Are You Preparing for Retirement?

One of the best things you can do for yourself is to be ready for the future. While there’s no way to predict what the future holds or completely prepare against every eventuality, you still need to do your best to prepare your finances against what might be difficulties that could sink your finances. Creating an emergency fund is one way to do that. Another way is to prepare for retirement.

What Are You Doing for Your Future?

Many of us expect to work past what people consider "normal" retirement age, but the reality is that we may not be able to choose when we retire. An accident or an economic downturn can easily cut our intended career well short of our expectations. Some of my friends work in Engineering firms in the aerospace industry. What was once thought of as a pretty lucrative and stable industry is now turned upside down because all of its customers, the airlines, are in danger of going under because of the coronavirus.

It’s hard to see how they can bounce back anytime soon. I mean, if your customers don’t have any customers because no one is really flying, then why would they order anything from you?

There have already been huge layoffs at my friends' companies, and basically, every Engineer who’s in their 60s has already been laid off and forced to early retire. Many of the Engineers in their 50s have also been laid off. This was unimaginable just a couple of years ago.

Even if you don’t lose your ability to work because of some unforeseen event, the fact is that you are likely to stop working at some point. When that happens, you will need money to live on. Whether you retire early or retire late, proper preparation is in order. You will be better off and have a bigger nest egg to rely on if you start saving for retirement right now. It’s important.

What you do now can have a profound impact on your ability to meet your bills and other obligations during retirement as well as your ability to do what you want. Your first step, whether your dream is to sit on the porch all day, or whether you want to travel the world, is to build up a retirement fund.

Tax-Advantaged Retirement Accounts

If you want to maximize your ability to build your nest egg, you need to take advantage of the tools offered to you. Tax-advantaged retirement accounts like IRAs and 401(k)s can help you boost your ability to save. The tax advantages allow you to put more of your money to work for you. With traditional versions of these accounts like a 401k or Traditional IRA, you receive a tax deduction when you make a contribution. These are often referred to as pre-tax accounts because you are contributing money that’s not taxed yet. When you withdraw money later, though, you will have to pay taxes on the entire withdrawal.

However, there are also Roth versions that allow you to skip the tax deduction, paying taxes now, and then avoid paying taxes on your withdrawals. Known as a Roth IRA, contributing to these accounts can be a great way to avoid paying higher taxes later and reduce your worries about how much you owe. You will also sometimes hear about it referred to as post-tax accounts. There are income limits that change every year because the IRS doesn’t want high-income taxpayers to use this as yet another way to shelter their income. If you qualify, a Roth IRA or a Roth 401k can be a great addition to your retirement arsenal.

Which route you take will depend on whether you believe how much you will have in retirement and what tax bracket you’ll be in once you no longer make money with your job. Naturally, you’ll want to take the tax bite now and contribute to a Roth IRA if you think you’ll be in a higher tax bracket come retirement time. Otherwise, a 401k and Traditional IRA will work out better for you.

It’s not an either/or situation though. If you can swing it, then I highly recommend you contribute to both a Traditional IRA and a Roth IRA. The beauty about having both a Roth IRA and Traditional IRA come retirement time is that you have more flexibility to control your tax rates. Aside from possibly paying less taxes out of pocket because you can decide whether you take money out of your pre-tax or post-tax retirement accounts, you might also be able to control withdrawals enough to meet certain income thresholds, qualifying you for tax credits and/or healthcare subsidies.

Showing Consistency

For best results, you need to start investing in your retirement accounts as early as you can. That’s stock market returns can vary greatly, but history has shown that it’ll eventually go up in the long run. By consistently putting money into the market to work for you, you’ll let compound interest work its magic. Did you know that you could’ve turned $3,000 into $41 million if you invested in the Dow Jones Industrial Average and just stayed invested? That’s the power of consistency and saving early.

Make sure that you contribute at least the same amount to your accounts each month, and increase that amount whenever you can. Make the contributions automatic to ensure that it happens regularly. When you are consistent, your portfolio grows at a regular rate, and you can also take advantage of times when asset prices drop by adding more shares to your portfolio. Later, as long as prices rise, you will have received more bang for your buck.

Don’t try to time the market though. Studies have shown that waiting to invest loses out roughly two-thirds of the time. That’s why you need to invest early, often, and as soon as you can to reap the most reward.

Regular investment is key if you want to be able to retire in comfort. Figure out how much you need to invest in order to achieve the results you want, and then make a consistent plan and stick to it. You might need to make adjustments as you go along, but the key is to consistently invest and starting early.