There is no quicker way for me to ratchet up the stress in a room than to ask how everyone is doing with their retirement planning. I understand the anxiety. The stakes are so high and wading through all the options-401(k)s, IRAs, Rollovers-can be confusing.
I am here to help. Master these four steps to get your retirement savings rolling, and your confidence up:
1 . Take the Free Money First
If your employer offers you a matching contribution when you contribute some of your salary to your retirement account, I want you to make sure you get every penny of that employer match. That’s like being paid a bonus…into your retirement account. Always contribute enough to get the maximum match. (But not necessarily any more…see Tip #2.)
2. Focus on a Roth IRA
Once you’ve maxed out on the match from an employer (or if you don’t have a plan through work, or the plan doesn’t offer a match) next focus on saving in a Roth IRA. I prefer Roths over Traditional IRAs for two reasons: Withdrawals from a Roth IRA can be 100% tax free if you follow a few basic rules. All retirement withdrawals from a Traditional IRA are taxed as ordinary income. And in a serious financial emergency, you have easier access to money in a Roth IRA: any money you contributed can be withdrawn without owing any tax (it’s just earnings that shouldn’t be touched.) This year you can invest up to $5,500 in an IRA; anyone at least 50 years old can bump that up to $6,500. You don’t have to invest it in one lump sum. Any discount brokerage will be happy to set up monthly or quarterly direct deposits from a bank or credit union checking account. The one catch is that there’s an income limit for investing directly in Roths. In 2016 an individual with modified adjusted gross income below $117,000 and married couples filing a joint return with MAGI below $184,000 can save the full amount.
3. Get a Spousal IRA
For those of you who are married, aim for each of you to have your own Roth IRAs. You don’t need to have earned income yourself to qualify. If you are married to someone with earned income-and you file a joint tax return-you both can have your own IRAs. That doubles what you can set aside for retirement!
4. Focus on the Long-Term
A 401(k) and an IRA are just names for types of retirement accounts. Think of them as empty luggage that you need to fill up…. with investments. That’s where it can get stressful, right? You’re not sure how much to have in stocks or bonds or cash. One solid rule of thumb is to subtract your age from 100 (or if you have a history of long-lived relatives, use 110). That’s the percent of your retirement portfolio you might want to consider investing in stocks. So if you’re 55 you might consider having 45% of your portfolio in stocks. The rest can be earmarked for short-term bonds and cash. Over the long-term stocks have the best chance of delivering inflation-beating returns. Cash and high quality bonds won’t earn much, but they are valuable protection when stocks are going through ne of their occasional downturns. By having a mix of stocks, bonds and cash you are positioned to reap the rewards of stocks over the long term, while tempering the risk, with bonds and cash.
5. Don’t Touch It
Resist the temptation to raid your retirement savings before retirement. Spend it now and what will you have to live on in retirement?