As someone juggling your student loans, starting your family, and trying to save for the future, it may be a little overwhelming to know where to start. There are many schools of thought on this topic, and ultimately you have to do what feels best for you and helps you to sleep at night. I’m not going to say that one is better than the other; however, for the sake of this conversation I want to focus on retirement saving.
Many of you have access to a retirement plan through your employer. However, did you know that the amount of the company match is not actually the maximum you can contribute? It is a common misconception that if a company matches you 5% for your 5% then that is all you can contribute. For 2018, if you are under age 50, you can contribute $18,500 inside of a 401k. We all strive to be able to save that much while navigating through life. Inside of your employer’s retirement plan you should have access to meet with an advisor so that you are better educated on the investment opportunities as well as different ways that you can work towards maximizing your contributions. It is important to increase these contributions at least annually. Some employers offer automatic increase. If yours does, great – make that election. If not, I suggest that any time you get a raise you should let your payroll coordinator know that you’d like to increase your contribution. Why when you get a raise? Because when you get a raise, you are not yet used to that dollar amount being used for your everyday expenses so why not take 1% of your let’s say 5% raise and earmark that for retirement savings? Let’s break that down into dollars – that is $1 for every one hundred dollars that you make.
If you do not have access to a retirement plan through your employer, there are still retirement savings options available. The most common types are Traditional IRAs or Roth IRAs. The main difference between these two is whether you want to pay income tax now or later. A Traditional IRA offers tax-deferred growth and the potential for a tax deduction now. A Roth IRA offers tax-free growth, but no deduction at the time of the contribution. You should consult your tax advisor to determine which is best for you. Either way, if you are under the age of 50, you are able to contribute up to $5,500. Most intuitions will allow you to make contributions monthly by making an electronic withdrawal from your bank account. This is highly recommended as it then becomes your new normal, and you do not have to write a check periodically to make contributions.
Are you self-employed? There are several options available to you as well. You can set up a Simple IRA or a SEP IRA. Each of these has different rules around maximum contributions. You should also take into consideration whether or not you have employees when deciding to start saving into one of these plans.
What if you have a retirement plan at your employer, but you want to be able to have more freedom in selecting your investments? You are able to have an employer sponsored retirement plan in addition to a Traditional IRA or a Roth IRA. However, depending on other factors you may not be able to make a full contribution to an IRA.
Ultimately, start saving for retirement as soon as you are able. Start with the minimum that your company will match and then work toward the goal of maxing it out. I’d like to share with you the example of two investors that saved the same amount of money, but started saving at different times in their life. Investor A saved $1,000 per year for ten years from age 20-30 and stopped, allowing this to grow until age 65. Investor B saved $1,000 per year for twenty years, from age 45-65. Assuming a flat 6% annual compounded return, Investor A has nearly three times more money than Investor B. This is represented in the illustration below.
I encourage you to sit down and take a hard look at everything to determine what is best for you. No one else can plan for your future but you. Still have questions or need some guidance? You can check out the resources available on our website www.AxiomFSG.com or contact me for more information.
This article was written by and provided courtesy of Michele Konkle, CFP®, Financial Consultant with Axiom Financial Strategies Group in New Albany, IN at 812-948-8475.