For many of us, saving for retirement may fall into the same category as going to the gym: “I’ll do it tomorrow.” If that phrase sounds familiar, you’re not alone. But just like exercise, the sooner you start — and the more you put into it — the better. So if you haven’t started saving for retirement, you should consider starting now. If you’re already contributing to a 401(k) plan, Individual Retirement Account (IRA), or other retirement savings vehicle, you may already be on your way to retiring on your own terms. (Go ahead and splurge on that glazed cruller.)
Of course, whether you've been saving for two months or 20 years, the goal ultimately is to get the most out of what you put in. Here are some considerations, among others, to help you do just that. Of course, you should discuss your own specific goals and circumstances with your experienced tax and investment advisors or legal counsel, as appropriate.
1. Consider How Much Income You’ll Really Need in Retirement
You should consider taking full advantage of all tax-advantaged savings vehicles, like the 401(k) and IRA you may already be contributing to. While there are benefits and drawbacks to different types of accounts (more on that in a minute), your main focus should be on how much income you’ll need when retirement comes.
Speaking of income, will you have enough income in retirement to cover your necessary expenses? Social Security and pension benefits are two examples of predictable income. Next, think about your monthly bills and expenses today and try to project what they may be tomorrow. Consider your priorities, both now and what they might be in the future. Your answers to these questions will help give you a rough idea of how much money you’ll need to to cover your expenses in retirement. With that information, you can determine how much you’ll need to save each month — and how much you may need to cut back — to reach those goals.
Everyone’s answers to these questions will be different. We can’t all spend our twilight years relaxing on a yacht in the Mediterranean. Nor do we all want to. But that’s the point. No two savers are the same. If you take the time to consider your monthly income needs and expenses, both now and in the future, you can increase the likelihood of getting where you want to go.
2. Consider the Tax Implications
If you are considering a traditional or Roth IRA to help you save, you need to be aware of key differences between the two, starting with the way contributions are made. With a traditional IRA, contributions may be tax-deductible and you don’t generally pay taxes on any accumulated gains, interest or dividends until the money is withdrawn. Withdrawals from a traditional IRA are generally taxed as ordinary income and tax penalties may apply if the money is withdrawn before age 59 ½.
Contributions to a Roth IRA are always made with after-tax dollars and are not tax-deductible. However, qualified distributions from a Roth IRA generally are federal income tax-free, provided they meet Internal Revenue Service requirements.
Looking beyond the basic retirement account, annuities may be another option when it comes to saving for retirement. You generally won’t pay income tax on the money in your annuity (including any interest or earnings) until it’s withdrawn, and annuities, under certain circumstances and conditions can guarantee income for life1. An annuity can help you reach your long-term goals whether you want to accumulate assets, generate guaranteed income — or both.
3. Consider Your Options…
Some annuity products can provide protection from market fluctuations with a fixed rate of interest. Other annuities can offer professionally managed investment options that provide exposure to the market — with all its potential risk and reward. There are even annuities that can help you establish your own pension-like, future income stream with purchase payments you make today.
There are many factors to consider when deciding between a Roth IRA, traditional IRA or an annuity product, including tax implications, minimum distributions and income restrictions. You should consult with your own tax, legal and investment advisors, as appropriate, prior to making any determination.
4. …And Consider Getting Some Help
Before you commit to any retirement savings vehicle, it’s important to understand both its advantages and limitations. After all, not every option is right for everyone. A trusted and experienced Financial Professional can help you determine your overall expenses, identifying potential income and projected expenses in retirement. If there’s a gap, he or she can help you evaluate a range of possible solutions. It can be like having a personal trainer for your finances.
The bottom line? It’s never too late — or too soon — to begin planning for your retirement income needs.