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Financial Basics

Retirement


Take the quiz

What percent of people plan to retire before age 661

That’s right.

In a recent study, 51% of workers plan to retire before age 66. But how many are prepared financially?

Not quite.

In a recent study, 51% of workers plan to retire before age 66. But how many are prepared financially?

woman on laptop

Why start now?
 

  • The earlier you start saving, the more wealth you'll have available to meet your needs later.
  • Grow your savings tax-free- the earnings on your retirement account aren't taxed until you take them out.
  • You can’t borrow for your retirement like you can for your education, home or business.
  • You can't rely on employers or the government for your personal long-term financial security.

 

 

Retirement savings checklist

 

  • Start saving early to realize the greatest reward.
  • Enjoy immediate tax advantages.
  • Take advantage of any 401(k) plan with employer matching.
  • Consider opening an IRA in addition to contributing to a 401(k).

 

Why is the power of compounding so important with respect to saving for retirement?

 

  • Compounding occurs when interest is earned on interest that has accumulated over time on an investment.
  • Retirement accounts benefit from tax-deferred compounding, so earnings generated are not subject to income taxation each year.
  • You only pay income tax on the earnings in the year you withdraw the funds from the account.

 

Take the quiz

Who is saving more for retirement - Hailey or Cameron?

That’s right.

Correct, due to the power of compounding, Hailey's balance will be $130,000 higher than Cameron's even though she contributed less. Hailey's total contribution is $40,000 and her balance at age 65 will be $583,091. Cameron's total contribution is $120,000 and his balance at age 65 will be $453,133.

Not quite.

That is not correct. Due to the power of compounding, Hailey's balance will be $130,000 higher than Cameron's even though she contributed less. Hailey's total contribution is $40,000 and her balance at age 65 will be $583,091. Cameron's total contribution is $120,000 and his balance at age 65 will be $453,133.

For illustrative purposes only.
This hypothetical illustration does not reflect the performance of any specific investment.
Actual rates of return cannot be predicted and will fluctuate. Your results may be more or less.
This example assumes an 8% annual investment return.
Potential income taxes have been ignored.

 

4 people at conference table

Grow your money

 

Following are common retirement savings plan options:

1. 401(k) or 403(b): Employer-sponsored retirement savings plans (403(b) are government and not-for-profit organizations that allow you to invest pretax salary on a tax-deferred basis.

  • You pay yourself first, putting some of your salary into the plan before any other deductions (e.g. income taxes).
  • Your employer provides the investment choices available to you, typically a mix of mutual funds.
  • Earnings in your account grow tax-free until you withdraw them.
  • Some companies match a set percentage of your salary if you contribute an equal amount to the plan (for example, 2%) each pay period.

2. IRA: An individual retirement plan (IRA) - offers tax advantages to encourage people to save for retirement on their own.

Traditional IRA:

  • You contribute to the account.
  • If you meet certain parameters, you can take a current income tax deduction for your contributions.
  • When you take distributions in retirement, you pay income tax on part of all of the distributions2

Roth IRA:

  • You make after-tax contributions to the account.
  • You do not take tax deductions for contributions.
  • Your retirement distributions are tax-free if you observe distribution rules.
3 people at a table

FAQs

1. How much can I contribute to a 401(k)/403(b)?

  • Currently, up to $19,500 per year (or $26,000 if you are age 50 or older)

2. How much should I contribute to a 401(k)/403(b)?

  • At minimum, contribute enough to obtain the percentage match from your employer. Ideally, contribute the maximum amount allowed each year to take advantage of pretax savings and compound earnings.

3. Why should I invest in an IRA?

  • If your employer does not offer a 401(k)/403(b) plan, you should begin saving for your retirement on your own with an IRA. Currently, you can contribute up to $6k per year (or $7k if you are age 50 or older).
  • If your employer does offer a 401(k)/403(b) plan, you may want to maximize your contribution there and then save even more toward retirement by contributing to an IRA.

4. Can I take money out before retirement?

  • There is a 10% penalty for most withdrawals taken before you reach age 59 ½.
  • In addition, you will need to pay income tax on your withdrawal.
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