Planning for Your Golden Years

Getting tired of working? Start your golden years planning now.

It’s never too early to start planning for retirement. Here’s an example of the money you could be saving by planning sooner rather than later. If you saved $5,000 every year for 15 years and your money earned seven percent interest annually, you would have $125,645. Increase the number of years to 25 and you will have earned $316,245. That’s a big difference!

And yet, according to the United States Department of Labor, many people aren’t saving. Check out these facts:

  • Fewer than half of Americans have calculated how much they need to save for retirement.
  • In 2012, 30 percent of private industry workers with access to a defined contribution plan (such as a 401(k) plan) did not participate.
  • Only about 54 percent of workers are earning retirement benefits at work.

The average American spends 20 years in retirement and you don’t want to waste those years worrying about money. Take these steps and make a plan so you can retire comfortably and with peace of mind.

Step 1. Start saving immediately

It’s estimated that a person needs 70 to 80 percent of their pre-retirement income to maintain the standard of living they experienced while working. For example, if you’re making $50,000 a year (before taxes), you might need about $40,000 a year in retirement income to happily maintain your lifestyle habits. So even if you’re fresh out of college and starting your first job, start saving now.

Step 2. Max contributions to your employer’s plan

If your employer offers a 401(k) plan and will match your contributions up to a certain percentage, take advantage of it and max out your matched contributions. The money is not taxed, which allows it to grow faster, and the money is automatically deducted from your pay – so you won’t miss it.

If your company doesn’t offer a plan, you are self-employed, or you simply want to diversify your retirement investments, open an Individual Retirement Account (IRA). You can contribute up to $5,500 a year into the account, and it’s tax deductible, as long as you or your spouse aren’t covered by a retirement plan at work, or if your combined incomes aren’t too high. You’ll also avoid income taxes on your contributions and on the earnings until you withdraw it. A Roth IRA is a bit different. You get taxed on the original sum you put in but never pay income taxes on the earnings as long as the account is open for five years.

If your employer offers a pension ask for a Summary Plan Description of it – they are required by law to provide it.

Step 3. Don’t withdraw your retirement funds early

According to the U. S. Department of Labor, pre-retirement withdrawals reduce the ultimate size of your nest egg. In addition, you’ll probably pay federal income taxes on the amount you withdraw (10 percent to as high as 35 percent) and a 10 percent penalty may be tacked on if you’re younger than age 59. In addition, you may have to pay state taxes. It’s simply not worth it. Have discipline and don’t touch your funds – not for a new car, addition to your home or to pay off credit card debt.

Step 4. Figure out how you’ll meet your expenses

The three key areas of retirement income come from Social Security, pensions, IRA’s/annuities, and your savings. We went over what an IRA is, an annuity is defined by the Department of Labor as an agreement with an insurance company in which you pay money in return for its paying either a regular fixed amount when you retire or an amount based on how much your investment earns. The earnings are also not taxed until you withdraw them.

If you don’t know your estimated Social Security benefits order a statement online or use an online calculator to make estimates based on expected earnings. Another way to meet your expenses is to build your personal savings. Invest in bonds, stocks, real estate (if possible) and CD’s. If you’re able to do this type of investing, label it as a retirement source and don’t touch it until retirement.

5. Eliminate credit card debt

Every year millions of people fall deeper into credit card debt. Paying down that debt interferes with saving for retirement. High interest rates, late fees, and prolonging paying off the debt by only making the minimum payments is money wasted. By paying only the minimum monthly payment, you increase the money you’re paying back.

For example, if you charge $1,500 on unnecessary items (clothes, electronic devices, etc.) and you only make the minimum payment of say, 2.5 percent on a 19 percent rate it will take you approximately 17 years to pay it off. And on top of that an extra $2,138 in interest payments is tacked on. That’s only if you don’t keep charging on the card.

Charge only necessary items and pay off the credit card debt each month if possible. If you find yourself struggling to pay off debt, contact a credit counselor for further advice.

Step 6. Prepare a withdrawal plan

When you approach the age of retirement, you need to plan how you’ll take money from your accounts. That’s because your withdrawals will get taxed. The IRS requires you to start taking required minimum distributions from certain accounts, like 401(k) plans and traditional IRAs, by April 1 of the year after you turn 70. Usually, the more money you withdraw the larger the tax hit. Plan accordingly and if necessary talk to a financial planner. Use these resources to help:

Step 7. Take advantage of additional resources

Use this toolkit provided by the federal government. It lists publications and contains interactive tools to help in your planning, plus information on how to contact important organizations regarding retirement such as the Social Security Administration, with your specific questions.

The following websites can also be helpful:

Get ahead now to plan for the future

If you don’t have enough money to save for retirement because of heavy credit card debt or need help improving your money management skills, call Consolidated Credit today. A certified credit counselor can evaluate your debts to help you plan for your golden years. Call to speak with a credit counselor now. You can also take the first step online with a free Debt & Budget Analysis.