New Year, New Savings Approach

Friday, January 03 at 01:05 PM
Category: Personal Finance

Strike up a conversation about retirement with someone in their early working years and their thoughts often can be read plainly on their faces. It’s as if they’re standing at one end of the solar system and being asked to spot a galaxy 100,000 light years away and being asked to plan for how they’re going to get there. It seems unreachable, unknowable for now. They’ll figure it out later.

Unfortunately, later doesn’t work too well. The longer we put off saving for retirement, the more risk we take in not having enough assets as that once-obscure galaxy comes into view. Starting a disciplined saving routine is less painful than it sounds, and a new year is as good a time as any to begin.

The most practical way for most people to start saving is through an employer retirement plan. It might be a 401(k). It could be a 403(b) or a SIMPLE IRA. There are other employer retirement vehicles, but these are the most common ones that allow the employee to contribute his or her own money.

Employers want workers to participate in these plans because they know it promotes worker satisfaction and, hopefully, more productivity and less turnover. So most companies match part of the employee’s contribution. For instance, several Fortune 500 companies kick in an amount equal to as much as 6 percent of pay as long as the associate contributes that much. The account owner has doubled his money before it’s ever invested.

The government also encourages retirement saving by allowing contributions to be made from earnings without being taxed. Then all growth and income generated inside the account go untaxed until withdrawals start in retirement. Ideally, those funds will be coming out at a time in life when a person’s tax bracket is lower than when he was working full time.

How much money will be needed in retirement depends on each retiree’s spending and big-picture goals. A financial advisor can help with that kind of planning. The advisor’s advice when it comes to saving typically is going to be to take advantage of the employer’s match at a minimum and to do more over time.

As nice as the IRS is in allowing pre-tax contributions, that generosity is limited. The most that can be deferred into a 401(k) in 2014 is $17,500 for anyone under age 50. At 50 and older, an additional $5,500 catch-up contribution is allowed for a total of $23,000 a year.

People whose employers don’t offer a retirement plan can use either a traditional IRA or Roth IRA. Which one is more appropriate depends on several factors that a financial advisor or tax advisor can help you determine.

A few generations ago, the retirement-funding recipe usually consisted of an employer pension, Social Security and personal savings. Now, pensions are rare and Social Security isn’t enough by itself to make ends meet for most. The importance of personal saving is greater than ever.

And delaying can be expensive. Assuming 6 percent annual compounded growth, an investor who saves $6,000 a year starting at age 25 will accumulate $754,741 by age 60. Waiting to start until age 35, that figure drops to $374,689. Waiting to start until 45, the total is $162,414.

So start now. Start with something. Even if it’s a token contribution, do it so it becomes a habit as you move into your higher-earning years ahead.

Tags: Cash Management, Financial Education, Investing
Katrina Coleman on 1/17/2014 at 2:38 PM
I'm a 34 year old woman how do I set up a retirement plan with arvest.. How much do I take out my check to save.
Arvest Blog Admin on 1/17/2014 at 3:42 PM
Hi Katrina - It is great to hear you're thinking about a retirement plan! We'll have an advisor contact you, at the email address you provided, to discuss your options.

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