that make it worth it to have separate accounts.

You should have a combination of investments and savings accounts based on your income level and the amount you're looking to save for retirement. The options we'll talk about in this article are IRAs, 401(k)s, and Roth IRAs. Let's get started learning about these great retirement options for you!

IRAs

IRA stands for Individual Retirement Account. It allows you to save money for retirement in a way that takes the most advantages of taxes. According to the experts at Fidelity, you should plan on needing up to 85% of your income in your retirement years. IRA accounts are great for additional savings in addition to your employers retirement savings options. The contributions can be tax-free and earn income that is also tax-free.

You should be contributing as much as 15% of your yearly income into retirement accounts. Once you reach the age of 70 and a half, you will have to start withdrawing the money from your IRA account. Once you start putting money into an IRA, you can choose how the money gets invested. You'll have a choice of bonds, stocks, CDs, Exchange Traded Funds and mutual funds. You can allocate your money all to one kind of investment or break it up by percentages. Talk to your personal financial advisor to find out what options are the best for your situation.

An example provided by Kiplinger shows how an IRA can work to build a substantial amount of money for retirement. "For example, if a 25-year-old opens an IRA and puts in $5,500 a year with an annual return of 6%, he will have a nest egg of $902,262 at age 65. If instead his savings were taxed at an annual rate of 25% over those 40 years, he'd end up with $615,157 at age 65." The tax breaks make a huge difference in earning more money for retirement.

IRAs are great for consolidating multiple retirement accounts with more than one employer. Talk to the financial managers at your current employer and see if putting all of your accounts into one IRA could work best for you. Make sure to check with your existing investments to make sure there aren't an tax charges that you don't want to be surprised about later.

Let's compare some of the pros and cons when it comes to IRAs:

Limitations of an IRA:

  • Penalty for taking money out early
  • Limits on the annual contribution amounts
  • You're required to start withdrawing money at age 70 1/2

Benefits of IRAs

  • You defer the taxes on earnings until you withdraw the money in retirement
  • You can contribute to your employer's retirement plan and an IRA
  • More freedom in choosing how to invest the money
  • Easy and cheap to start

IRAs are great if you don't have a retirement option with your employer or if you are self-employed. You can have one even if you are putting money into other retirement accounts. Just remember that IRAs have lots of rules that you don't want to break or it could cause you penalties.

401(k)

CNN tells us that a 401(k) is a retirement plan that is set up by your employer. You decide how much money to deduct from your paycheck based on limitations for contribution amounts. Employers can choose whether or not to match a certain percentage of employee contributions. If your employer matches any amount, make sure that you're contributing the max amount to get the most matching funds from your employer. This is free money for retirement that doesn't come directly out of your pocket.

Your employer doesn't have anything to do with how the money gets invested. Employers hire investors to take care of the options for 401(k) investments. You can often meet with specialist from the investment company to find out the best options for you and how you want to save. It is highly recommended to take advantage of these investment meetings. Most of the time they are free, and you can get greater insight into making the most out of your retirement savings. The investment company is where your employer will send your deductions from your payroll each month.

Make sure to review the performance of your investment options a couple of times per year. You want to see consistent performance across your portfolio. If you're looking for new funds to invest in, look at the ones that perform the best for five years or more. Yahoo! Finance and Google Finance are great resources to look up your funds and get detailed information.

Look for additional funds that get added to your plan. New funds can be added because they are replacing funds that aren't performing well and they are expected to do better. Make any adjustments to your portfolio so that it matches your most comfortable level of risk.

Now let's look at the ups and downs of 401(k)s to give you a better idea of how they might work for you:

Positive elements of a 401(k)

  • The limits on contributions are high
  • You can deduct the amount put in your 401(k) account for the year on your income taxes
  • There are no income taxes or capital gains until you start withdrawing money after retirement
  • Employers can match some of your money
  • You can borrow from your account in case of an emergency

Negative aspects of a 401(k)

  • Not all plans are flexible. Most employers offer only certain investment options
  • When the money is withdrawn, it is taxed as income
  • There are extra penalties for early withdrawl
  • You must start withdrawing money at age 70 1/2. If you're still working at that time, there might be a higher tax rate as well
  • Usually there is a waiting period when you start a new job. Waiting periods can be anywhere from a few months to a year.

The bottom line with a 401(k) is if you have the opportunity to invest your money in one, you should seriously consider it. If your employer matches funds, you're a fool not to take advantage of the free retirement money.

Roth IRA

A Roth IRA is similar to a traditional IRA but offers more flexibility and more tax options. The goal is to invest money to generate a large profit, and then keep investing the profits back into the account to save a sizeable amount for retirement. You can withdraw your contributions to your Roth IRA any time but investment earnings are penalized if you take them out before you're 59 1/2. If you chose to convert a traditional IRA into a Roth IRA, you aren't able to take anything out without a penalty for five years after the money is transferred.

Once you reach retirement age, you can continue to work and contribute to a Roth IRA. As long as you're making income of any amount, you can still put money aside for when you're done working.

This example from LearnVest can help you understand the way a Roth IRA works when compared to a traditional IRA. "Let's say that you contribute $150 per month for 20 years, which comes out to $36,000. If you earn 7% returns, those contributions could morph into $78,000 - over half of which would be your investment earnings. With a Roth IRA, you only pay taxes on that $36,000 - and then you're done. With a traditional IRA, you'd be taxed on the entire $78,000 sum when you withdraw." There are fewer taxes with a Roth IRA when you take your money out.

But there are positives and negatives with Roth IRAs too. Let's compare the basics:

Benefits of Roth IRA

  • No taxes on withdrawals made during retirement
  • You can leave money in your Roth IRA for as long as you want. You don't have to start withdrawing money at 70 1/2
  • You can leave tax free money to be inherited

Drawbacks of a Roth IRA

  • No tax breaks up front when you deposit the money
  • Contribution limits based on income

Unless you make too much income to contribute to a Roth IRA, it's a good idea to increase your retirement savings with fewer tax burdens than other retirement savings options.

Conclusion

Don't wait too late to start saving for retirement. It's wise to save for retirement while you're young so you have more options. You don't want to be 80 and still working because you didn't put enough money away. Think about the life you want to have when you're retired. You'll need more money if you plan to travel and live an expensive lifestyle than if you're looking to downsize your home and relax in retirement.

You're never too young to start saving for retirement, so if you're just starting your career consider putting a part of your income away now so you don't have to put away extra amounts at the end of your career. You can be too old to save for retirement. Once you reach a certain point in your career, it can be very hard to save enough money each year. And once you are age 70 1/2, you have limitations on which accounts you can put money into.

Use the previously discussed investment opportunities to help you live the life you want once you're retired. It's important to educate yourself on all the options that are available to you for saving for retirement. Another great resource to help learn as much as you can is MSN Money. Happy saving and we hope you have a wonderful retirement whenever that is!