Retirement planning 101: A Q&A

From METRO CREATIVE CONNECTION

Individuals need not look very far to be reminded of the importance of planning for retirement. Television ad campaigns have been front and center for many years. Banks also heavily promote their retirement-planning services to account holders. The emphasis financial firms and banks place on retirement planning underscores just how important it is for individuals from all walks of life to prioritize securing their financial futures.

Ad campaigns can make saving for retirement seem simple, but plenty of people may have questions about how to save for the days when they are no longer working.

Why and when should I begin investing to build my retirement savings?

It’s never too early to start saving for retirement. Young professionals may not be anywhere close to retirement, but that doesn’t mean they can afford to put off saving. Much of that has to do with inflation. The rate of inflation varies, but it’s fair to assume that your cost of living will rise dramatically between your 23rd birthday and your 70th birthday. If you choose to simply save as opposed to investing that money, your money will not grow at a rate necessary to overcome inflation. Though there are no guarantees with investing, traditional retirement investment vehicles have a proven track record of outpacing inflation. For example, Standard & Poor’s 500 reports that individual retirement accounts grew by an average of 10.8% between 1971 and 2020. Over that same period, the U.S. Bureau of Labor Statistics indicates that the dollar had an average rate of inflation of 3.99%.

How can I save for retirement?

Various investment vehicles can help people save for retirement. Many people utilize employer-sponsored 401(k) retirement plans. These allow individuals to deposit money via pre-tax contributions that are deducted from their paychecks. For young people, enrolling in these plans as soon as they’re eligible can be a great way to begin building their retirement savings, and since many people contribute between 6 and 10% of their pre-tax earnings, their take-home pay will not be significantly different once they enroll. IRAs, pension plans, certain life insurance policies and regular contributions to personal savings accounts are some additional ways to save for retirement.

How much will I need to save for retirement?

No two people are the same, so there’s no simple answer to this question. Estimates about how much people will need in retirement range from 60 to 80% of their yearly income the year they stopped working full-time. A financial advisor can be a useful ally as people try to calculate how much they will need to save for retirement. However, the simplest answer to this common question is that there’s no such thing as saving too much money for retirement, so long as saving does not adversely affect other areas of your life.

What if I need money before retirement?

No law prohibits people from withdrawing funds from designated retirement accounts before they retire. However, there may be significant financial penalties and tax consequences if you do so. For example, the Internal Revenue Service allows penalty-free withdrawals from a 401(k) after an account holder turns 59 1⁄2. Withdrawals made before then could be subject to federal and state income tax and a 10% penalty of the amount withdrawn. Individuals are urged to speak with a financial advisor about withdrawal guidelines and penalties prior to opening a retirement account.