It’s that time of year. The time when we all make New Year’s resolution that we know good and well we are going to fail miserably at. Most statistics have the one-month failure rate for New Year’s resolutions at about 80%, meaning that a vast majority of our resolutions don’t even make it to February. But, the one I am about to propose to you is one that 80% of us can’t afford to fail at, retirement saving.
Let’s start with a few numbers that are a little scary. Most financial advisors believe that you need about 80% of your working salary during retirement. Seeing as the average Social Security benefit for 2019 is $17,532 Social Security alone is simply not going to be enough for most of us. Add into the mix the fact that just 57% of employers offer a retirement plan and it is clear that a good portion of us are way behind on planning for retirement. That statement is proven by the fact that roughly half of all retirees pass away with less than $10,000 remaining in their retirement accounts, with a large portion of those people having nothing. That’s cutting it way too close.
First and foremost, if your employer offers any type of a 401(k) plan, or another retirement plan, with a matching feature you should absolutely be taking part. A “match” means that your employer is willing to put the same amount of money in an account for your retirement as you do, up to a limit designated by the company. For example, they will put in 3% of your annual salary if you agree to defer 3% of your salary into the account, for a total of 6%. This is literally free money. Have you been hounding your boss for a raise and they won’t give in? You just found one.
If you’re not fortunate enough to have a retirement plan through your employer you still have options. Both ROTH IRAs and Traditional IRAs are government-sponsored plans for individuals to save for retirement. These accounts provide tax benefits that a savings account can not. In the case of ROTH IRAs you pay taxes before the money goes into the account, so when you withdraw the funds at retirement age you pay no taxes on any of the growth in the account over the years. For Traditional IRAs the taxes are paid upon withdrawal, so the money in the account grows tax-deferred until retirement. Generally, if you think you will pay a higher tax rate later in life you will want to go with a ROTH and pay the taxes now. If you anticipate your tax rate decreasing later in life you should lean toward a Traditional, why pay your higher rate now if you can pay a lower rate later? Either way, the tax benefits of these accounts make them a more attractive option for retirement savings vs a standard account.
IRAs do have contribution limits (maximum amounts you can put in per year) and high-income earners may not be eligible to contribute to this type of account. If one of these limitations restricts the amount you can save you still have the option of a standard brokerage account. This type of account does not have any tax benefits or matching features that the previously discussed accounts have, but they still provide a vehicle for setting money aside for retirement that can be invested. One important note is that employer-sponsored plans and both ROTH IRAs and Traditional IRAs have penalties for withdrawing funds before a certain age, generally age 59.5. This penalty is usually 10%, and you will also lose the tax benefits of that account on the withdrawn money. It is imperative that if you contribute to one of these retirement accounts that money needs to stay there. Do not earmark that money for any other purposes, and it should only be withdrawn as an absolute last resort.
The honest truth is that a vast majority of Americans are failing at saving for retirement. If you’re looking for a New Year’s resolution important enough that you won’t feel like you can break it, then this is it. You can start most of these accounts with very small amounts of money, and then set them up for automatic contributions each month to keep you honest. Regardless of your age, it is never too late to start setting money aside for those golden years!
For more information on the services that we offer please visit: www.austinwealthsolutions.com.
Cody Austin
Austin Wealth Solutions