In 2004, I was working as a customer service representative, taking inbound customer service calls for a local bank. Most of the calls that I received were from elderly customers calling to see what their checking account balance was, or if their social security deposit had posted. Almost all of those callers were living solely on social security income. Most of them were overdrawn before their next deposit, because it simply wasn’t enough for them to live on.
Repeating the same overdraft conversation call after call, really hit home for me. My heart went out to these seniors who were trapped in the never-ending cycle of constant overdrafts, and not having enough money to survive throughout the month. It also opened my eyes and led me to start saving for retirement immediately in my early 20’s, instead of waiting until later in life. I did not want to be in that same situation when the time arrived for me to retire.
According to an Economic Policy Institute (EPI) report, “Less than 13% of Americans have pensions, and nearly half of families have no retirement account savings at all.” In 2016 a Go Banking Rates survey revealed that, “35 percent of all adults in the United States have only several hundred dollars in their savings account and 34 percent have zero savings.” That leaves only 31% of American adults with adequate savings accounts. Which percentage do you fall into? If we are living paycheck to paycheck or are consumed with debt and other obligations, how actively are we saving for our future, and more specifically our retirement years to come?
As we learned in Part 1 and Part 2 of our Financial Past, Present and Future Series, we need to be diligent in correcting the mistakes of our past by paying down debt. We also need to take control of our present financial footprint by saving more and spending less. Let us not forget to set up our financial future by proactively preparing for retirement.
Below are a few tips to assist you with your retirement savings goals and other savings avenues in order to successfully set up your financial future.
1. Start saving for retirement as soon as possible.
As soon as you start your first full time position, even if you are in your late teens or early 20’s, you need to start saving for retirement, through a qualified retirement plan. The earlier you start the better, because even if you can’t save hundreds of dollars per month when you first start out, the compound interest of any retirement savings will greatly benefit you later. According to investopedia.com, compound interest is calculated on the initial principal, which also includes all of the accumulated interest of the previous period of a deposit or loan. In short, compound interest boosts your initial investment and helps your balance to continue to grow over the years.
I cannot stress enough how important it is to start saving for retirement sooner rather than later. It is recommended that everyone save at least 15% of their income, in order to save enough money to last their entire retirement stage of life. Even if you can’t start out saving 15%, starting with a lower percentage and increasing it every year is still a great help. The key is to start by saving something instead of nothing.
For 2019, you can contribute up to $19,000 to your 401K or employee sponsored plan. The good news is, if you are age 50 or over, you can contribute an additional $3,000-$6,000 this year to catch up. This is great if you haven’t been able to save as much as you would like in previous years, or if you just want to save more for retirement now. The contribution limits change each year and vary by the type of plan, so check out www.irs.gov for your allowable contribution amount.
2. Get your 401K or other employer sponsored plan company match.
Many companies match your retirement contributions up to a certain percentage. If your company does offer a contribution match, I don’t care what you have to do, but make it a priority to increase your contribution to at least meet their requirement. You should want to receive their full matching funds. It’s extra money to help your retirement balance grow and you deserve it!
Don’t contribute 2%, when your company offers a match up to 10%. The extra 8% from you, plus that additional 8% from your company, can significantly boost your retirement savings over the years. If your company offers a match based on your contributions and you are not contributing anything at all, you are walking away from free money. This is money that you will definitely need later in your retirement years.
3. Open a Roth or Traditional Individual Retirement Account (IRA).
In addition to contributing to your company’s retirement plan, you can also contribute to an IRA to save more towards retirement. With a traditional IRA, you receive the tax advantage in the same year that the contribution is made, but the withdrawals are taxable. With a Roth IRA, your withdrawals during your regular retirement age are not taxed. Always check with a professional tax preparer when determining which type of IRA is right for you and your tax needs.
For 2019, you can contribute up to $6,000 into an IRA. If you are age 50 or over, you can contribute an additional $1,000 this year. The contribution limits change each year, so check out www.irs.gov for the latest contribution amounts.
4. Every time you get a raise, increase your retirement savings until you reach the max.
Even if you increase it by only 2% per year, after 5 years, your increase will be at the 15% mark if you initially started at 5% in your early 20’s. This will still give you time to grow your retirement savings. If you can contribute more sooner, make sure that you do.
Some employers have options that allow you to set the increase to occur automatically each year. Take advantage of that option if it is available, so you can set it up and don’t have to remember to increase it later.
You should also consider saving all or a portion of your annual or monthly bonus and tax refund for retirement as well.
5. Open and contribute to a Health Savings Account (HSA).
If you are eligible to open and contribute to an HSA, those funds can be used to cover qualified medical expenses, such as co-pays, prescriptions, dental and eye exams, glasses, etc. You can use your HSA to pay for existing qualified healthcare expenses now, or you can continue to contribute to the account and let it build up for later use during retirement. In retirement is typically when your monthly income decreases, but your medical expenses increase.
If you are eligible for an HSA through your employer’s health care plan, you should be able to make payroll contributions to the plan, just as you would for your retirement plan. Contributions to an HSA are tax deductible and decrease your taxable income.
Many employers who offer high deductible health insurance plans, also offer an employer contribution. They may require a few things from you to receive the contribution, but it’s usually a simple health screening and/or health survey to qualify. Many employers will offer on-site health screenings to make it more convenient for you to participate. You also have to open the HSA account if you do not already have one. Some employees miss out on receiving the employer contributions, simply because they do not complete the requirements or open the account.
