In this post, our blog covers essential information on Saving for Retirement. Start today, and carefully consider the tools at your disposal. You’ll be glad you did!
Start Saving for Retirement, Now!
Table of Contents
- 1 Start Saving for Retirement, Now!
- 2 Saving for Retirement with Individual and Employer Plans
- 3 Things to Do to Prepare for Retirement
- 4 Ready for more?
When might be the best time to start saving for retirement? There is no time like the present to start saving for retirement. The younger, and sooner, the better! If you haven’t already started saving for retirement, there is no time like RIGHT NOW to start. Don’t be discouraged if you put saving for retirement off for decades, be encouraged, take action, and start. You can do it!
Apply Mêtis to your financial situation, prepare, save, and be ready for retirement. Strike a healthy balance in what you enjoy today versus saving for tomorrow. Saving for retirement is about delaying consumption, the accumulation of assets, or at least their preservation. However, I don’t think it is reasonable to completely defer all material enjoyment for “one day” either.
Use Compounding Interest to Your Advantage!
One doesn’t need to be an expert in mathematics to leverage the advantage of compounding interest. Anyone can take advantage of this concept. All things equal, the money put into savings today will earn interest. The money earned from interest will then start accruing interest. Before long, compounded interest will be propelling your portfolio into exponential gains. The opposite is true as well. If you put off saving for retirement, you’re generally making the process harder for your nest egg to grow. Those years of compounding interest are valuable!
Time Value of Money Retirement Example
The example I remember in school, posed as a question, was this: Would you rather have $10,000 today, or $10,000 in 10 years? The correct answer would be to take the money today (and invest it). The $10,000 smartly invested and diversified will likely yield more in the future. However, a key element is ten thousand of today’s dollars, after accounting for 10 years of inflation, will be more valuable than ten thousand of tomorrow’s dollars (all things equal). Simply put, a dollar today is worth more in the future.
Use this concept to your advantage in retirement. Saving more today, saving in an automated fashion, and letting it grow as long as possible is the best way forward. By doing so, you’ll be leveraging the time value of money to your advantage, boosting your position in retirement.
Use Your Budget to Manage Saving for Retirement
During our first years of marriage, my wife and I had a difficult time figuring out how much we should save for retirement. It seemed to us like the internet was generally full of random percentages, but we had a hard time aligning that with the reality of the budget.
The “Getting Started Series” is ordered in order of importance, and I recommend you consider it as a starting place to build your own financial future. At this point of the series, other key items are likely in place and established. Now that you’re saving for retirement, see if you can aim for 10-15+% of your gross household income. If that is too much for the budget, scale back, but then try to reclaim that as your household brings in more over the years.
Another part to remember is that the 10-15+% can include employer matching! As an example, if your employer provides a 401(k), matches dollar-for-dollar up to the first 2.5% contributed, then you have a total of 5% knocked out already.
Diversification and Fees
Never put all your eggs in one basket. Think about how to protect your retirement savings by investing in various sectors, investment types, and asset classes. Some of this can be accomplished by the use of an ETF (Exchange Traded Fund) or Mutual Fund. The same can be applied to bonds versus stocks, or in the way that funds are set up to target various retirement years (target-date funds). Those are just a few examples!
Another critical piece to watch CAREFULLY is the amount of money you will pay to get access to these funds. Fees come in MANY forms. Make sure you understand what you are paying for in that “irresistible financial product.” Seriously, be careful. Your net return after an expensive fee structure could actually be less than you think. There are many low-fee opportunities to consider in today’s financial industry. Weigh that carefully against the alleged benefits of the fund with high fees (remember, past performance is no guarantee of the future).
Saving for Retirement with Individual and Employer Plans
In this section, we’ll talk more specifically about common retirement plans and how you can use them to prepare for your retirement.
Traditional IRAs AND Roth IRAs
Traditional and Roth IRAs are great ways to save for retirement. There are several differences between the two. One of the key differences to weigh carefully is when taxes are due. Generally speaking, the Roth option allows the saver to pay taxes now while the Traditional IRA route kicks it down the road. Instead, Traditional IRAs generally lower current taxable income. While these points are designed to help equip you, I highly recommend consulting a tax or retirement professional who is familiar with your particular financial situation.
Traditional vs. Roth
The individual retirement accounts (IRA) are two options available for savers. As mentioned earlier, Traditional IRAs can be helpful for households who anticipate lower taxable incomes in retirement. Roth IRAs could benefit those who anticipate being in a higher tax bracket in retirement.
However, for myself, even if I make less in retirement I prefer to have the taxes paid to the extent possible before retirement. My employer plan is taxed in a traditional sense (pay taxes in retirement), and so I use the Roth option as an offset. This is just a personal choice, but I mention it as an example of adapting the various tools at your disposal to match your retirement projections.
