Many people earn a lot of money in their active years. Yes, the make even much more than they will need for the present moments and yet, they end up in wants because of their failure to save for the future.
Hence, saving for the future is very crucial if you want to enjoy your post-retirement years. However, it is one thing to invest, it is another to invest in the right retirement plans so that one does not end up losing one’s savings. This article will serve as an invaluable guide for making right decisions in regards to your retirement investment plans.
When Should You Start to Save for the Future?
This is a question that everyone is asking. Ordinarily, most people don’t see the need to start planning for retirement until about 10 or 5 years to their retirement. However, experience has shown this kind of mentality to be wrong. This s because the earlier you start, the less will be your invested principal and the more will be your interest at the end of the day and vice versa.
For instance, if you start saving $4,000 annually towards your retirement at the of 20 in a tax-deferred investment account and stop when you are 35, upon retirement, at 65, you will have had $614,700 in your retirement investment account at the annual rate of 7%. Whereas, if you start investing the same amount annually at the age of 35 till you retire at 65, your retirement savings will only have amounted to $423,040 at the same interest rate.
What are The Best Retirement Plans?
It is not enough for one to just start saving early alone, one must also invest in the right plans. He best plans for retirement savings are Individual Retirement Accounts (IRAs) and 401(k). Each of these plans has its peculiar features. These plans are tax-favored i.e they offer tax-deferral which gives you the privilege to delay paying taxes on the principal you invested and the interest until you withdrawing.
What is an IRA?
An IRA is an investment plan that helps you save for retirement while offering you tax-deferral.
There are 3 main types of IRAs, namely:
- Traditional IRA: In this plan, you save money that you can take off on your tax return while your principal your principal can grow until you are ready to start withdrawing during retirement. The retirees in this plan are in a lower tax bracket compared to the tax they pay during their active working days. Hence, the tax-deferral implies that the tax rates are lower.
- Roth IRA: in this plan, you make savings with an after-tax. This means that your savings will grow tax-free after meeting some specified terms.
- Rollover IRA: this plan is for savings rolled over from a qualified retirement investment plan. It involves translating eligible assets investment plans such as 401(k) or 403(b), which are employer-sponsored plans.
What is 401(k)?
A 401(k) is an employer-sponsored retirement plan in which workers invest a portion of their paychecks before taxes are deducted.
401(k) retirement plan derives its name from the section of the tax code in which it is stated. It was formulated in the 1980s in order to supplement pensions. It arose as a result of the problem employers had with financing pensions steadily.
401(k) offers you the privilege to determine how your money is invested.
In spite of the fact that 401(k) offers a great way for you to save for the future, it has its own disadvantages. For example, with 401(k) you can’t access your employer’s savings before specified period of time, called vesting.
Vesting is the duration of time for which you must have worked for your employer before you can access your 401(k) contributions. This is to prevent employees from quitting too early. More so, there are penalties for withdrawing before the retirement age.
Employers get an administrator to manage your 401(k) account. The administrator carries out the paperwork and attends to your requests. He can also help you shift your savings around.
In 401(k), one salient question people ask is how much should they invest? To this, the answer is as much as you can. The more you invest, the more your returns.
It is advisable to, at least, invest the amount that will be enough to get you entitled to a full matching that company offers. Almost all the plans allow for this and the common maximum of which is 3% of the annual salary.
Matching fund is a provision in which your company contributes to matching your 401(k) contributions, provided it is not more than 3%.
How Should You Invest?
Years after retirement can last for about 30 years or more, so you will need as much money as possible to satisfy your needs.
The returns on stocks investment are almost twice as those on bonds, according to Morningstar, a research firm. Hence, most financial experts advise that people should invest ¾ of their total investment in stocks and stocks funds.
However, stocks could be very unpredictable and dangerous to invest the greater part of your earning in, most especially as you get older.
So, if you know that you can’t handle the pressure that comes with the likely unfavorable turns of event in stocks, then you should consider increasing your stakes in bonds and bond funds which offers much more security.
How Should You Change Your Strategy as You Get Older?
As you get older, you should invest more in bonds and bonds because they are more secured than stocks.
Also, most retirement plans have an option called “target-date retirement funds”. It is an autopilot which, on a regular basis, automatically apportions and reapportions your assets (stocks, bonds, and cash) in the best proportions to give the optimum returns/risk ratio as you get older. To opt-in, what you just have to do is to simply opt for a fund that is tagged with the year you wish to retire.
How Much Money Will You Need in Retirement?
This is the most important question one can ask before making any plans for retirement. Generally, experts recommend that you may need to invest about 70% of your pre-retirement annual salary in order to get enough returns from your retirement plans depending on what your post-retirement dreams are.
It is very necessary, therefore, to estimate your post-retirement expenses.
Will Social Security and Pension Be Sufficient To Take Care of You?
Most often, social security and pensions are always not enough to take care of retirees’ expenses. Hence, the need for you to save as much as you can in order to make up for the shortfall.
How Much Should You Save?
Obviously, there is no specific answer for this. However, the general advice is as much as you can. Most experts suggest one saves 10% to 15% of your annual income, starting from your 20s.
To be more specific, however, first, you have to project the estimate of your probable expenses after retirement and then plan on saving towards it ahead.
How Can I Downsize My Retirement Budget?
The obvious way is to reappraise your expenses and cut-off some not-too-necessary expenses.
You may also defer your retirement from 60 to, say, 67. This way, your money will have more time to grow and you will be reducing the number of your post-retirement years too.
You can also decide to be working part-time during your post-retirement years. But the problem with this is that you may not have the energy or the interest to work during your old age. Or you may have health challenges that will prevent you from working or even; employers may not be willing to employ you then.
What If You Are Starting Out Late?
If you are starting out late, say you are already in your 40s, then you can still do the following to maximize your retirement investment.
Firstly, you must try to max out your savings to tax-deferred retirement. The maximum contribution allowed for by the IRS as at 2016 is $18,000 for a 401(k) plan and $5,500 for traditional and IRAs. If you are in your 50s already, you can utilize and extra catch up savings option. There are even some government provisions for the late starters.