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 that people don’t say that anymore!! This photo above – yeah…that is where I want to spend my golden years!!!
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 so overwhelmed. Retirement planning is a little intimidation to me.
When a group of 45-year-old friends sit around the table talking about retirement planning and investing, there are many things that I do understand. I know that funding for retirement planning is essential at any age but more so at 45 years old.
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 ok 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 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 what I don’t know are the details on 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 perceive myself to be, I want to know more about investing for my future. So I decided to get my hands dirty.
Teachers, nurses, government officials, protective services, some factory workers, and military all still participate in pension plans. A pension plan is merely a retirement account for employees. There are many variables on the idea itself; contributions and who makes them( employers and/or employees), age to collect, and amounts are given. My understanding of pensions is that its 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 the research I am doing, 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 have more to do with which type of employer you have.
403(b) is retirement planning for teachers, hospitals, and religious organizations and charities.
457 plans are for government workers and other non-forprofit.
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 years of age, the maximum you can contribute is $18,500 per year. Fifty or older gets a “catch-up” option with an additional $6,000 per year. 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, 0r 457. If your company does not, there are other ways to save independently.
There are so many other options for putting money away for our golden years.
CDs or Certificate of Deposit
These are certificates purchased from a bank for a specified amount. These 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 CD’s (certificate of deposits), and they have a pretty low-interest rate yet still higher than CDs. Many experts say that annuities are not the best option unless you have maxed out al other contributions. There are too many fees attached and many times; they are sold by insurance companies, not financial experts.
Traditional IRA and Roth IRA
Ah, the Individual Retirement Account. So there are two different IRA’s to chat about. According to the IRS website, your total contributions for 2019 cannot exceed $6,000 ($7,000 if over age 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 are 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 income per year, and there are limitations. If you are married, filing jointly, your income must be below $203,000 to contribute to a Roth IRA according to the IRS website. 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 had 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.
So what’s the difference between the two IRA’s?
- 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 kind of 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 at 70 1/2 years old; you HAVE TO take money out.
- If you withdraw money before retirement, you will have to pay tax on that money. And if you take it out before you are 59 1/2, you will also have to pay penalties.
- With a traditional IRA, you are really at the mercy of what the future tax rate might be. Because Roth IRA’s 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 to Roth IRA’s. As stated above you must make below $203,000 as a married couple, filing jointly.
- There are no age limits for contributions.
- There are no minimum age distribution rules.
- You can withdraw money from a Roth IRA anytime for any reason without penalty.
- You can also choose a beneficiary to inherit your account, and they will also be able to 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 the 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 sit and have a consultation with a financial advisor (or two, three, four) to find someone to help you if you chose 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 that 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!
As a Canadian, I found this really interesting to read. Our retirement planning vehicles are a little different up here, so I learned a lot.
That said, I’m with you – retirement planning can be super intimidating. I’m going to be turning 30 next year and at this point, I have a government pension (I’m in the civil service) and about $20K in RRSPs (mostly because of my first job, which had a match). Outside my pension, I don’t contribute much right now because we are paying back debt but I still do a little here and there. I do worry about being behind in this regard…which makes me worry for some of my friends, who I know have not even started saving yet.
Once we get a bit more debt paid off, I think I’m going to be looking into adding some GICs to the mix. I think eventually it would be good to sit down with a financial advisor and go through everything again and make sure I have the best asset mix. It’s been a while since I did that, so can’t hurt to refresh.
Rambling comment, but thanks for the encouragement to think a bit about this!
Tara – what is an RRSP?
I think you have plenty of time yet. Especially since you have a head start with a government pension. And just think about all the spare change you will have once you are debt free!!!