Why You Need to Start Contributing to Your Retirement Now!

 


        Most of us dream of being able to retire. No more alarm clocks or dreaded commutes. No more spending the majority of your day working at a job or with people that you may not even necessarily like (lol). But in order to ever realize this dream, you need to ensure that you will be financially secure in your ‘golden age’ and the only way to do this is by planning for your retirement; and the sooner you get started, the better.

        Now, generally speaking, when we’re younger most of us fail to take planning for the future—especially for retirement— seriously. I’ll admit it, I was there thinking that I had lots of time before I needed to worry about or even concern myself with the thought of retirement. If you’re an avid reader of the blog, you already know how this mindset cost me thousands of dollars in matching from my organization, you can read more about it here. But trust me, unless you plan on working for the rest of your life, are poised to collect an inheritance, or are planning to win the lottery in old age (lol), you really need to start contributing/planning for your retirement now!

        According to the Centers for Disease Control and Prevention (CDC), the average life expectancy in the U.S. is currently 78.6 years old, with women living 4.9 years longer than men. The CDC’s report further states, “by 2030, older people will outnumber minors for the first time in U.S. history; and it is estimated that half of adults who live to age 65, live well beyond 85 years.” Simply put, we are living longer and that means we will have to be able to cover our living expenses for a lot longer than previous generations. However, despite this, a report by the U.S. Federal Reserve on the Economic Well-Being of U.S. Households in 2018 found that approximately 25% of American adults have no retirement savings, and the number was even higher for minorities. If you don’t want to be a part of a similar statistic in the future, then there is no better time than now to start planning now.

        If you are wondering how to get started or even what types of plans are even available, No worries! I will outline the most common ways to save for retirement below. But, keep in mind that retirement planning is unique to each person’s financial situation and future goals. So as always please do your research to make sure your plan ultimately serves your needs. (Note: There are several types of retirement accounts that differ depending on if a person is self-employed, a small business owner, or a high-earner to learn more about these types of accounts. If any of these situations apply to you, check out this article.

 

‘Employer-Sponsored Only’ Plans:

        Pretty self-explanatory but these are retirement plans that only employers are allowed to offer; these include your 401(k), 403(b), and 457(b) plans. According to Forbes, it's estimated that over 50 million Americans participate in 401(k) plans which hold a grand total of $4.5 trillion in assets. Employer-sponsored plans are popular because they are fairly easy and very convenient to contribute to. They also allow you to contribute more than some of the other options. In 2020, the IRS allows you to contribute up to $19,500 to a 401(k), 403(b), and 457(b) —if you’re under 50 years old and up to $26,000 if you're over 50.

        One of the biggest benefits to employer-sponsored plans is that some employers offer Matching —meaning that they will match your contribution up to a certain percentage. For example, if your employer offers a match of 100% for contributions of up to 5% of your salary this means that if you contribute 5% of your salary to your retirement your employer will also contribute a full 5% of your salary to your retirement.

  • To illustrate and for the sake of simplicity, let’s assume that my gross pay or money I make before taxes and deductions are taken out is $1,000.
    • If I contributed 5 % of my gross pay ($1,000 x .05 = $50), I would have contributed $50 to my retirement and my agency would have matched that $50; ultimately putting $100 towards my retirement each pay period.
  • That’s a $100 contribution, even though I, personally, only paid $50. You can’t beat that.

Quick tip: If your employer offers matching, find out the percentage and make sure you contribute at least that amount, otherwise you are leaving free money on the table.

        Not all places of employment offer these plans, so check with your Human Resources (HR) department to see if your job does. However, if one of these plans are offered all you need to do is opt-in and pick the percentage of your income that you would like to contribute. The money will automatically be taken, pre-tax, out of your paycheck and contributed to your retirement account.

 What you need to know about these types of plans?

