Retirement 101

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Originally posted on Money with Merne’s Facebook Page on January 16-20, 2017:

Ah, retirement. Saving for it is the ultimate delayed gratification. If you’re a live-in-the-present kind of person, you may struggle with preparing for it. You have to want it. Have a vision in mind of retirement and what you want to do. How will you spend your days? Where will you live? These aren’t just silly questions, you should have a good idea what your retirement lifestyle will be so you can properly plan financially for it.

401k. (Or 403b for non-profit) A retirement account offered through your employer. It’s usually pre-tax meaning it comes off the top of your paycheck and you’re only taxed on what’s left after it’s taken out. That’s great, it reduces your taxable income in the present. BUT you still have to pay taxes when you withdraw the money in retirement. Your employer limits the investment options but they may offer a match (translated: free money!). There are penalties for taking out the money before retirement age. And these accounts are in a kind of limbo when you leave your employer. But they’re probably the easiest retirement account to set up since your employer does a lot of the work and your contributions automatically come out of your paycheck.

IRA. Individual Retirement Account. Of the Traditional and Roth variety. Individual because you have to set them up yourself through a financial institution and make your own contributions. But you have a plethora of investment options. And you can take it with you no matter where you work.

  • Roth IRAs: you contribute post-tax money. There are no penalties for withdrawing your contributions at any time. Your money grows tax free and you withdraw in retirement tax free. What you see is what you get! Unfortunately there are income limits so if you make too much, you may not be eligible to contribute to a Roth.
  • Traditional IRAs: similar to a 401k, they take pre-tax money and you pay taxes on your withdrawals in retirement. There are penalties for withdrawing sooner, but there are no income limits.

Now that you know the definitions of 401ks and IRAs, what should your strategy be for investing and taking advantage of all these options? Suze Orman has given some great advice. She loves Roths! In the past she has said:

1. Contribute to your company 401k up to the match.
2. Fully fund a Roth IRA if you can.
3. Any extra, increase your 401k contribution.

My husband and I are doing #1 and #2 and our goal is to do #3 when we’re not paying for full-time childcare anymore.

In other retirement articles I’ve read, a good goal to shoot for is saving 15% of your income for retirement.

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