Spokane Journal of Business

For late retirement savers, best time to start is now

Several options available for income strategies beyond Social Security

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Not long ago, I was driving with my son. As I flipped through the radio stations, he noticed that I only listened to music from the ‘70s and the ‘80s. He asked me why I didn’t listen to music from the ‘90s. I explained to him that the ‘70s and ‘80s, I was in high school and college, and I listened to a lot of music. However, during the ‘90s, I didn’t have much time to listen to music.

My first child was born in 1990, followed by a second in 1993 and a third in 1997. I explained to him that during the ‘90s, his mother and I were working furiously to make a living while raising three kids. So, when I hear songs from the ‘90s, they just don’t resonate with me like songs from the ‘70s and ‘80s.

What’s the point? I was reminded of how it is very easy to get so busy over a period of time that other areas of life can be neglected.

Not listening to a lot of music for a 10- to 15-year period will not have a huge impact on your future. 

However, not saving any money for retirement over that same period of time will impact your future. In fact, if you have neglected saving for retirement for a 10- to 15-year period, you are, quite frankly, in trouble.

The good news is that there are still ways to move forward even if you have let 10 to 15 years go by. Ideally, the best time to start preparing for retirement is as a young person. 

The next best time to prepare for retirement is right now. I would like to highlight briefly the primary retirement savings options. It is important to note that everyone’s life circumstances are different. Therefore, not all of these retirement savings options are available to everyone.

The first retirement savings option that typically comes up is Social Security. Yes, Social Security will provide some income for you in retirement. However, it is important to note that it’s only designed to replace about 40% of your former income. 

By the time you become a senior citizen, you are going to need almost twice that amount to live comfortably. In fact, you may need more if you run into costly health issues. That is why it is crucial that you maximize your savings during your working years and that you do not let 10 to 15 years go by without saving.

To maximize savings during your working years, most people will want to start by considering an individual retirement account. An IRA is available to anyone who has earned income. There are two different types of IRAs: traditional and Roth. 

When considering a Roth IRA, it is important to first look at one’s income. For example, if you are single and earn over $122,000 a year, or if you are married and file jointly with earnings over $193,000, you won’t be allowed to fully fund a Roth IRA. 

If you qualify, you can fund a Roth IRA with after-tax contributions. The advantage to doing this, especially for younger people, is that you have a long period of time for your money to grow on a tax-free basis with the ability to withdraw the money in retirement tax-free.

In contrast, a traditional IRA is funded on a pretax basis. Your money also grows on a tax-deferred basis until withdrawn in retirement. 

However, when the money is withdrawn in retirement, it is taxed as ordinary income. With a traditional IRA, it is possible that some of the contributions may be tax deductible. Unlike a Roth IRA, you will be forced to start taking money out of your account at the age of 70 ½.

Workers under 50 can contribute only $6,000 a year to a traditional or Roth IRA, while workers over 50 can contribute up to $7,000. This leads to the question, are there ways to save more for retirement?

Yes, you can save more for retirement if you work for a company that offers a 401(k) plan. 

These plans come with higher contribution limits than IRAs. For the current year, the limit is $19,000 for workers under 50, and $25,000 for those older than 50. 

The other main benefit of a 401(k) is that most employers who sponsor these plans also match employee contributions at different levels. For example, your employer might match up to 3% of your salary, assuming you contribute that much yourself. That is basically free money.

Perhaps you are self-employed, or own a small business, and don’t have the opportunity to take advantage of a 401(k). Are there ways that you can save for retirement as a self-employed person or small business owner that will allow you to save more than what is allowed for an IRA? 

Yes, there are two types of retirement plans that may be considered: Simplified Employee Pension IRA and a Savings Incentive Match Plan for Employees IRA.

The SEP-IRA doesn’t allow the employee to make contributions. Instead, the employer, which may be a sole proprietor, makes contributions to the employee directly. The employer can contribute up to 25% of an employee’s salary, or up to $56,000, whichever is less. Also, contributions are at the discretion of the business owner, and can be adjusted if the company or owner has a rough year.

The SIMPLE-IRA allows a small business owner the opportunity to set up the plan for both themselves and for their employees. 

Any employee who has earned at least $5,000 is eligible to participate. 

Eligible employees can choose to make elective deferrals, like a 401(k) plan, and they may receive nonelective deferrals from the employer. Currently, the SIMPLE-IRA contribution limit is $13,000 for workers younger than 50 and $16,000 for those over 50.

These are just a few of the more popular options used to save for retirement, but it is important to note that there are a variety of other options that may be considered. The plans discussed above do offer tax benefits, but keep in mind, it is certainly possible to save for retirement by simply saving for retirement. In other words, opening a taxable brokerage account, which allows you to invest in a variety of different mutual funds and/or stocks and bonds, can be considered.

My bottom-line encouragement is that no matter which plan you pursue, or which savings path you take, you have to get started. 

Don’t let yourself become so busy that you allow 10 to 15 years to go by without saving for retirement. If you will be intentional about saving for retirement now, you will be in a position later in life to enjoy the music from any decade.

Rick Biel is a financial adviser with Biel Investment Management, in Spokane. He can be reached at 509-995-5734 or Bielinvest@aisgadvisor.com.

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