SECURE YOUR FINANCIAL FUTURE! INVEST IN YOU!
Welcome back to Money 101, Invest in You: Ready. Set. Grow’s eight-session guide to financial wellness.
Today, we’re tackling something that many Americans aren’t fully prepared for: retirement. We want you to succeed in saving enough money in your 401(k) plan or individual retirement account for a comfortable retirement.
The idea may seem daunting. You have bills to pay and can only save so much — if anything at all.
Yet, you need money for retirement. It’s not too late to start saving or to bump up your contributions in order to ensure that you have enough cash to live comfortably when you are no longer working.
By following the challenge below, you’ll learn about the different types of plans, how much you should save and how to manage your savings.
Thanks again for joining me — and happy learning!
CHALLENGE #3: SAVING FOR RETIREMENT
Types of retirement plans
Traditional 401(k) plans: Try to contribute as much as you can to your employer-sponsored retirement plan, mostly commonly a 401(k). Some may offer a 403(b) or 457 plan. Contributions to a traditional 401(k) are made pre-tax, so it reduces your taxable income.
Roth 401(k): This plan works like a traditional 401(k) but contributions are made after tax. Unlike the Roth IRA, there are no income limits.
Maximum contribution amount: : $22,500 in 2023, plus a $7,500 “catch-up” contribution if you’re 50 or older.
Bonus: You may also get “free money” if your employer provides a matching contribution to your account. If you can’t afford to contribute the max, then at the very least put in as much as the employer’s match so you aren't leaving any money on the table.
There are different types of IRAs.
Deductible IRA: If you are not covered by a company plan, you can deduct your IRA contribution from your taxable income. If you are covered by your employer’s plan, your eligibility for this IRA depends on your income and tax filing status.
Nondeductible IRA: Contributions are made with after-tax dollars. This is the only option if you aren’t eligible for a deductible IRA or Roth IRA.
Roth IRA: Contributions are made after tax, which means you pay no taxes when you take out funds in retirement. You can start to do that once you hit 59½ and have funded the account for at least five years. There are no mandatory withdrawals starting at age 72, like in other types of IRAs, but there are income restrictions.
State-run retirement plans: Some states, including California and Illinois, now offer retirement savings options to workers whose employers do not have a company plan. Most are similar to a Roth IRA but are run by the state.
Maximum contribution amount: $6,500 in 2023, plus a $1,000 “catch-up” contribution if you’re 50 or over.
How old you are when you start saving will determine just how much you should set aside. If you start in your early 20s, then socking away 10% to 15% of your salary each year could be enough. However, if you wait until you are 45 years old or older, you may have to set aside as much as 35% of your salary.
Assess your situation and see what you can do. If it is only 5%, then start there. As you earn more money, you can up it to 10%, then 15% or 20% or more.
“The question isn’t at what age I want to retire, it’s at what income.” — George Foreman
It may take more than just making regular contributions to your savings to reach your retirement goal. That’s why it’s important to make sure you have the right combination of investments within your portfolio.
You can also choose to invest in a target-date retirement fund. Chose the fund closest to your anticipated retirement date and as it approaches, the fund manager slowly alters the portfolio to become more conservative.
If your employer offers financial education or an advisors’ hotline, take advantage. Or, consider hiring your own financial planner. Just be sure to do your research and have a face-to-face meeting first.
The key is to look forward and not panic with any day-to-day market gyrations. Just make sure your investments match your goals and the mix fits your time horizon.
Saving for retirement is vital. Now that you have the tools, you can set yourself up for success.
Next week, we’ll address buying a home. Whether you are a first-time buyer or looking to move up, we’ll guide you through the process.
We look forward to continuing to help you — Invest in You!
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