Imagine that you are sitting on a beach in the Caribbean with a cold drink in your hand and the warm sun beating on your face. Two days ago you were packing up your office and saying your good byes. As you walk out of your office you say to yourself “ahhhhh retirement”. Retirement is supposed to be a joyful moment in your life, but for many people it is terrifying. They have not saved enough money to enjoy retirement without working. The following are some interesting retirement statistics from Business Insider:
Approximately half of all workers in the United States have less than $2000 saved up for retirement.
36 percent of Americans say that they don’t contribute anything at all to retirement savings.
35% of Americans over the age of 65 rely almost entirely on Social Security payments alone, which averages only $1,177 a month.
A record 33% of Americans now plan on working past the age of 70.
43% have less than $10,000 in retirement savings.
Only 46% of workers have tried to calculate what they need to save for retirement.
In order to live comfortably in retirement the average person would need to save a minimum of $750,000. This seems like a lot of money, but if you start saving early it is not that difficult to reach. The first thing you need to do is figure out how much you will need in retirement. Here is a great retirement calculator to help you. The next step is to figure out where to invest. There are many options, but here are a few of the most common types of retirement accounts:
- Individual Retirement Account (IRA) – This account can be setup by you with most financial institutions. You can contribute a maximum of $5,000 a year if you are under the age of 50 or $6,000 a year if you are over the age of 50. Contributions will reduce your taxable income and are tax deferred, which means you don’t pay taxes on the money until you withdraw it.
- Roth IRA – This account is a more flexible version of the above IRA. The maximum contribution is the same as a traditional IRA, but the contribution can only be made to one of these accounts or split between the two accounts. According to tax law, you cannot make a yearly contribution of more then $5,000 or $6,000 to all your IRA accounts combined. Roth IRA contributions are not tax deductible, but the funds can be withdrawn at any time without a penalty or tax.
- 401(k) – This account is setup through your employer if they offer it. Contributions to this account are tax deductible and the income is tax deferred. These accounts are great because most employers will match a portion of your contribution up to a certain amount. For example, if you contribute 6% of your monthly income to the 401(k) your employer may match 50%. This means they will contribute an additional 3% of your monthly income. Where else can you get a guaranteed 50% return on your investment.
- SEP IRA – This account is designed to help self employed individuals and small business owners. Contributions are tax deductible and all income is tax-deferred. Money cannot be withdrawn from the account prior to retirement without a penalty. The maximum contribution can be up to 25% of the owners W-2 salary or up to 20% of the net adjusted business profits.
- Whole Life Insurance Policy – I touched on this in my last post. When you make premium payments on this policy it accrues a cash value. Overtime this cash value can become substantial when you include dividends, which are paid at the discretion of the company. At the time of retirement you will still have the same death benefit, but you can receive distributions to supplement your retirement. This won’t cover all your retirement expenses, but it can really help.
Retirement accounts are wonderful vehicles for investing and saving. The tax deferred benefit on many of the retirement accounts are great because when you retire you will probably be in a lower tax bracket then you are now. The younger you start saving the better off you will be. Honestly, who wants to work their entire life. Get out their and enjoy those new found hobbies.
“Retirement means no pressure, no stress, no heartache… unless you play golf.”