Each account also carries additional differences. As we’ve said previously, according to the IRS, you cannot deduct contributions to the Roth IRA, but you generally can for the Traditional IRA contributions. Roth IRAs also allow contributions after age 70 1/2. The IRS has a helpful chart for comparison purposes for which I have posted the link here.
Contribution Limits and Technicals
Here’s a link for the current limits for both types of IRA (Traditional, and Roth). If you don’t have an employer plan, I especially recommend these vehicles. Even if you have a retirement plan, but you can’t quite get to that 10-15% mark (including the employer’s contribution), these accounts could help close that gap.
Additionally, here’s a summary from the IRS on a few other helpful topics. Use these to apply Mêtis, build out your plan, and prepare as best you can for what retirement brings. (Again, be sure to consult a tax or other financial professional to ensure proper alignment between intentions and tax laws):
- Roth IRA publications from the IRS
- Traditional IRA publications from the IRS
- IRA FAQs provided by the IRS
If you’re still looking for more details, try these two links as well (590-A and 590-B):
- Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs)
- Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)
Saving for Retirement with the 401(k)
In a lot of cases, the 401(k) has essentially replaced traditional defined benefit plans (i.e. pensions). In general, the defined contribution plan, which includes the 401(k), generally requires the individual to invest their own funds. This is different from the defined benefit plan which is when the employer invests the funds.
As an example, the 401(k) plan can be set up as a Roth or Traditional status. Generally speaking, the contributions from the employer are treated as Traditional status. As such, in this example, an employee can contribute 3% of their salary, which is then matched by the employer’s 3%. This 6% is then saved in the 401(k) for the employee’s retirement. Of course, this is an example, and many employers offer varying degrees and tiers of contributions.
Regardless, if your employer offers a 401(k), I highly recommend looking into it. Used properly, the 401(k) is a powerful savings tool. If possible, try to contribute at least what the employer is offering to match. Otherwise, you could be leaving money on the table.
(Don’t) Forget Social Security
For a lot of us, a quick glance at your pay stub will reveal a good percentage of your gross income goes to Social Security. You can use this link to the Social Security Administration estimate what those dollars and cents from your paycheck today will translate into during retirement.
I think it makes sense to diversify your retirement income. Avoid counting on any one source for retirement. As the old saying goes: “Hope for the best and plan for the worst.” This fits well with the topic of Social Security. As an example, for my situation, I plan on delaying any draw from Social Security as long as possible. Instead, by drawing on other sources of retirement income, the Social Security benefit will be maximized when I need it. Check with a professional to see what makes the most sense for your retirement projections.
Things to Do to Prepare for Retirement
By this point in the “Getting Started Series,” you are well on your way to applying Mêtis in your personal finances. Great work! As we round out the retirement angle, keep in mind that there are a LOT of options for retirement. In my opinion, the points in this article are great places to start. I have listed a few final thoughts on retirement, below.
Don’t (EVER) tap into your Retirement Accounts
I highly recommend restricting yourself from all retirement accounts. Even though there are special scenarios for some retirement vehicles that allow access for various states of need. One day, your older selves will thank your younger self for the discipline. If you do find yourself faced with an emergency, first try to draw from your Emergency Fund. Then, get another job, sell something, do something – ANYTHING, but try not to use the retirement accounts. Especially considering the benefit of compounding interest, try to guard against tapping into the Nest-Egg.
Life Insurance and Living Trusts
Life insurance is another essential component to consider, and while not pleasant to think about, it is part of managing your financial profile and caring for your loved ones. God forbid, if you should not make it to retirement for an unforeseen reason, the hard work and wealth you’ve accumulated should go to your family. Take the steps today, ensure what would already be an extremely difficult time isn’t made worse. Life Insurance is critically important – don’t leave your loved ones stranded.
Additionally, I also recommend wrapping your portfolio and assets into a Living Trust. That process, along with your Will and any necessary Powers of Attorney, can typically be handled by your trusted family attorney. The process worked well for us, was relatively easy to accomplish, and provides peace of mind. We now have a good plan in place, one that will take care of our loved ones, and that was worth every bit of the work along the way.
Don’t Stop Saving for Retirement Now (Living off Savings Later)
Especially when you are young, even when the markets get bad, continue to invest in your retirement in regular intervals. This is accomplished through something called dollar-cost averaging. All things equal, by investing on a routine basis, instead of trying to beat or anticipate the markets, your fund will steadily march along over the years. Take the emotion out of it.
As a suggestion, try to set your amount, set your date, set your allocations, and then check in once every six months. Consider rebalancing on a 6-month or 12-month interval. In a lot of cases, this can be done with a brief setup at the beginning, and then largely left to grow with a passive approach.
Now, of course, the market conditions are volatile, and past performance doesn’t guarantee any sort of return. However, it is my opinion that establishing the habit of saving for retirement on a regular basis, as early as possible, as long as possible, with a low-cost basket of funds (i.e. diversification), and without drawing the funds pre-retirement will be a very beneficial exercise.
BEST OF LUCK on your continued financial journey!