How to Start Planning for Retirement
Credit: Jean Chatzky, NBC’s TODAY show
WHAT IS A 401(K)?
A 401(k) is a retirement plan offered by an employer that allows you take a percentage of your paycheck (you decide how much) and put it aside for your retirement. This money usually gets invested on your behalf in a variety of stocks and bonds so that your money can create more money. You choose your investments, either directly or by picking a mix that reflects how much risk you’re comfortable with. The money that goes into your 401(k) is taken from your paycheck before taxes, reducing your taxable income.
Why not just sock away all your money into a personal savings account, you ask? Because if that money is just sitting in an account for 20-plus years without being invested, your earnings actually lose value over time. The reason? Inflation (mostly).
The hypothetical $20,000 you put away today will not be worth $20,000 in 30 years if it’s been in a traditional savings account, thanks to inflation and account maintenance fees. Having a 401(k) ensures that the value of your money grows by keeping it in the market, which generally outpaces inflation in the long term.
Companies vary with their 401(k) packages, but many of them offer “matching,” meaning that they will match your contribution up to a certain percent. It’s simply free money (!) for your account.
Bottom line: If your company has a 401(k), you should probably take it. Ask someone in your HR department to put you in touch with the retirement accounts adviser to discuss what type of investment package is best for you.
WHAT IS AN IRA?
IRA is an acronym for a section of the IRS Code, “Individual Retirement Arrangement” or “Individual Retirement Account” — a place to put money away for retirement that will be then invested for you. IRAs can be used in combination with a 401(k) or as an alternative to one if your company doesn’t offer a 401(k). Much like a 401(k), the money is invested across various stock/bond packages that you choose, so that it can grow over time. IRAs do have contribution limits, though: In 2019, you’ll be able to put $6,000 a year into an IRA, with an additional catch-up of $1,000 allowed if you’re over age 50.
There are two main types of IRAs:
- Traditional IRAs: The money you put into a traditional IRA is tax-deferred, meaning you pay the taxes on it when you withdraw it. Unlike a Roth IRA, it doesn’t matter how much money you make — you can always make contributions (up to the maximum allowed).
- Roth IRAs: For 2019, the income phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household, up from $120,000 to $135,000. For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. Contributions aren’t tax-deductible, but any money you withdraw is tax-free.
Bottom line: If you don’t have a 401(k), then yes, you absolutely need an IRA if you want to save for retirement.
HOW MUCH DO I NEED FOR RETIREMENT?
It depends on a lot of variables: How old you are now, how much (if any) you’ve been saving in a retirement account, how much you make per year, and how comfortable you want to be when you retire. There are a ton of retirement calculators out there that can given you a better idea of your personal situation.
Bottom line: As a general rule, always save 20 percent of your income. Keep going after raises and promotions whenever you can. It definitely adds up.