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Retirement is more like a journey than a destination. That may sound like a slogan on a T-shirt, but it actually is good advice to keep in mind as you prepare for retirement. And by prepare, we mean save and plan. Let’s look at some of the stages on that journey and the opportunities you have along the way.
Stage One: Accumulate and Invest
It’s never too early to start saving for retirement. True, in your twenties and thirties you will likely have student debt, your first mortgage, and car payments. You may be starting a family and saving for your kid's education costs. But saving early for retirement can actually save you money. That’s because of the tax advantages of the most common retirement saving plans.
More than half of working Americans are eligible to participate in an employer-sponsored retirement plan, and everyone is eligible to set up their own Individual Retirement Account (IRA). All of these retirement saving options come with tax advantages: in some cases your contributions are tax-deductible in the year you make them (401(k) and similar employer-sponsored accounts, Traditional, SEP and SIMPLE IRAs), in others (Roth IRAs), you pay no tax when you take distributions from the account.
A good rule of thumb is to save 10% of your salary while in your twenties, gradually raising that rate as you get older and your earning potential increases. When you celebrate your 30th birthday, you might be up to a 15% saving rate. If saving that much seems hard to do, for a month or two try keeping track of what you spend. There will be fixed costs (rent or mortgage, utilities, insurance payments) and discretionary spending (entertainment, clothing purchases, travel). Where you can cut back on discretionary spending—one less dinner out, fewer trips to the dry cleaner—you can redirect that money into retirement savings.
As your saving rate increases, you also can look at the mix of investment you hold in your accounts. This is where a self-directed IRA works to your advantage. With a self-directed IRA, you control your investments, and have a greater range of assets to choose among than in a typical brokerage or bank IRA.
Stage Two: Plan and Save
In your forties, and certainly in your fifties, it’s time to get even more serious about planning and saving for retirement. You’ll want to keep on saving as well, at an even higher rate if possible. Once you reach age 50, the IRA allows you to make larger “catch-up” contributions to your qualified retirement savings account.
As to planning for retirement, your first step may be setting a retirement date. Early? Late? Not at all? This decision has financial repercussions. For example, if you retire at 62, you will be able to collect Social Security, but your payments will be less than if you delayed for a few years.
Your age at retirement also has an impact on how long you will be retired. People are living longer these days, and it is not uncommon for people to live well into their nineties. The longer you are retired, of course, the more money you will need to live comfortably. These days, you might want to plan for 20 or 30 years of retired life.
To estimate how much you will need to live the retirement of your dreams, a budget is an important tool. As you did while saving, estimate what your living expenses will be, including fixed and discretionary costs. Then, get out the calculator—or talk with your financial advisor—about how far your retirement savings will stretch.
The more fun part of planning is figuring out where you want to live and how you want to spend your retired years. These decisions too, have financial implications. Will you purchase or rent a new residence? Travel broadly or stay closer to family?
And of course, the cost of living varies from one place to another. This is another factor to consider as you plan for how big a retirement nest egg you will need.
Stage Three: Distribute and Enjoy!
This is where the journey really gets exciting. You get to enjoy the saving and benefit from the planning you’ve done over the years.
You can start taking distributions anytime from your IRA, but you'll have to pay the 10% penalty, unless you take distributions at age 59 ½ (which has no penalty). You can retire with full Social Security benefits between the age of 65 and 67, depending on when you were born. Or, you can wait until age 70 to tap into your Social Security benefits (Note: Waiting this long does not increase the benefit you will receive.) At age 70 ½, you must start taking your required minimum distribution from your IRA.
Get Help During Your Journey to Retirement
You don’t have to make this retirement saving journey alone. Trained financial advisors, many of them certified for their expertise in retirement planning and IRAs in particular, can help you plan. And the trained professionals at The Entrust Group can answer questions about self-directed retirement savings accounts. Visit us online or give us a call at 1-800-392-9653.