What is the Best Retirement Savings Account for Me?
Gregory Palacorolla, CFP ®
We’ve all heard the warnings and read the stories about what will happen if we don’t plan/save for retirement. So, why are so many Americans NOT saving? Is it an insatiable desire for instant gratification and inability to see the long- term effects of saving? Maybe Americans aren’t making enough in their paychecks to offset the costs of daily living expenses, childcare costs and revolving debt. Perhaps it is a paralysis born from a lack of knowledge. The first two may not be solved overnight, but the latter is an area you can act on quickly, starting by reading this post.
How many are saving?
- According to Northwestern Mutual’s 2018 Planning and Progress Study, which surveyed over 2,000 adults, 21% of Americans have NOTHING saved for the future, and another 10% have less than $5,000 stashed away.
- Almost 66% of employed people between the ages of 21 and 32 have NOTHING saved for retirement, and according to the Economic Policy Institute, the average retirement savings across all age groups is only $95,766.
Why should I save?
There are many reasons why you should save for retirement, but let’s start with the top 3:
- Social Security is fading fast. According to the latest projection, if nothing changes, the Social Security trust fund will only have enough revenue coming in to pay 77% of promised benefits starting around 2034. For 33% of older Americans, it provides 90% or more of their monthly income, which equated to a maximum monthly retirement benefit of $2,687, for those who retired at full retirement age in 2017. Many retired, elderly are walking the tightrope of poverty, while they work at a minimum wage job to make ends meet.
- Tax deferred growth. Saving in a tax-deferred account reduces your income taxes. Making deductible contributions to a traditional IRA reduces your income as you are taking money from your savings or checking account to make that contribution. If you contribute to a 401k plan on a pre-tax basis, this reduces your take home pay, and the net effect is less than the contribution amount because the amount that your income is reduced is less than the amount you contributed. For example:
Jonathan earns $100,000 per year in his current job
His income tax rate is 28%
He is paid weekly
He contributes 10% of his salary to his 401k account offered through his work every pay period
His weekly contribution will be $192
His paycheck will be reduced by only $138
- Rising costs of healthcare. The average cost of healthcare in retirement for a couple retiring today at age 65 is about $280,000, according to an annual estimate by Fidelity. This number assumes the couple is participating in original Medicare and includes premiums for part B and part D coverage. It assumes lifespans of 87 for a man and 89 for a woman. It excludes long-term care and dental costs.
It is quite clear saving for retirement is crucial. The next questions to arise are obvious; How much should I save and what retirement vehicle is the right one for me? It truly does depend on the individual or couple, their lifestyle, what they currently have saved up, their medical needs, future events, etc.. However, there are general rules of thumb that those in our profession use as guidelines. For example, Fidelity recommends stashing away 15% of your income. As for the proper plan to use, we’ve compiled a chart to help with sorting through plan features, benefits and things to consider for the various options available.
|Plan Type||Plan Features||Benefits||Things to Consider|
-Matching contribution up to 3% of employee comp.
-2% non-elective contribution for each eligible employee
-25% early distribution penalty if processed during this time
-For 2019, AGI under $137,000 for single filers
-AGI under $203,000 for married filing jointly
-Employee elective deferral 2019 limits: $19,000 or $25,000 if over age 50
-Employer contribution: 25% of gross income (if corporation) and 20% of net income (if sole proprietor/partnership)
-No annual filings if plan has less than $250K in assets; no discrimination testing required
No matter what plan you choose, you will be in a much better position putting money away for your retirement. Oftentimes the sacrifices we make today act as seeds allowing us to experience enormous growth and success tomorrow, but of course it is up to us to plant the seed.
Sources: CNBC, Time, HuffPost, Forbes
© Geier Asset Management, Inc. Nov. 2018. Gregory Palacorolla, CFP ® is Director of Wealth Management for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of November 2018 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.