Manage Your Retirement Savings Accounts
Last Updated: September 11, 2017
Whether you've been saving for retirement for years, or you've yet to save a dime, it's a good idea to review the basics. This is a good place to start, providing a general overview of the smartest, safest ways to make the most of your retirement savings.
How Much Income Should be Set Aside Into a Retirement Savings?
Do the math. Determine your life expectancy based on your family history and personal health. Then multiply the number of years you expect to live in retirement by the annual amount of money you are personally responsible for covering. Obviously, there is no way of knowing with certainty how many years you will live but, in this day-and-age, it is probably a safe bet to plan for 85 to 90 years, or more.
Though conventional wisdom holds you will need less to live on per year in retirement than you do now, the truth is most people underestimate how much they really need. (Yes, some expenses fall off, but others rear their ugly heads.) To be on the safe side, assume you will need as much income per year as you need now.
So, after deducting income you expect to receive via social security and, if you are so lucky, your pension, divide how much you personally need to contribute to your retirement by the number of years you have left to get there. This will tell you how much you need to save per year between now and then.
Where Should I Invest My Retirement Savings?
The wisest investments for your retirement savings include 401(k) plans and IRA's.
What is a 401(k) Savings Account?
A 401(k) is a retirement savings plan offered by employers to their employees.
What is a Deferred 401(k)?
A traditional deferred 401(k) allows you to deposit income into the savings plan without paying taxes on it. Instead, these taxes are deferred, meaning you pay them later, on the date of withdrawal.
What is a Roth 401(k)?
A Roth 401(k) requires you to pay taxes on income when it is deposited into the account. Then no taxes are due at the time of withdrawal.
How Do I Choose Between a Traditional Deferred 401(k) and a Roth 401(k)?
If it's early in your career and you are making less than $40,000 a year, you may opt for the Roth 401(k). You are probably in a lower tax bracket now than you will be at retirement. So it will save you money in the long run to pay taxes upon deposit via a Roth 401(k). However, once you start making more than $40,000 a year, switch to a traditional deferred 401(k), as your tax bracket at retirement will probably be less than the height of your career.
When Should I Enroll in a 401(k) Plan?
As soon as possible, as the sooner you start saving, the bigger returns you'll see from interest earned, over the years, in the long run. Some employers automatically enroll their employees into the plan. If you're not sure, check with human resources and get it done!
How Often Should I Deposit Money Into My 401(k)?
You probably should set up an automatic withdrawal from every paycheck, if your employer has not done so already.
Do I Have to Deposit the Full Amount of My Employer's 401(k) Match?
You are by no means required to deposit as much of your income as your employer is willing to match, but it's certainly the smartest thing to do. For as long as your employer offers the match, do your best to deposit the full amount, as you re doubling your money.
What is an IRA?
An IRA is an Individual Retirement Account that may diversify your money into various investments, such as a mutual fund or retirement annuity. This is something you can, and probably should, have in addition to your work's 401(k).
What is a Deferred IRA?
A deferred IRA allows you to deposit income into the savings plan without paying taxes on it. Instead, these taxes are deferred, meaning you pay them later, on the date of withdrawal.
What is a Roth IRA?
A Roth IRA requires you to pay taxes on income when it is deposited into the account. Then no taxes are due at the time of withdrawal.
Is It Permissible to Make Withdraws Early From My 401(k) and/or IRA?
While you are legally entitled to be able to make withdrawals from your retirement savings, it is never advisable to do so, as you will pay in penalties. That is why it is imperative that your regular savings plan not only includes savings for retirement but also for an emergency fund, just in case.