For most of us, retirement is something that we dream about the moment that we start working. Even if we enjoy our careers, there is something magical about the ability to make decisions like what time you’re going to wake up in the morning of your own free will. Of course, your ability to retire will depend largely on good planning and a little bit of luck along the way.
When Should You Retire?
There are many schools of thought when it comes to when you should stop working. As a technical matter, the United States government says that the full retirement age is 67. This means that you’re entitled to your full Social Security benefit check based on your work record upon reaching your 67th birthday.
However, you may choose to aim to retire when your 40 or 50 in an effort to enjoy life while you’re more likely to be healthy. Conversely, you may decide that you enjoy working and want to remain employed until well after age 70.
When you retire will depend on a number of factors including your physical and financial health. It’s not uncommon for Americans to work later in life to keep up with the rising cost of food, shelter and medical expenses. It’s also not uncommon for Americans to have little or no retirement savings, which means that they rely on a paycheck to meet their basic needs.
Start Saving for Retirement Early
Ideally, you’ll start saving for retirement the moment you start working. Whether you are working part-time for $15 an hour as a teen or make $100,000 a year as a salaried professional.
The IRS allows those under the age of 50 to contribute up to $7,000 into an individual retirement account (IRA). You can also contribute up to $23,500 into a 401(k) each year. These limits are often increased to account for inflation.
Those over the age of 50 may be entitled to contribute above those limits in an effort to pad their savings as they approach retirement. Saving at any age is important as the more time you have in the market, the more time your money has to compound.
The Tax Implications of Saving for Retirement
You can choose to save for retirement through a tax-free vehicle such as a traditional IRA or traditional 401(k). Alternatively, you can choose to contribute to an after-tax Roth IRA or 401(k).
When you contribute to a traditional account, you use pre-tax dollars to fund it. While in the account, the money grows tax-free until you start making withdrawals. Traditional accounts are ideal if you think that you’ll be in a higher tax bracket now and a lower one while in retirement.
A Roth account allows you to use after-tax dollars to fund your retirement. As with a traditional account, the money grows tax-free until you start making withdrawals. However, as you have already been taxed on your contributions, there is no need to do so again in the future.
This is often the best choice if you think that you’ll be in a higher tax bracket in the future or if you simply don’t want to worry about paying taxes in retirement. Another potential benefit is that you can take out any money that you’ve contributed without incurring a penalty.
Any withdrawals made from a traditional account prior to age 59 1/2 incur a 10% penalty in addition to income tax. This is again not the case with a Roth account because the money has already been taxed.
What Are Your Retirement Goals?
It’s worth noting that you don’t have to stop working to consider yourself retired. For instance, your goal may be to start a nonprofit agency, volunteer at a homeless shelter or engage in other activities to keep yourself busy.
Retirement may be a great time to start your own business or help a family member get their own company off of the ground. You may also decide that you simply want to spend your days fishing, traveling or otherwise indulging in your hobbies.
Ideally, you will have some sort of goal in mind when you begin your career as it helps you make better decisions about your money. For example, you may decide to invest in real estate so that you have passive income needed to take vacations or donate to charity.
A financial advisor can help you determine your goals and create a plan to meet them. A good advisor will provide you with some flexibility in case your goals change over time. Your financial plan should also have some flexibility to account for unknowns such as an unexpected medical emergency, large home repair bills or other expenses.
Managing Medical Costs in Retirement
Generally speaking, you’re more likely to get sick, break a bone or incur some other sort of health issue as you age. Therefore, it’s important to have long-term health insurance or some other supplemental coverage to protect against costs that Medicare won’t cover.
Having insurance may prevent you from having to sell your home or liquidate other assets that you wanted to give to your kids or grandkids. You may also want to consider putting assets in a trust or taking other actions to minimize the risk of losing them because you incurred a large medical bill.
A financial advisor or an attorney may be able to help you create an estate plan that accounts for medical or other costs as you age. In many cases, trusts or other estate plan documents can be changed with proper advance planning.
Retirement is a dream that most people have, and if you plan well, it is one that can become a reality. Ideally, you’ll start planning as soon as possible and will have a team of advisors ready to help you make the most of your money now and in the future.