What About My Retirement?
When I think about my retirement, I think about the Dr. Seuss book, “Oh, the Places You’ll Go.”
When I retire, I plan to travel to exotic places, spoil the grandkids I hope to have someday and spend lots of time on the beach. I know these dreams won’t come true without some wise decisions on my part–many of which have to do with my retirement plan.
Be encouraged to know that retirement plans have become more flexible than in the past. Companies now often offer provisions to maximize your benefits.
If your employer offers a retirement plan, ask yourself these questions:
Should I join my company’s retirement plan? Or could I save enough on my own?
More and more employees are responsible for saving for their retirement through a 401(K) plan where the employer will often put money in as long as the employee contributes to the plan. There are other types of plans, but this is increasingly the most common. Very definitely, you should contribute to your plan if you have the option to do so, especially if your employer is willing to match your contribution. After all, the matching portion from your employer is “free money.”
It will be very difficult to save as much outside your retirement plan as you can inside the plan. Not only because of the employer match, if there is one, but because your contributions will likely reduce the amount of taxes that come out of your paycheck. Putting money in a retirement plan generally means you pay less in taxes while you are working and trying to save.
How much should I save for retirement?
Standard wisdom says you need to save as much as you can possibly afford, but at least contribute enough to receive all of your company matches.
A plan can be designed to allow all eligible employees to contribute up to $16,500 in 2011 regardless of income. Employees age 50 or older by year-end can contribute an additional $5,500 as a catch-up contribution.
Regardless of the dollar amount, you are allowed to put into your plan, contributing the maximum amount is a good rule of thumb to follow. After all, these are most likely funds you will need to live on during retirement. A little sacrifice now can go a long way to a happier retirement.
If you are not financially able at the present time to contribute the maximum amount, a good strategy is to set a schedule where you gradually increase your contributions over time until you do hit the maximum amount.
In addition, salary increases are another great way to help you reach your maximum annual contribution. Since you have not yet become accustomed to the increase in pay, funneling it to your retirement plan is an easy way to boost your contributions.
Which is best – traditional pre-tax contributions or after-tax Roth 401(k) contributions–or a combination of both?
Pre-tax contributions provide a larger paycheck now because they reduce your current payroll taxes. These contributions are made before taxes are calculated, allowing deferral of the taxes until the funds are withdrawn from the plan, giving employees more money in their pocket at the end of the month. When you retire, the money taken out of the retirement plan is then taxed at your current tax rate. The logic is that once retired, you will be in a lower tax rate. However, this may not always be the case.
Roth 401(k) contributions are after-tax contributions so your paycheck is smaller, but your earnings grow tax-free.
Which option is best depends upon a variety of factors, including your tax rate now versus your expected tax rate at retirement.
What is the best way to invest?
Will you review your account periodically and rebalance among stocks and bonds? Or would you be better off with funds managed by professionals?
Either way you go, the first investment decision ought to be how much to have in safe investments such as cash equivalents and bonds and how much to have in riskier investments such as stocks. This is commonly called the asset allocation decision.
Most retirement plans are offering “Lifestyle” and “Target Retirement Date” funds. With both types of asset allocation, you can take advantage of professionally managed funds based on your needs. Lifestyle funds maintain a consistent stock/fixed income allocation, ideal for those who want to control when to alter their investments based upon their changing needs. With Target Retirement Date funds, your allocation becomes more conservative as you near your retirement age.
Studies suggest asset allocation is probably the single most important investment decision you will make as it will impact your return more than anything else. Remember, you can change your asset allocation so it is important to review your allocation periodically and make changes as necessary.
Will I have enough to retire?
Will your retirement be all you hoped for or will it be more like another Dr. Seuss classic, “How the Grinch Stole Christmas?”
TCO can help you reach your retirement goals. Please contact us to schedule an appointment.