By Pete Alfano
Setting aside savings from your monthly paycheck can be difficult whether you are single or raising a family. Even more challenging is saving for the future — in other words, your retirement. Who wants to contribute money that cannot be touched without penalty for a few decades?
But with the future of Social Security and Medicare in question, it is even more imperative to contribute to a retirement plan that will enable you to pay the bills and keep food on the table in your senior years. And there are several options available.
As with most financial matters, first, determine your disposable income after paying monthly bills. Trim the fat if you have any. For instance, do you need four streaming services? Now you will have a better idea of how much you can contribute to an employer-sponsored 401k, an IRA, a Roth IRA, or a Simplified Employee Pension (SEP).
Any of these is an excellent way to watch your money increase at a rate estimated to be between five and 8% annually — much higher than a traditional low-interest savings account. That’s true even when the economy goes through cyclical ups and downs. While a savings account will give you instant access to your money, it will lose value over time because of inflation. The federal government does insure your savings up to $250,000 for individuals and $500,000 for joint accounts, but if you have that much stashed away, consider withdrawing some of it and investing in a retirement fund.
Stashing Your Money
One of the best options is an employer-sponsored 401k. This plan enables you to contribute pre-tax dollars, which are deducted automatically. Many employers still contribute to the plan, adding to your fund. For example, if your salary is $75,000 a year and you contribute $10,000 to 401k, the federal government will base your tax rate on $65,000. Remember, this is a long-term form of investment. If you are forced to withdraw money before you are 59 1/2 years old, there is a 10% penalty. In 2023, you can contribute a maximum of $22,500 to your 401k.
An Individual Retirement Account (IRA) enables you to invest pre-tax dollars into funds that you choose. In 2023, you can contribute up to $6,500 in pre-tax dollars and even get a tax deduction based on your annual salary or if your employer does not offer a 401k plan. If you are 50 and older, you can contribute $7,500. You must deduct a predetermined amount in your IRA when you turn 72, and that money will be taxed as ordinary income. You can contribute to an IRA and a 401k.
A Roth IRA is different because your tax benefit comes when you withdraw your money. In other words, your contributions are funded with after-tax dollars, but your withdrawals are tax-free. You can contribute $6,500 in 2023 and $7,500 if you are 50
What if you are self-employed or own a small business with several employees? Then, a Simplified Employee Pension (SEP) IRA allows you to contribute up to 25% of your annual income with a maximum of $66,000 in 2023 and fund your account and those of your employees. And those contributions are tax-deductible.
Lastly, consult your CPA or a financial advisor who can help you determine which retirement investment strategy is optimal for you and provide professional guidance to help grow and safeguard your nest egg. Whichever retirement plan you choose, keep in mind that the future is not as far away as you may think.
Realities of Retirement
The Social Security retirement age is going up, and people need to keep working to ensure they are financially secure in their senior years. Statistics show that 62% of retirees depend on Social Security, which isn’t enough. They need supplemental income. Pension plans have gone the way of the dinosaur in most cases, and the money you stash in a savings account is growing at a snail’s pace. Inflation also takes a toll, eroding the value of
Therefore it is a necessity to set aside money for retirement sooner rather than later and manage your investments to help protect your financial future. The senior population is growing, and no one can predict what Social Security will look like 25 or 30 years from now or what the cost of living will be. A candy bar cost five cents once upon a time and going to the movie theater for a double feature was fifty cents.
There is no denying that a 401k, IRA, Roth IRA, or SEP carries some risk. It’s vital to enlist the help of a financial advisor who will tailor a plan based on your needs and goals. If you are younger, for example, you can afford more risk because history shows losses are relatively short-term, and your investment has greater potential to grow over the years. If you are older, be more conservative because you want to minimize losses and protect your financial future. That $2 candy bar you bought today might seem like a bargain in 2050.