Since medical expenses are usually much higher as we age, this is a great, yet often overlooked option to save for medical expenses later in life. You don’t have to use the money within the same year, so you can use this as a great avenue to save for retirement as well (to be used strictly for qualified medical expenses).
*You must have a high deductible health insurance plan and meet certain requirements to be eligible to open and contribute to an HSA. Your employer will let you know if your plan qualifies for an HSA, but you do not have to be on an employer sponsored plan to be eligible. See www.irs.gov for eligibility and more details. If you are not eligible to open or contribute to an HSA, you can still open an additional savings account and earmark it for medical expenses to be used during retirement. You can never have too many savings accounts.
6. Build an emergency savings.
Typically, you should have at least 3-6 months (more if you can), of monthly expenses saved in case of emergencies. This should be a separate savings account that does not get touched except in extreme cases of emergency, where you may have lost your job, gotten sick and unable to work or collect income, etc.
Once you determine the dollar amount of your monthly expenses, decide how long you want to take to build up the first 3 months of savings. If you have $4,000 in monthly expenses, and you want to save $12,000 (3 months of savings) over the next year, you would have to save $1,000 per month to meet that goal. If $1,000 is too much to save per month, increase the savings period to 18 or 24 months. If this method is still too much, start to save a specific dollar amount every month or every pay period, to build the habit of saving, no matter how small the amount.
Having an emergency savings is extremely important if you do lose your job, because this will keep you from needing to pull money from your retirement accounts. Anytime you pull from your retirement accounts prior to eligibility age, you will pay extremely large tax penalties. It will also take away from funds that you will greatly need later in life.
7. Open a certificate of deposit (CD).
CD’s usually pay more interest than the average savings account. Once you start to accumulate a nice savings balance, you may be able to open a cd with as little as $1,000, and lock in a better rate than your savings account for a specific period of time. You can always close the CD out early, but you will pay a penalty and/or forfeit a portion of the interest to do so.
Most financial institutions offer special rates at certain times, so calling around to rate check before you lock in a rate is a great idea. CD’s range in terms from a few days to about 5 years. If you have some money that you want to get a higher rate on, I would do a CD for 6 months to 18 months at the most. You could choose a 2 year or 3 year CD, only if the rate is too good to pass up. The more money you put into a cd, the higher the rate they may offer. There are also jumbo rates if you open a cd for $100,000 or more.
8. Speak to a financial advisor about other investment options.
Stocks, bonds, mutual funds, and other investment products are not Federal Deposit Insurance Corporation (FDIC) insured, and you could lose money on your investment, but they have the potential for a higher rate of return than savings and cd’s. It’s best to diversity when you invest your money. You also want to be careful when selecting who will assist you with your investments, because there are some advisors/firms who will suggest products that give them the highest commission on your accounts and transactions.
9. Open a 529 College Savings Plan for your children.
529 College Savings Plans may be utilized for K-12 tuition and college. There are 2 types of plans. There are college savings plans and prepaid tuition plans. Contributions are not tax deductible, but earnings are federally tax free, in addition to not being taxed when the funds are deducted to pay for college costs. Almost every state has at least one type of 529 Plan, so if you have children, this is something you will want to check into, to assist with funding their education.
10. Try to increase your income.
You can apply for promotions, move around within your company or apply to new companies to increase your pay. You can also get paid for your hobbies or look for new ways to bring in multiple streams of income (legally of course-lol!!).
11. Get life, supplemental and/or long-term care insurance to protect your life savings.
If you are already living paycheck to paycheck or drowning in debt, what would happen to your family if something were to happen to you or your income? There are a number of different life and supplemental insurance options that may not be as expensive as you think. Make an investment in securing you and your family’s wellbeing, should an unfortunate event occur.
Sometimes people wait too late to consider long term care insurance. Long term care insurance helps to cover the extremely high costs of medical care if you are diagnosed with a severe disorder, disability or chronic medical condition. Yes, you may currently be healthy and have very good health insurance, but health insurance does not cover if you have health aides come into your home, need to move into an assisted living facility, or attend an adult day care.
Most people wait to purchase long term care insurance when they are in their late 50’s or 60’s, which is understandable, but if you wait too late or get diagnosed with something before then, you will not be eligible for coverage. There are some policies that will pay a family member to care for you if needed, but you have to make sure that your policy covers that option, because most of them do not.
Always check all of the limitations of the policy and cost for premiums to see if it is beneficial for you. Everyone does not need every type of insurance out there, but most of the people who do need some form of insurance do not have it.
Bonus for Everyone:
Try your best not to start withdrawing from your retirement accounts prior to the set retirement age requirements. Once you take your first withdrawal, it will be much easier for you to continue to withdraw from it. As I stated before, anytime you pull from your retirement account prior to eligibility age, you will pay large tax penalties, not to mention take away from funds that you will greatly need later in life. Protect your financial future at all cost.
Many retirees have to go back to work to afford insurance, medications, and some basic needs. Even people who actively saved for retirement sometimes endure financial hardships, when faced with mounting medical bills or unforeseen events. If we prioritize our spending and saving habits, we can successfully set up our financial future for the better.
I hope that this 3-part series has been beneficial to you. If you haven’t already done so, check out Part 1 and Part 2 of our Financial Series: Past, Present & Future, and try to tackle at least 1 goal until you have mastered it, and can successfully move on to your next goal.
What is at least 1 goal you plan to implement from the Past, Present and Future Series right now? Let me know in the comments below…
*FLOURISHQueen.com does not provide tax or legal advice. Always check with a licensed professional for your specific tax and legal needs.