Simple Guide To Retirement Planning For Beginners

I love the idea of a clean slate.  A new year feels so exciting to me!  When I wrote about goals in my last blog post, one of my biggest goals was to educate myself on retirement planning and investing options. Most financial experts will suggest sticking 15% of your income into retirement accounts, and we are on point.  I wanted to say “on fleek,” but my teen son said people don’t say that anymore!!  This photo above – yeah…that is where I want to spend my golden years!!!

Retirement Planning

My husband has a 401(k) that we are maxing out, but I was curious to know what our other options are. There is so much information out there; I was feeling overwhelmed. Retirement planning intimidates me a little.

When a group of 45-year-old friends sit around the table talking about retirement planning and investing, I understand many things. I know that funding for retirement planning is essential at any age, but more so at 45.

I know that my teacher friends all have pensions, and one friend is still in the National Guard, making it her career, and she is well covered. My last friend has been at the same company since she graduated from college, and I believe she mentioned she might be behind but is doing alright. At our age, we are looking at 20 years until retirement. They seem to be doing okay in their retirement planning process.

But what about those who are not?  What questions are they asking?  401(k), 403(b), or 457?  Annuities?  What about a Roth IRA or Traditional IRA?   I wish Target carried those!!!  Cartwheel deal on Roth IRA’s??  Score on retirement planning and a latte from Starbucks!!!

But I don’t know the details of how to make these specific investments. How do you pick what’s best? Do you need an entire portfolio, and do you watch the stock market every day?

As financially savvy as I consider myself to be, I want to know more about investing for my future, so I decided to get my hands dirty.

Pensions Explained

Teachers, nurses, government officials, protective services, factory workers, and the military still participate in pension plans.  A pension plan is merely a retirement account for employees.  There are many variables in the idea itself: contributions and who makes them( employers and employees), age to collect, and amounts given.  My understanding of pensions is that it’s a specific dollar amount multiplied by years of service.  So, if you have been a teacher for 20 years, your pension might be $90 multiplied by 20 years.  This would equal $1800 per month as your pension amount.  That $90 amount is decided by your employer well in advance.  Yours could be more, it could be less.

According to my research, it might not be the best choice to rely solely on your industry’s pension—one may never know when and if that money will be decreased or even dissolved.

Differences Between 401(k), 403(b), And 457

These plans include 401(k), 403(b), and 457.  Relatively, they all do the same thing, but the numbers depend more on which type of employer you have.

403(b) is retirement planning for teachers, hospitals, religious organizations, and charities.

457 plans are for government workers and other non-forprofits.

And 401(k) plans are for everyone else.

Each of these retirement plans has a limit on how much you can contribute each year, depending on age.  If you are under 50, you can only contribute $18,500 per year.  Fifty or older get a “catch-up” option with an additional $6,000 yearly.  According to Forbes, there was a $500 increase in 2018, bringing maximum contributions up to that $18,500 mark after being stuck at $18,000 for three years.

Employers do not have to offer retirement plans such as 401, 403, or 457. If your company does not, there are other ways to save independently.

There are many other options for putting money away for our golden years.

CDs or Certificates of Deposit

These are certificates purchased from a bank for a specified amount. They are normally locked in for a chosen amount of time, usually one, three, or five years. So, you could buy a CD for $500 for three years, and no matter what, you are locked in for those three years. Right now, the interest earned on that $500 is between 2.7 and 3.1%, depending on the length of time.

Annuities For Retirement

These are similar to CDs (certificates of deposits), and they have a pretty low interest rate yet are still higher than CDs. Many experts say that annuities are not the best option unless you have maxed out all other contributions. There are too many fees attached, and often, they are sold by insurance companies, not financial experts.

Traditional IRA and Roth IRA

Ah, the Individual Retirement Account.  So, there are two different IRAs to chat about.  According to the IRS website, your total contributions in 2019 cannot exceed $6,000 ($7,000 if you are over 50).  Also, some interesting information: if your taxable compensation (or income) was less than this, you cannot contribute any more than that.  So, if your income, including wages, tips, salaries, commissions, and bonuses, is only $4,000, that is as much as you can contribute to an IRA.

With a Roth IRA, this contribution also greatly depends on your annual income, and limitations exist.  According to the IRS website, if you are married and filing jointly, your income must be below $203,000 to contribute to a Roth IRA.  You can find out more on their website.

However, if you are a stay-at-home spouse without an income, you can still contribute as long as you file your taxes as “married—filing jointly” and as long as your spouse has taxable compensation, as stated above. I found that interesting. As a married couple, even if one is working, your maximum contributions to an IRA are $12,000 per year with separate accounts.

Traditional IRA

• With a traditional IRA, you can get a deduction on your taxes for that year, but taxes are taken out when you withdraw the money at retirement.
• You must make any contribution to a traditional IRA before the age of 70 1/2.
• There is a forced minimum distribution at age 70 1/2. This means you have to take money out at that age.
• If you withdraw money before retirement, you must pay tax.  And if you take it out before you are 59 1/2, you will also have to pay penalties.

Roth IRA

• With a traditional IRA, you are really at the mercy of the future tax rate.  Because Roth IRAs are contributed after taxes, you are certain of the amount you will have to live on during retirement.  What you see is what you get.
• There are income limits on Roth IRAs. As stated above, a married couple filing jointly must make below $203,000.
• There are no age limits for contributions.
• There are no minimum age distribution rules.
• You can withdraw money from a Roth IRA anytime without penalty.
• You can also choose a beneficiary to inherit your account, and they can withdraw tax-free.
• With these options, you do not have to check Yahoo Finance every 3 hours to see how your investments are doing unless you enjoy investing as a hobby.  But for a pure beginner like me, it is just not necessary.

Many banks have financial advisors that they can refer you to, and Dave Ramsey has SmartVestor Pro referrals if you are looking for an investment teacher. I encourage you to consult with a financial advisor (or two, three, or four) to find someone to help you if you choose to go that route.

I also encourage you to research, research, and research some more when deciding where to put your money.  Investing is not a new outfit you can discard next spring when it’s out of style. Retirement planning is a serious business!   This is your future, your legacy, and your ‘dream come true’ money.  Stay smart!