Financial Haves and Have Not’s
Are you struggling to make ends meet while your benefits get more expensive, long-term employment seems bleak, and retirement seems impossible? You’re not alone and the truth is it’s getting harder each year.
A person rarely advances more than one economic level than their parents and even that is harder than it once was. Pension plans are disappearing, social security is in jeopardy, and good paying jobs, especially with benefits, are difficult to find.
You know how difficult it is to get ahead financially with all of the constant obstacles in your way. To begin with, each year workers are forced to pay a greater portion of their health care costs. Next, raises are generally less than the current rate of inflation, leaving workers falling further behind. Finally, pension payouts are declining. Now, more than ever, you have to work hard and contribute more yourself to have a chance of retiring comfortably.
Retiring on the same money you currently make takes planning and discipline. You can retire comfortably by taking advantage of your company benefits and following a few simple plans.
401k’s
Company pensions have been largely replaced by 401k’s that offer some matching contributions. If you have a 401k, begin contributing as soon as you can and at least enough to receive the maximum contributions of your employer. Do not borrow against your 401k unless it is an emergency that you cannot cover any other way. People get rich by compounding interest but this only happens when you let your money work for you. The added benefit is a lower tax rate because of the tax-differed contributions.
IRA’s: Roth or Traditional
If you plan on making more money in retirement than you do in your working years, a Roth IRA is usually best. Roth IRA’s earnings grow tax-free but your contributions are taxable immediately.
Roth IRA Features
- A Roth features tax-free withdrawals for certain reasons after a five-year holding period. An important thing to remember is that your contributions are always available to you tax-free on any distribution of any kind. Taxes on any earnings will apply for early distributions.
- Premature distributions for any reason other than those qualified by the IRS are also subject to a 10% penalty as well.
- There is no age requirement that you must start taking distributions.
If you expect your income to drop or remain largely unchanged, a traditional IRA is usually best. Traditional IRA’s allow you to defer taxes on contributions and earnings.
Traditional IRA Features
- Certain early distributions (before age 59 ½) are not subject to a penalty. These include withdrawals up to $10,000 for first-time home purchase or amount paid for qualified post-secondary education expenses.
- You must take required minimum distributions at age 70 ½.
- You can convert a traditional IRA to a Roth, but those contributions are taxable in the same tax year as the conversion.
The amount that you may contribute to either IRA is determined by your Modified Adjusted Gross Income (MAGI).
Live Within Your Means
It sounds cliché but how many of us really do. It doesn’t take long to be paying away your earnings in interest and losing ground on the principal. Don’t buy more than you can afford to pay off in full each month (Obviously this doesn’t include your mortgage and possibly your car).
Plan
Thinking about switching jobs soon? Think about any pension plans you might leave behind by leaving too soon. If you’re close to 10 years, it might be worthwhile to stick it out and save your pension.
If you believe social security will survive the current crisis like I do remember that it’s based on your lifetime earnings (not overtime). You should get periodic statements showing you what you will receive based on expected earnings and retirement age. Some people end up working a few years longer than originally planned to capture the higher payout.
Write It Out
Retirement income is nothing to guess about. You need to write everything out and evaluate it periodically.
Here’s a sample of how your plan might look like:
|
Investment
|
Balance
|
Monthly
|
|
401K
|
$200,000
|
|
|
Social Security
|
|
$1,068 at 65 years old
|
|
Pension from XXX
|
|
$500
|
|
Pension from YYY
|
|
$1,000
|
|
IRA
|
$300,000
|
$ (depending on term)
|
|
Life Insurance – Whole Life
|
$50,000
|
$ (depending on term)
|
|
Totals
|
$550,000
|
$2,568 + IRA + Life Ins.
|
A simple chart like this will allow you to make the decisions necessary to retire comfortably.
People are living longer and longer in retirement and should plan for 30 years to be safe. If you know where you want to be, make a plan and stick to it. The retirement you’ve always worked for and dreamed of can be yours with the proper attention and self-discipline. Happy Trails!