by Josh Stelzer
After the financial meltdown in 2008-2009, many boomers are now in their 50’s and quickly approaching what was supposed to be their “Golden Years”. Their retirement picture today is most likely very different than it was just 5 years ago. Even with account values cut in half during the recession, there is still a way to save your way into retirement.
The number one focus obviously has to be on savings. Not the kind of petty savings like giving up your twice a week caramel macchiato at Starbucks. Instead, you need start dedicating a good 10% or more of your gross income toward reaching your retirement goal. There is no arguing the fact that sacrifices will have to be made, but only you can make the necessary changes to meet your retirement objectives. If you set your mind to it, you can accomplish the task at hand. Here are a few steps to get back on track and make your retirement a reality.
First, I recommend that you get a hold of your monthly spending habits. Creating a cash-flow analysis with Snider Advisors “My Financial Plan App” is a great way to itemize your monthly income and expenses. This includes fixed expenses, discretionary spending, emergency savings contributions, or automatic withdrawals to your investment accounts. The goal here is to account for every dollar that comes in and goes out, which should balance out to zero at the end of each month.
If you end up with a large amount of unaccounted for expenses, you need to start tracking your spending habits so that you can pinpoint where the additional funds are going. I recommend using the Mint.com service to accomplish this task. Mint works by setting yourself up with a budget and linking your accounts to the program. It’s a free service and does an excellent job of organizing your spending habits into categories like “restaurants, groceries, mortgage, etc”. After your first few months using Mint.com, you will be surprised how quickly you realize where you’re spending those unaccounted for dollars.
Now that you have a grasp on your cash flow, you can begin to design a plan for reaching retirement. The first step in your plan will be to decide how you should allocate your savings. In this economic climate, first and foremost has to be emergency savings. Your goal should be to save a minimum of 6 months worth of fixed expenses. This will allow you to pay your bare necessities for a 6 month period in a worst-case scenario. I can’t emphasize enough how extremely important your emergency savings will be for your future.
After protecting yourself in the event of an emergency, you need to look toward building (or re-building) that nest egg. The first place we always recommend allocating your investable assets to, is any 401(k) or 403(b) match program offered by your employer. This is an immediate 100% return on your investment, and you should contribute up the matched percentage offered (typically 2-6% if available). Be sure to check out your company’s plan documents and vesting schedule requirements.
Next, you should look to see if you are able to contribute to a Roth IRA. Typically, Traditional and Roth IRA’s offer you more flexibility and investment options than your company’s retirement plan. There are income limitations to making Roth contributions, so please refer to the IRS website by clicking here to see if you are able to contribute. A Roth IRA allows you to make after tax contributions so that your money grows with tax-deferred gains, and is withdrawn tax-free.
If a Roth is not an option due to your income level, your funds should be directed to a Traditional IRA. In most cases you will be allowed to take a tax deduction equal to your contribution amount, and your withdrawals will then taxed as ordinary income. Both IRA’s have a $5,000 per year maximum contribution limit unless you are age 50 or older, in which case, you are allowed to contribute an additional $1,000 each year.
If you are able to max out your employers match program and your IRA, the next investable dollars should be directed back into your 401(k) or 403(b). These accounts give you the advantage of tax deferred gains, which will allow compounding interest to work in your favor.
Keep in mind that this is general guidance and that there are alternatives to some of these investment accounts. SEP IRA’s and SIMPLE plans may be an option for you depending on your profession and your business structure. This is why it’s very important to meet with a qualified professional to seek advice on what’s best for you specifically. We are always here and happy to help at Snider Advisors, and you can sign up for a complimentary consultation by clicking here.