“There’s a lot of decades between 2am drunk munchies and the early bird special. Do we need to talk about this now?”
Without a doubt. The Golden Years, as your grandparents might’ve called them, may be decades away but you really do need to start thinking about them now. You know you need to plot your career path in order to be successful; the same principle applies to retirement prep.
Retirement, at its core, is the time period after you stop working full time and start living off your 401(k) and other retirement accounts, any life savings, Social Security payments, or part-time income. For many Americans, retirement traditionally begins any time between 62 and 70 years old – that is, the age range when you can start collecting benefits. If you’ve scrimped, saved, and maximized your investments, however, retirement could be as early as you want it to be.
And though you think you have ample time to prepare, plenty of hypotheticals still exist in retirement planning: how long will you actually live? How can you possibly predict your health or any potential medical conditions? How much will you spend on care? Can you really save enough money to live comfortably for at least 20 years? These are uncomfortable questions, sure, but that uncertainty is exactly why you need to start preparing now. Needing around-the-clock care, for example, can deplete your nest egg.
We’ll delve into calculating your expenses and planning for unexpected events, but let’s zero in on the biggest weapon in your retirement arsenal that you have now: your tax-advantaged retirement savings accounts. These accounts boast tax-deferred growth – so you won’t need to worry about capital gains. Even if you can’t sock away hundreds of dollars every month, you can still stash a small amount and benefit from decades of compounding (link) in these types of accounts:
401(k): Offered as part of your job’s benefit package, you can automate pre-tax contributions from your paycheck and get matching contributions from your company (if matching is part of your benefits package). When you retire, your 401(k) withdrawals are taxed.
IRA and Roth IRA: If you don’t have a 401(k) with your company, you can open your own IRA or Roth IRA account. With an IRA, you contribute your pre-tax income and pay taxes on withdrawals in retirement. With a Roth IRA, contributions are made after taxes are taken out, so you won’t pay taxes when you do eventually withdraw your cash.
Keogh Plan and SEP IRA: If you’re a freelancer or a small business owner, your Keogh Plan or SEP IRA is your tax-deferred equivalent of an individual IRA. Similarly, you’ll also make contributions with your pre-tax dollars and then pay taxes on the withdrawals.
After forty to fifty years in the workforce, you deserve a break. An extended one. We can’t tell you what retirement will look like – for some people, it’ll be playing golf every morning before afternoon bingo at your retirement community. Others may pack their belongings in a trailer and spend their days on the ultimate road trip. What we can tell you is how you can prepare for it. And we’ll tell you how to do it in two words: Start. Now.
Photo: Trev Grant