Let’s face it: The prospect of having less money on hand now for a seemingly far away future isn’t appealing. But, with many now living longer and some choosing to retire earlier, financial planners say that most underestimate what the true cost of retirement will be. Others are finding that financial assurances they had historically relied upon, like social security or pensions, aren’t sufficient.
“It ultimately comes down to the days of the pension [being] gone,” says Bradley R. Newman, CFP® with Roof Advisory Group (www.roofadvisory.com), a fee-only investment management firm in Harrisburg. “It used to be people went to work, worked for one employer, had a pension, social security and that’s it.”
Instead, Newman says the onus of funding retirement is now falling on the individual. “You have to be self-sufficient: No one is going to do this for you,” he says.
While retirement looks different for every person, saving and allocating money for the future starts with a plan; the earlier you start, the more you’ll have as a cushion for retirement, whenever that may be. Susquehanna Style sat down with three financial planners in the Susquehanna Valley to find out how to financially plan for retirement while in your 30s, 40s and 50s.
30s: Roth IRAs and 401Ks
For many young people, retirement is a far away concept. So when people in their 20s and 30s come in to her office to talk financial planning, Judy Frantz gets excited for two reasons: “They’re interested in investing, and because they need to do it,” she says. “By taking control of their own financial future, they’re taking control of retirement.” Frantz, a financial advisor at Frantz Financial Services in Lancaster, suggests that young people start by opening a Roth IRA, an individual retirement account that’s more flexible than a traditional IRA. With a Roth, your money grows tax-free. But you have to follow certain rules, like waiting to withdraw funds until you’re 59 ½ years old, or you get penalized. There are also limitations for how much you can contribute each year, $5,500 (or $6,500 if you’re over 50 years old), and restrictions based upon your income. For example, as a single tax-filer, you must earn less than $114,000.
Yet, stipulations aside, financial experts say having a Roth IRA is a sound investment. And adding to your Roth doesn’t have to be a once-a-year, lump sum contribution: You can set up monthly deposits, as if you were paying a bill.
“If you’re anything like me, if you don’t see it, you won’t spend it,” says Andy Riggle, CFP® with Riggle & Associates, LLP (www.rigglewealth.com) of Hanover. Each year, Riggle says he sees more and more clients in their 30s investing in Roth IRAs. “I always recommend for clients to start with something they’re not going to miss: something that won’t make or break their weekly cash flow.”
In addition to contributing to a Roth IRA, advisors also suggest that young people take advantage of 401Ks, especially employer-sponsored plans where funds are matched. “Don’t let the free money go,” Riggle says.
40s: Maximize Contributions, Reduce Debt and 529 Plans
As you enter your 40s, your highest earnings years on average, your contributions to your 401K plan and Roth IRA should continue. In fact, Riggle suggests doing more than just adding to retirement accounts: Now past the prime, initial house-buying years, and with more disposable income, aim to max out contributions each year. The expert says another worthy goal during your 40s is working to reduce debt, like paying off your house or paying down credit cards. “It’s important all along, but for my clients, the goal is to be debt-free by retirement,” he says.
If you have children, your thoughts may vacillate between your own financial future and theirs. How will they pay for the rising cost of college tuition? Can you afford to foot the bill, or at least help out? Experts say one way to invest wisely for college is with a 529 Plan, an education savings plan that allows you to put money away now and withdraw it tax-free when children go to college. “At first, it’s a burden. It’s the same with investing,” says Frantz. “It’s like your first rent: It’s gut-wrenching.” Like a Roth IRA, there are stipulations: Your child must attend an accredited institution, and if you pull out money early, you pay a penalty and get taxed on earnings, or how much the account has grown.
But Frantz says one helpful facet of the plan is that you can start out with a small contribution, as low as $250, and add $50 at a time. Also, if your child doesn’t go to college, you have the ability to change the beneficiary of the account. And if none of your children decide to go to college? “In effect, you have a great savings account,” says Frantz, adding, “Think about all the time your money had to grow.”
50s: Approaching Retirement and Other Considerations
With retirement on the horizon, knowing the specifics of your financial plan becomes even more imminent. “When you start to hit your 50s, you’re now at the point where retirement is less of an academic exercise and more of a reality,” says Newman. “This is when you need to drill down in a detailed fashion to get a sense of what is the impact of your plans.” And start to figure out the specifics of how you will recreate your paycheck in retirement, potentially 30 to 40 years of life.
Experts say you should not only continue to invest and make sure that your accounts are diversified, but also consider a wider scope of planning that encompasses life insurance, long-term care and estate planning. “Many people feel like they’ll live forever. But have the conversation now,” Frantz advises. While it may be difficult, consider establishing trusts, drafting a will and a living will, and designating beneficiaries and a power of attorney, if you haven’t done so already. Experts say wills should also be updated every ten years. “When something happens, it all gets into place,” says Frantz. “It takes the pressure off of everybody.”
Now is the time to work closely with a team of professionals, from accountants to attorneys, to ensure you’ve got a unified strategy for handling assets. “It’s a process. The average person doesn’t walk around all day everyday thinking about expenses, cash flow, all that stuff for retirement on a daily basis,” says Riggle.
That’s why plans need to be tailored to fit individuals’ retirement goals; advisors can help sift through specifics. “When I help people with their investments, it’s not only about what we’re investing in, but creating a plan to get to where they want to go,” says Frantz. “Some people really want to leave something for their kids. Others want their kids to build their own fortunes. When people look back on their lives from 80, it’s not only their accomplishments they look at, but what legacy they want to leave.”
