You deserve to be able to enjoy retirement and pursue interests without worrying about money! The worst retirement outcome is for you to be 95 years old, unable to work, but have no more retirement savings. It's better to work for an extra year or two in your 60's than to expend all of your savings in your 90's and have no ability to generate income. You should have enough savings so that you can rest during retirement for however long you live instead of thinking, "I can't afford to live beyond 85."
Don’t count on Social Security to provide a comfortable retirement, especially if you’re under 40. You should instead focus on preparing for retirement through saving and investing wisely. The #1 account type used for the management of retirement investments is the 401(k), and it is likely to be the centerpiece of your retirement planning, too.
56% of job-seekers expect an employer to offer a 401(k).
The Looming Social Security Shortfall
Social Security is essentially the national pension plan, with all of the advantages and disadvantages of such systems. The Social Security system's greatest flaw is that the plan was implemented when people didn't live as long as they do today. Instead of serving as a true safety net for people who lived beyond expectations, Social Security now pays most retirees who worked before age 65. (There are exceptions but not many.)
As noted by Dan Caplinger, the Social Security system isn’t on track to be perpetually solvent. Don’t count on Social Security for very much retirement income if you're under 40 years old. You might receive some money from the system, but the present trajectory of funding argues against it. We shouldn't assume that the government will provide the current level of benefits forever, so that’s why you need to take control of your own retirement planning!
401(k) Basics
The 401(k) is a type of retirement investment account used by over 41 million Americans businesses.1The 403(b) is a similar plan available to employees of public schools, certain hospitals, and nonprofit organizations, according to the IRS. Standard 401(k) and 403(b) accounts are funded with pre-tax contributions, meaning that these are tax-deferred retirement plans. You don’t pay taxes on money added to the account, but you still pay taxes when you withdraw money in retirement. (The rare Roth 401(k) switches the tax burden by requiring you to pay taxes on contributions but not on withdrawals for retirement.)
As noted by Elyssa Kirkham, “People age 50 and over can make catch-up contributions of $6,000 to a traditional 401k, for example, in addition to the regular $18,000 annual 401k contribution limit.” 401(k) and 403(b) accounts are provided by employers, but each employee’s 401/403 account is owned by the worker and wouldn’t be impacted even if the employer went bankrupt. These accounts are also portable, and a 401(k) account started with one employer can “roll over” into another employer’s plan should the worker switch jobs. Envision the entire account following you throughout your career!
Around 70% of people in affluent households have a 401(k).
Maximize Your 401(k)
Most employers will add contributions to employees’ 401(k) accounts, and, in many cases, companies will match their workers’ contributions up to a certain level (say, 6% of an individual’s annual salary). You should always save enough in your retirement account to receive any, and all, matching funds from your employer. Otherwise, you’re leaving free money on the table! You do like free money, don’t you? Capturing all of the match can supercharge your account balance, especially if you receive good pay.
It’s also important to invest wisely through your 401(k). Diversify your assets by utilizing mutual funds and exchange-traded funds that funnel money into different sectors of the stock and bond markets. Look for funds that invest overseas, too, because there are many appealing international investment opportunities! As you near retirement, you will want to be more conservative with your investment allocation because you will have less time to recoup money lost in a recession or lackluster fund. Remember that a 100% return is necessary to recover from a 50% loss!
Wrapping Up
In summary, Americans often haven't prepared for retirement, but we want to ensure that doesn't become an issue for you. Begin to improve your retirement readiness this week by contacting us for a free 401(k)/403(b) review! The number of retirement accounts, investment strategies, and portfolio allocations can be overwhelming, and we can answer all of your retirement planning questions with clarity. Take charge of your retirement now so you can enjoy your golden years in the future.
Sources:
1 Jobvite
2 Statista
3 Ipsos