By: Christian Wagner – President, Penn Investment Advisors
Are you saving enough for retirement? If you are like most clients we speak to at Penn Investment Advisors, the answer is “Probably not.”
The Employee Benefit Research Institute’s April 2019 Retirement Confidence Survey reports that 2 in 3 workers are confident in their ability to live comfortably in retirement. A big part of the increase in worker confidence comes from an increasing belief that they will have the ability to handle one of the key expenses in retirement — their health care.
Confidence in a comfortable retirement is also strongly correlated, however, based on whether survey respondents had a retirement plan in place. 8 in 10 workers with a defined contribution retirement plan in place were confident that they would have enough money for a comfortable retirement. Meanwhile, around a third of all workers without a retirement plan were not at all confident about their financial security in retirement.
The good news is that you can avoid falling into this ‘confidence trap’ by preparing yourself for retirement now. The key is to assess your retirement needs early by determining what lifestyle you want to live and how much money you need each year to afford it. Then start saving money as early as possible and learn the basics of the various retirement-savings vehicles available to you.
Assessing your retirement needs
The Retirement Confidence Survey also reports that only 4 in 10 workers have actually tried to calculate how much money they needed to save for retirement.
This is the biggest mistake that workers make as their retirement years draw closer. If you do not know how much money you will need to live the lifestyle you want in your retirement years, you are far less likely to save enough money each month to reach these goals.
The amount of money you need to save each month will vary depending on your goals. Your savings needs will differ depending on whether you want to travel the globe after retirement or if you would prefer spending your post-work days visiting your grandchildren who live less than an hour’s drive away.
Know, too, that your health will play a significant factor in how much you will need to live comfortably after retirement. If you or your spouse require a significant amount of medical care, your savings, no matter how much insurance coverage you have, will be more likely to dwindle at a faster rate.
Most people rely on three sources of funding for their retirement years: social security, the savings they have built over the years and either their pension or 401(k) plan.
The combination of these three funding streams must equal or better the amount of money that you determine you need each year to live comfortably in your retirement.
Starting early
The best move is to start saving for retirement as early as possible. The later you wait, the more difficult it will be to save enough.
Vanguard Group researchers Maria Bruno and Yan Zilbering, in their article Penny Saved, Penny Earned show how vital saving early is.
According to their research, investors who saved 6 percent of their salaries in a portfolio split evenly between stocks and bonds starting at age 25 enjoyed a median portfolio balance at retirement of nearly $360,000.
That figure fell to $237,000 for investors who waited until 35 to start investing and $128,000 for those who waited until age 45.
The message here is simple: It is never too early to save for retirement.
In fact, those workers in their 20s and early 30s might be especially well-suited for saving for retirement. It becomes more challenging to set aside retirement money once children, mortgage payments, and auto loans enter the picture. Young workers who get into the habit of saving early for retirement will be more likely to continue their savings even as their monthly expenses rise.
Retirement-savings vehicles
If you have decided to boost your retirement savings, the good news is that you have plenty of financial vehicles to choose from when saving for your retirement years.
While pension plans are becoming rarities, many workers do have the option of participating in the 401(k) plan at their company. If your company offers such a plan, you will be wise to participate and to contribute as much of each paycheck as allowed. The more you save each month, the more comfortable you will be in your retirement years.
An Individual Retirement Account, better known as an IRA, is probably the best known of these vehicles. If your employer does not offer a retirement plan, you can deduct your contributions to a traditional IRA from your gross income. That pays off at tax time; you will pay a lower amount of taxes because your reported income will be lower. However, your contributions to an IRA are not deductible if you have a retirement plan at work.
You can start withdrawing money from an IRA at the age of 59-and-a-half without paying any penalties. When you withdraw money from a traditional IRA, though, you will pay taxes.
A Roth IRA operates differently. The contributions to a Roth IRA are never tax-deductible, but the earnings on these contributions grow tax-free. This means that you pay taxes when you contribute money to a Roth IRA, but you do not pay them when you withdraw it.
You can also withdraw money from a Roth IRA before you turn 59-and-a-half and not pay any penalties.
There is one thing that both Roth and traditional IRAs do have in common: The money you deposit in both types of IRAs will grow tax-free.
IRAs are a major source of retirement savings. However, investors can also earn retirement income through such savings vehicles as stocks, bonds, and annuities. The best plan is to rely on several types of retirement-savings vehicles. That way, if one type does not perform well — say the stock market falters — your other vehicles can help cushion the blow.
Moral of the story: Whether you are 25 or 55, it’s never too early or too late to start planning for retirement. Retirement means different things to different people. Ask yourself: What do you want your retirement to look like? When you’re ready, contact our team of certified advisors to start the process of planning for a financially secure retirement (CTA).
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Investment advisory services are offered through Penn Investment Advisors, Inc. , a Registered Investment Advisor. Penn Investment Advisors is a wholly owned subsidiary of Penn Community Bank (Bank). Penn Investment Advisors does not offer or provide legal or tax advice. Please consult your attorney and/or tax advisor for such services. The products offered by Penn Investment Advisors are not insured by the FDIC, the NCUA or any other agency of the government, are not deposits or other obligations of the Bank or guaranteed by the Bank and involve investment risks, including possible loss of principal amount invested.
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