Retirement Planning

How much money do you need to be able to enjoy the lifestyle you have now when you retire?

Most people underestimate the amount they set aside for their retirement years. There are many factors that can deplete your funds - unpredictable market losses, inflation, rising cost of healthcare, taxes and a weaker Social Security system, among other things. 

With life expectancies increasing, many people now spend a third of their life in retirement.  The real challenge is how to have enough so you do not outlive your money.

It is essential to have a tangible plan to prepare for these years. Actively planning for your retirement is one of the most crucial choices you can make.  And it’s never too early to start.

How much do you save up to retire comfortably?  There is no definite answer to this because this is highly personalized. Your “magic number” will be based on what your goals are for your money.

Traditionally, people were advised to aim to have a nest egg of $1 to $1.5 million.  Other professionals go by the 80% rule.  What does this mean? Your savings should be enough to allow you to live on 80% of your income at retirement. 

To illustrate, if your annual income is $100,000, your savings should be $80,000 a year for roughly 20 years.  This will give you a nest egg of $1.6 million. 

This may all sound daunting. And it  may make you feel like just giving up if the numbers feel out of reach.

However, sound advice from professionals who understand the specifics of your financial picture, a few basic tools and some investing know-how can help you create savings to help you live comfortably long after your final paycheck.

Young Adulthood (Age 21 to 35)

These are the millennials. The youngest of this generation are now entering the workforce and the older ones are now in their mid to upper thirties.

Here are the retirement tools they can take advantage of:

Employer-sponsored retirement plans - 401(k) or 403(b)

These are investment accounts which you can utilize and can make contributions to by deferring part of your paycheck.  Your employer may also make contributions on your behalf as well.

What benefits do these plans have for you?

• Company Match. The employer may match what you invest, up to a certain amount. It is essentially free money. To make the most of this, you can and even should contribute more than the amount that your employer puts into your retirement fund, if you are able to. 

For instance, you can choose to contribute 3% of your annual income to your investment account. Your employer may match this and this is essentially free money  which grows over the years. 

The above mentioned amount is just an example. Experts recommend putting in 10% upwards. For the year 2019, employees below the age of 50 can contribute up to $19K of their income to their 401(k).

• Tax Savings. Because the amount you put into your retirement account is deducted from your paycheck before taxes, taxable wages are reduced. This may also potentially increases tax refunds. 

• Roth 401k Contributions.  Your retirement plan may offer the option of making Roth contributions.  This means the money invested will go in after-tax. But your contributions and all the earnings over all the years you are invested, will come out tax-free at retirement. 

Talk to us to determine which type of contribution would work best for you!

• Time, more than money. When you start early, you take advantage of time to let investments mature. Thanks to compounded interest which allows interest to earn interest, the more time you allow your money to stay in a retirement investment, the more interest you earn. 

Even if you set aside just $50 a month, this will be worth three times more if you start investing at age 25 than if you wait a decade later. 

Roth IRA (Individual Retirement Account)

With a Roth IRA, you can contribute up to $6,000 a year ($7,000 if you are over age 50) if your annual income is below a certain level as of the tax year 2019.

With this retirement savings account, taxes are paid now on contributions instead of having to pay taxes once the cash is withdrawn in retirement. 

Roth IRA’s, though, have income restrictions which limit use as income level increases. As your income bracket increases, this may not be an option that you can take advantage of, anymore. 

For this reason, people in the 21 to 35 age bracket should take advantage of this retirement savings account. It can be a great source of tax free income when you retire.

Early Midlife (Age 36 to 50)

At this point, income is higher.  Unfortunately, however, so are financial obligations for most people.  Mortgages, insurance premiums, credit card debt and student loans need to be taken care of. 

These obligations may take a toll on your saving habits.  Nevertheless, it is crucial to continue saving at this critical stage. 

This age is when you take advantage of increased income while still having the time to invest and earn interest. 

Here are the retirement tools this generation can take advantage of:

401(k) and/or Roth IRA

Continue to take advantage of the 401(k) matching programs that your employer offers.  In addition, you can catch up contributions by trying to max out contributions to your 401(k) account.  At this point, you can contribute up to $25,000 a year (as of 2019). 

Traditional IRA.  If you are fortunate to be earning enough to have additional cash to invest, you can open a traditional IRA if you are at your maximum contribution level for your 401(k).  If you are contributing to a Traditional IRA and a 401k, your traditional IRA contributions will NOT be a tax-deduction, but the investments will still grow tax-deferred. 

Life Insurance. This is recommended once you have a family and assets that you want to protect.  Life insurance is not for you but for the family you leave behind. If their quality of life would be greatly affected if you died, and thereby lost your income, then you need life insurance. 

You can opt for the term insurance which gives coverage for 10 to 30 years or for the more expensive permanent life insurance, the coverage of which do not expire. 

Also consider Disability insurance. This will ensure that your family will be able to survive financially without touching your retirement savings should anything happen to you that would prevent you from working. 

Using A Financial Planner. With more income, assets and investments, your financial status is more complex at this point.  Expert help from a professional financial planner can help you manage your finances better.

Other forms of investments. These are reasonably safe ways to supplement retirement savings:

• Blue chip stocks
  
• Real estate investments (Rental property)
• CD’s or time deposits

Long term care insurance. It is important to invest in insurance to help cover the cost of home care or a nursing home should you require it in your later years. If not planned for properly, health related expenses can deplete your retirement savings.  

At this point, your investing moves should be toward protecting and preparing to use your savings to replace your paycheck in retirement. 

Here are important things to take note of:

• Distribution penalties. Withdrawals from 401(k)’s and traditional IRA’s carry a 10% tax penalty but are lifted at the age of 59 ½ . You can begin making early withdrawals at this age but we recommend not taking out any money before retirement.
• Social Security benefits. While full benefits can be enjoyed at the age between 65 to 67, you can qualify for partial Social Security benefits at age 62. Payments will be at the highest level when you reach the age of 70. 
• Required minimum disbursements. At age 70 ½ , regular withdrawals must be made from 401(k)’s or traditional IRA accounts. This will be taxed as ordinary income. A big penalty is given for missed required distribution or for amounts that are not enough. A 50% tax is levied on the amount not distributed.