Top Retirement Planning Questions
When should I start planning for retirement?
By Jennifer Adams
I read an article recently that answered this question and it made me think, hmmmm. The answer was to start saving for retirement in your twenties. I thought, wow, that seems like a young age to start saving.
Most people are in that stage of being right out of college, looking for employment, carrying student loan debt, saving for a reliable car, or down payment on a house. However, in reality, the sooner you start the better off you will be when retirement rolls around.
When I first started in this business over twenty years ago, I began contributing $25 to my Roth IRA per pay period. I was convinced to do this because of a chart called “The Cost of Waiting.” This is an illustration that shows these figures:
If you start investing $250 per month at:
· Age 25, the value of your account by age 65 could be $878,570
· Age 35, the value of your account by age 65 could be $375,073
· Age 45, the value of your account by age 65 could be $148,236
*This is a hypothetical example for illustration purposes only and does not represent an actual investment. Assuming an 8% annual rate of return.
How do I start? I always tell our clients the first place to start is your company retirement plan, if one is offered. You should aim to contribute each pay period up to the amount of the company match.
Company match is free money as long as you stay with the company to the end of the vesting period, typically five years. If you have more discretionary income left after retirement plan contributions or your company doesn’t offer a retirement plan, consider contributing to a Roth IRA.
The maximum contribution amount for those under age 50 is $6,000 (or $500 per month). For those over 50, you can contribute up to $7,000 (or $583 per month). If you have discretionary income over and above those two options, then consider opening a taxable account, which has no contribution limits. Most importantly, autodraft is your best bet. You are more likely to be disciplined about saving money if you don’t have to think about it each month.
How much is enough? I’m asked this question often and the answer is always “it depends.” I know this seems cagey, but it truly is the answer. For many years, people would say if you have one million dollars in your portfolio at your retirement, you would be set.
That definitely could be the case, but for some people, it doesn’t work. Our clients have so many different factors in their lives that determine how much is enough. Those range from accumulated savings, living expenses, healthcare issues, risk tolerance, children, and so on.
When reviewing your retirement plan, it’s a good idea to make a list of your goals, review your expenses, and have a financial planner run some projections for you. This will help you determine if you are on track to reach your goals.
What is my biggest threat? Threats to not achieving your retirement goals come in various sizes. Not having saved enough by the time you retire is challenging. Living beyond your means and carrying a significant amount of debt during your lifetime could derail your retirement.
In our business, the biggest threat we see to a client’s retirement is the cost of healthcare and long term care. Healthcare costs if you retire before age 65 (before Medicare starts) can really take a bite out of your retirement. It’s not uncommon to be paying more than $1,000 per month per person for a high deductible health care plan.
That’s $12,000 per year for health insurance that covers costs only after the $7,000 deductible has been paid out of pocket. Health insurance costs are increasing each year. Long term care costs are even higher than health insurance in retirement. Long term care costs in North Carolina, for example, are approximately $95,000 per year for a semi-private room in a nursing home. [DS1]
If you need memory care, and this is happening more and more, add twenty five percent to that cost of care in a facility. What can you do to prepare? Keep yourself mentally and physically healthy with low stress levels as much as possible, save money to meet your goals, and buy insurance to share the risk of health and long term care expenses.
Why do women seem to be behind when it comes to retirement savings versus men? Women are behind from the very beginning when it comes to retirement savings.
Mainly for four different reasons: Women make about 81.6 [DS2] cents on each dollar that a man makes (which has not improved much in the last 20 years.) Pensions and Social Security benefits are often less for women if they took time out of the workforce to stay at home with their children for one or more years.
Women have a longer life expectancy, often living five to seven years longer than men. “Gray divorce,” those that happen after age 50, are leaving women with 40% of their pre-marital income to plan their future.
What other questions do you have about retirement? Jennifer Adams, CFP®, CDFA™ is a financial planner with Starks Financial Group in Asheville. She specializes in retirement planning and divorce planning for women. Find her at www.starksfinancial.com.
The foregoing information has been obtained by sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jennifer Adams and not necessarily those of Raymond James. 401k plans are long term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to 59.5, maybe be subject to a 10% federal penalty. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely taxfree.