A Q&A about retirement planning
Individuals need not look very far to be reminded of the importance of planning for retirement. Television ad campaigns touting the need to plan for retirement have been front and center for many years. Banks also heavily promote their retirement planning services to account holders. The emphasis financial firms and banks place on retirement planning underscores just how important it is for individuals from all walks of life to prioritize securing their financial futures.
Ad campaigns can make saving for retirement seem simple, but plenty of people may have questions about how to save for the days when they are no longer working.
WHY AND WHEN I SHOULD BEGIN INVESTING TO BUILD MY SAVINGS? RETIREMENT
It’s never too early to start saving for retirement. Young professionals may not be anywhere close to retirement, but that doesn’t mean they can afford to put off saving for the day when they call it a career. Much of that has to do with inflation. The rate of inflation varies, but it’s fair to assume that your cost of living will rise dramatically between your twenty-third birthday and your seventieth birthday. If you choose to simply save as opposed to investing that money, your money will not grow at a rate necessary to overcome inflation. Though there’s no guarantees with investing, traditional retirement investment vehicles have a proven track record of outpacing inflation. For example, Standard & Poor’s 500® (S&P 500) reports that individual retirement accounts (IRAs) grew by an average of 10.8 percent between 1971 and 2020. Over that same period, the U.S. Bureau of Labor Statistics indicates that the dollar had an average rate of inflation of 3.99 percent.
HOW I CAN SAVE FOR RETIREMENT?
Various investment vehicles can help people save for retirement. Many people utilize employer-sponsored 401(k) retirement plans. These allow individuals to deposit money via pre-tax contributions deducted from their paycheck. For young people, enrolling in these plans as soon as they’re eligible can be a great way to begin building their retirement savings, and since many people contribute between 6 and 10 percent of their pre-tax earnings, their takehome pay will not be significantly different once they enroll. IRAs, pension plans, certain life insurance policies, and regular contributions to personal savings accounts are some additional aways to save for retirement.
HOW I MUCH WILL NEED TO SAVE FOR RETIREMENT?
No two people are the same, so there’s no simple answer to this question. Estimates about how much people will need in retirement range from 60 to 80 percent of their yearly income the year they stopped working full-time. A financial advisor can be a useful ally as people try to calculate how much they will need to save for retirement. However, the simplest answer to this common question is that there’s no such thing as saving too much money for retirement so long as saving does not adversely affect other areas of your life.
WHAT I IF NEED MONEY BEFORE RETIREMENT?
No law prohibits people from withdrawing funds from designated retirement accounts before they retire. However, there may be significant financial penalties and tax consequences if you do so. For example, the Internal Revenue Service allows penalty-free withdrawals from a 401(k) after an account holder turns 591⁄2. Withdrawals made before then could be subject to federal and state income tax and a 10 percent penalty of withdrawn funds. Individuals are urged to speak with a financial advisor about withdrawal guidelines and penalties prior to opening a retirement account.
Saving for retirement is vital and it’s never too early to begin investing in your financial future.