  • 401(k): The amount contributed to a 401(k) is deducted from your taxable income. You have to start taking withdrawals from your account starting at age 70 ½ .These withdrawals will be subject to taxes. Also, if you take money out of the account before age 59 ½, you may have to pay a penalty.
  • 403(b): This type of plan, also known as “tax sheltered annuity” (TSA), is only offered to individuals working for a non-profit or tax-exempt organizations like public schools. Just like a 401(k), withdrawals will be subject to taxes and a penalty may be incurred if you withdraw before age 59 ½ .
  • 457(b): This type of plan is offered through state and local governments (and some non-profits). 457 plans are not governed by Employee Retirement Income Security Act (ERISA), which is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. Since ERISA rules do not apply to these accounts, the IRS does not assess an early withdrawal penalty to 457 participants who take money out before age 59½, though the amount taken is still subject to normal income taxes. To learn more about 457 plans, check out this article from Investopedia.

   

Individual Plans (they can also be offered by Employers):

        Individual retirement accounts (or better known as IRAs) essentially allow anyone with earned income to save money for retirement in a tax-advantaged way either with tax-free growth or on a tax-deferred basis. As stated above, some employers do offer IRAs. The contribution limit for an IRA in 2020 is $6,000, or $7,000 if you are 50 or older. I know you may be thinking that this is a lot less than the potential $19,500 you are able to contribute to an employer-sponsored plan but the good thing is that you can contribute to both! And most people set up IRAs as a way to help supplement their current savings in their employer-sponsored retirement plan. However, there is a caveat to this — meaning if your income exceeds the IRS limits, you might lose out on one of the tax benefits. Check out this article from NerdWallet to learn more. There are two common types of IRAs: the traditional IRA and the Roth IRA.

What you need to know about these types of plans?

  • Traditional IRA: Similar to a 401(k), the amount contributed to a traditional IRA is deducted from your taxable income. You have to start taking withdrawals from your account starting at age 72. These withdrawals will be subject to taxes. Also, a penalty may be incurred if you withdraw before age 59 ½ .
  • Roth IRA: Unlike a traditional IRA, you will pay taxes on the amount you contribute to a Roth IRA now. However, your money will grow tax-free and you will not have to pay taxes on withdrawals in the future. There also isn’t a mandatory distribution age (the age when you have to start withdrawing your money) and you can contribute to a Roth IRA as long as you are earning an income. Although, your eligibility to contribute to a Roth IRA is based on your income level. In 2020, in order to be eligible to contribute to a Roth IRA you must make under $139,000 (if you file single) or $206,000 (if you're married and file jointly). The people who benefit the most from having a Roth IRA are those who believe that they will be in a higher tax bracket when they retire.

        I also want to mention that there is also a Rollover IRA that allows you to contribute money “rolled over” from the employer-sponsored plans mentioned above into this type of traditional IRA.

        Bottom Line: Even though you only live once (#YOLO lol) odds are that you’re going to live for a long time. Therefore why not do your future-self a favor by planning for the future now. I know most people don’t want to work for the rest of their lives, so why not take the steps now to prepare for the future you want.

 

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Comments

  1. This is something I definitely need to get going on!

    ReplyDelete
    Replies
    1. Thanks for your comment! Yes, you will be pleased in the future that you started planning now!

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  2. Thanks so much for sharing these great tips! I started contributing about 2 years ago and in happy I started. Just wished I had started sooner. Busy as young person this is something we don't generally think about. Thanks for sharing.

    ReplyDelete
  3. Excellent advice to start saving for retirement now! I put off saving for retirement and ended up having to catch-up later. It's so much harder to catch-up. I really lost out on all the years my retirement savings could have been growing. Compound interest is magic stuff!

    Luckily, I was hired as a social worker where a 457(b) plan was available. The 457 plan offers a special "catch-up" period in the 3 years prior to retirement age if you are behind in retirement contributions. For 2020, the amount you are allowed to contribute is $39,000 per year for 3 years.

    ReplyDelete

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