Retirement: 401k’s, Social Security, IRA’s!

Written by on October 4, 2018

Welcome to another session of cracking open the Bank Vault. Today, we are going to talk a little bit about the future, and how to plan for it accordingly.

No one wants to, or physically can, work forever. However, the concern is that you will still need money when you can no longer work for it. That is where retirement income comes in, this is the money that is supposed provide for you when you can no longer work, and that is why it is so important.

The problem for far too many people is a lack of retirement savings, or not enough retirement savings. According to a survey by BankRate.com, 20% of Americans aren’t saving at all, that’s extremely troubling. Saving is important in the short term, as unexpected expenses can wreak havoc without it.  For the long term? Savings are essential with no working income. Savings are going to be needed to pay for your housing, food, healthcare, and everything in between. 

There are many different ways to save for the future, each having their own unique benefits and drawbacks. We will discuss each way you can save for retirement, and then discuss the pros and cons of each. The important thing is to find the best one for you, and get started saving, no matter how small the starting amount. 

Social Security

Social Security in the grand scheme of things, is a type of retirement savings mandated by the government. When social security is taken out of your paycheck (6.2% of gross pay up to $90,000, equally matched by your employer,) it is pooled and distributed to those who are eligible to receive the retirement benefits, which are retired adults age 62+. This is to say that Social Security is essentially a pay as you go system, relying on surpluses in order to continue funding yearly. 

The amount each person receives is different as well. To quote directly from the Social Security website, 

“We base Social Security benefits on your lifetime earnings. We adjust or ‘index’ your actual earnings to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. We apply a formula to these earnings and arrive at your basic benefit, or “primary insurance amount.” This is how much you would receive at your full retirement age — 65 or older, depending on your date of birth.”

In laymen’s terms, the Social Security administration takes your highest earning years, averages them, and calculates what the monthly equivalent would be after adjusting for current wages. It is important to note that this would be your benefit at Full Retirement Age, if you were to retire early benefits would be adjusted accordingly. 

401k

If you are employed full time, chances are your job offers a 401k program. This program allows employees to invest either pre- (traditional 401k) or post- (Roth 401k) tax dollars for retirement purposes. If you select to participate/invest in a traditional pre-tax 401k, you are taxed at the time of a withdrawal. In contrast, if you select to participate/invest in a Roth post-tax 401k contributions are not subject to taxes. 

Typically, funds contributed to these programs are matched up to a specified percent by employers, with some companies offering profit sharing investment opportunities in their employees plans. 

Earnings in a 401k plan are tax deferred, and may either be chosen from a group of pre-selected investment products by the employee, or managed by a professional hired by the company. 

IRA

An IRA, or Individual Retirement Account, works in many ways very similar to a 401k. Similar to a 401k there are Traditional & Roth type IRAs, which allow you to invest pre- or post-tax dollars with the same withdrawal tax implications.  The notable difference between a 401k and IRA investment is that there is no potential of an employer match to your contribution with an IRA. 

There are IRA programs that will allow self-employed workers to enjoy the benefits of an employer contribution. SEP IRAs, or Simplified Employee Pension IRAs, are an IRA allowing a business owner to deduct contributions from business income. This potentially allows participants to secure lower tax rate. The tradeoff for this type of investment is that an individual is not able to make contributions directly to the SEP IRA themselves, and future withdrawals are taxed as income. 

The last type of IRA program available for small businesses and self-employed individuals are SIMPLE IRAs. SIMPLE IRA’s, or Savings Inventive Match Plans for Employees, allows employees to make a contribution to their account REQUIRING the employer to make contributions as well. Contributions in this plan, however, are tax deductible at withdrawal, as with a traditional IRA. Also, since all contributions are tax deductible, the contributions could potentially result in a lower tax rate for business and employee. 

Recap

As we close this session of the Bank Vault, I want to reiterate a few points. Nearly 1 in 5 Americans are saving nothing, and that is a major issue. It is my hope that with this information on the various ways you can begin to plan for your future, that you find what will work best for you. The future is definitely scary to plan for, but with research and asking the right questions of your company benefits administrator, provider or human resources representative it can be made easier and rewarding. As always, you can find me on both Twitter & Instagram at @Didge_Dee, I thank you for cracking open the Bank Vault with me and look forward to our next session. 


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