Saving So You Can Stop Working

The reason we save is so we can eventually stop working. What does the ideal retirement life look like for you? Your retirement needs and goals will shape your saving strategy. Whether you’ve just entered the workforce, you’re comfortably progressing along in your chosen career path, or you’re in your final years of working, NOW is the time to work on your retirement plan. Planning early is best, but it’s never too late to start saving so you’re prepared for those golden years.

Ways to Save

There are a lot of ways to save for retirement, but we want to highlight some of the most common options.

401(k) Plans
Many employers offer some sort of retirement plan where money is taken out of your paycheck before taxes and put into an investment account. 401(k) plans are the most common. The name 401(k) refers to a section of the Internal Revenue Code regarding these types of retirement accounts. You are not taxed on 401(k) contributions until you take money out of the account.  If you’re lucky, your employer offers contribution matching up to a certain percentage of your income. Whenever possible, contribute the maximum amount that your employer will match. Also, avoid withdrawing funds from your 401(k) unless absolutely necessary. Early withdrawals will cost you a ten percent penalty to the IRS, and you will be taxed on the amount you take out.

Traditional IRAs
IRA stands for Individual Retirement Account. Traditional IRAs allow you to save in a tax-deferred account. You have the freedom to choose your investments, and you must begin taking withdrawals at age 70 ½. If you leave your current employer, you can open a rollover IRA to keep the money you have already saved, without facing tax penalties. This allows your money to continue growing and earning interest between jobs.

Roth IRAs
Unlike traditional IRAs, the money you contribute to Roth IRAs is taxed. However, that money grows tax-free so that when you withdraw funds later, you are not taxed on that money or the interest it’s earned. There are no age restrictions on when you can withdraw money from Roth IRAs.
 

Save Early, Save Often

Regardless of the type of account you use to save, it’s important to save early and save often! Returns on retirement accounts can compound over time, meaning you earn additional returns on your principal and on past accumulated returns. For example, if you began saving $1,000 a year and gained 8 percent returns at age 25, your account would be worth around $260,000 by age 65.  if you wait until you are age 35 to start saving, your account would only be worth about $122,000 by age 65 based on an 8 percent return. Time is money when it comes to investing and the power of compounded returns.

Investing Strategies for Retirees

As you approach retirement, it’s important to review your portfolio to address your changing needs and risk tolerance level. Upon retiring, your investing goals may shift from building wealth to using those funds to cover your living expenses.

Consider working with a professional as your investing priorities change. For example, you may want to shift your assets to less risky investments that continue to provide growth but produce a more stable income.

When working with a professional, keep a close eye on your monthly statements to make sure your money is being invested in the way you asked. Watch for excessive or unauthorized trading and beware of investments that are unsuitable for your needs, goals, and risk tolerance.

Finally, your retirement is not something to set and forget.  It’s important to continually reevaluate your investing strategy up to and throughout your retirement. Your needs may change, or unexpected expenses may occur.  Periodically revisiting your portfolio will also help you keep track of your “burn rate,” or how quickly you are using the funds available from your investment products.

Helpful Resources

AARP’s Retirement Calculator
Investing Basics
Investor Resources
Scam Basics
Senior Fraud