Make Sure Your Finances Are In Order For Retirement
October 30, 2019 Author: Tess Downing, MBA, CFP®, Complete View Financial
The American people are barreling towards a retirement crisis. In spite of a vibrant economy, Americans are not saving.
The retirement crisis is highlighted by the baby boomers generation. In the 55 to 73 age group, 17 percent of boomers have less than $5,000 saved for retirement. Of all American age groups, 22 percent have less than $5,000.
It is time to get your personal finances in order before it’s too late. Social security alone is not adequate to maintain your current lifestyle. Read on for tips on how to get on the right track for retirement.
Retirement Statistics
The retirement statistics are not much better as you move into different age groups. Only 5 percent of Americans have between $5,000 and $25,000 saved. Just 16 percent have saved more than $200,000.
Savings shortfalls are often due to lack of planning. Nearly 50 percent of Americans say they don’t know how much they saved for retirement.
At the same time, these individuals know their savings are underwhelming. Roughly 45 percent believe they will outlive their savings.
Retirement Savings Goals
Many people wonder how much they should have saved. People are also curious how old they should be for each savings milestone.
For the most part, financial experts are reluctant to designate a specific age for savings goals due to the differences among households. However, one number to strive for is one to one-and-a-half times your annual salary by age 30. While it may sound ambitious, you will benefit with a relaxing retirement at a good age.
Personal Finances
Spending habits are the primary reason that many people do not have enough saved for retirement. By taking control of your personal finances, you can reach your savings goals. Read on for personal finance tips that will help get your retirement plan on solid footing.
Reduce Discretionary Spending and Create a Budget
Many people are surprised how much they spend on discretionary items each month. Did you know that one-third of Americans spend more on their coffee addiction than investing?
Reducing wasteful spending is the most important step to getting your financial house in order. Money wasted on an inactive gym membership or streaming service can be redirected towards retirement savings.
Eliminate Debt
The best way to get your finances in order is by reducing or eliminating debt. Financial experts maintain that you should have reduced your debt by 45 years old. This includes credit cards, auto loans, and student loans.
Debt payments prohibit you from reaching your full economical potential. Wasteful spending includes more than your daily Starbucks latte. It also includes the monthly interest that you pay on debt.
In terms of financial planning, there is good and bad debt. It is important to prioritize the elimination of bad debt. Obligations that fall in this category include credit cards, auto loans, and medical debt.
While the goal is to eliminate all debt, some is better than others. For example, mortgage debt and student loans are tax deductible. This means you can lower your tax liability by claiming interest on your tax filing.
Tax Withholdings
Many people are under the false impression that tax refunds are good. People like getting a big tax refund check from Uncle Sam at the end of the year.
However, you are essentially giving the government an interest-free loan on your money. Instead, you should revise your W-4 form to get your refund amount as close to zero as possible.
There are two ways to make this happen. The first is claiming the right number of dependents. The other way is to have a fixed withholding each paycheck that is in line with your annual tax liability.
The immediate effect is putting more money in your paycheck. These funds can be used to invest or pay down debt.
Take Advantage of Employer Benefits
A surprising number of people are leaving employer-funded benefits on the table. Did you know that 20 percent of Americans do not take advantage of their employer’s 401(k) matching program?
In a 401(k) match, employers contribute an equal amount to your retirement savings up to a certain percent. For instance, envision a scenario in which you contribute 5 percent of gross earnings to your 401(k) plan. Your employer matches that contribution up to 5 percent.
If you choose not to participate in your company’s 401(k) plan, this means that you are leaving free money on the table. Also, you are bypassing the future compounding earnings on the 401(k) savings account.
You should take full advantage of all benefits that your employer provides. In addition to a retirement savings plan, this could also include items like a health savings account (HSA).
Maximize Your IRA Savings
An Individual Retirement Account (IRA) is an effective way to generate compounding earnings. IRAs are tax-deferred investment vehicles that are typically invested in stocks, bonds, and money markets.
Personal finance experts encourage investors to use the Roth IRA if they are eligible from a Modified Adjusted Gross Income (MAGI) perspective. The reason for this choice is the long-term tax benefits.
Typically, IRA contributions are tax-deductible. In the Roth IRA alternative, contributions are not tax-deductible.
However, this plays to your benefit in the long run. Unlike Traditional IRAs, withdrawals from a Roth IRA account are tax-free if the account has met certain criteria.
The bottom line is that you should plan to maximize your contributions to a Roth IRA or a Traditional IRA. For people under 50 years old, this means $6,000 in contributions per year. If you are over 50, the maximum threshold increases to $7,000.
Unlike a Traditional IRA, you don’t have to stop contributing after age 70½, as long as you still have a qualifying earned income.
A Recap of Retirement Preparation
Millions of Americans are unprepared financially for retirement. You do not have to be a statistic. With proper financial planning, you can live a full life in retirement.
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