When was the last time you took a serious look at how your retirement plan compares to how you want to live in your future? According to a report from the Federal Reserve released in 2020, the median amount of money in American retirement accounts was about $65,000. That was before a pandemic that brought new financial challenges and possibly hindered retirement contributions or stopped them entirely because of job loss or emergency expenses.
Depending on your monthly expenses, $65,000 might not last very long without a source of income to bolster it consistently. For example, if you spent about $1,000 per month, you would have roughly five years before you ran out of money. Understanding your options and getting started on a plan is critical to avoiding an empty bank account when you need money the most.
Keep these tips in mind as you think about your financial future.
Know what you need
Not only is starting to save early essential to retiring on time, but so is budgeting how much you think you’ll need. Make sure to account for inflation because, as we’ve seen in recent months, prices can increase quickly and make your money less valuable. Everyone lives by different means, but a good launching point for your budget should be 70% to 90% of your annual income per year before retirement.
Diversify your portfolio
This is just a fancy way of saying, “Don’t put all your eggs in one basket and expect success forever.” A retirement plan through your work can be a convenient and profitable option, but if you happen to lose your job, that option disappears. If the stock market crashes while you have a significant amount of money invested for your future, you may feel like you’re back at square one with no power to change your situation. Having multiple assets and accounts will help minimize the effects of negative events in your life and keep you on track for a comfortable retirement.
Take the good as it comes and don’t dwell on the bad
Maintaining a level head about your finances is important, no matter how well or poorly life is going. Receive a bonus at work? Tuck some away into your retirement. One of your stock purchases exploded? Think about withdrawing some of the profits or moving a portion of the money to a different investment. Losing a job, getting a divorce, or encountering an unexpected emergency can challenge your retirement goals, so it’s important to not overspend in the rich times in case you need to dip into your funds before you’re ready. Having multiple savings methods will also help you to not overreact if something doesn’t go exactly as you planned.
Know where your investment is going
There are many different ways you can save for retirement, from a 401(k) to individual retirement accounts (IRA) to accounts that are mentioned less often, such as a 403(b) or 457(b). If you are enrolled in a retirement plan through your job, employers will sometimes offer matches up to a certain amount, meaning that you can contribute a certain percentage of your paycheck and your employer will contribute the same amount, in addition to your regular paycheck. This is free money, so it’s always a good idea to capitalize on it if possible.
Understand the tax implications
When choosing between retirement plans, pay attention to the word, “Roth.” If you see this distinction, it means you’ll pay taxes immediately on the money you contribute. The upside is that you won’t need to pay taxes whenever you withdraw. Traditional plans work the opposite way, avoiding immediate taxation and delaying it to the time of withdrawal.
It’s never too early to start saving for retirement, but it can certainly create a stressful burden if you wait too long. Pacific Cascade Federal Credit Union can help you set up multiple types of accounts to assist with your retirement planning. Contact PCFCU today to get started.
