9/12/2013 6:30 PM ET|
6 moves that will affect your retirement
These retirement planning choices determine how financially secure you will be in your golden years.
The choices you make during your working years and at the beginning of retirement affect how comfortably you will live in old age. Here are some retirement decisions that will have a big impact later on in your retirement years:
When you start saving
Beginning to save for retirement at a young age makes it much easier to save enough to retire comfortably. If you save $5,000 per year in a 401(k) beginning at age 25 and earn a 6 percent annual return on your investments, you would reach age 65 with a nest egg of $798,741. If you begin saving $5,000 per year at age 40 and earn the same return, you'll hit age 65 with just $283,161. In fact, even if you save $10,000 per year beginning at age 40, you'll still end up with significantly less money ($566,315) than if you started saving $5,000 per year in your mid-20s.
"If you're younger, you should start right away because the value of compound interest is huge," says Walter Romatowski, a certified financial planner for Castellan Financial Advisors in Palo Alto, Calif.
Whether you get a 401k match
Employer contributions to your retirement account make it much easier to amass a bigger nest egg. A 30-year-old employee earning a $50,000 salary who saves $5,000 per year and gets a 3% 401k match will accumulate $747,662 by age 65, assuming 6% annual investment returns. An employee who saves the same amount without getting an employer match would retire with just $575,125. "If your employer has some sort of retirement plan, make sure you save at least enough to get the match," Romatowski says.
Cashing out your 401k
Cashing out your 401k plan, even once over the course of your career, can result in a significantly smaller nest egg in retirement. For example, a worker who consistently saves 6% of his pay in a 401k plan and gets a 3% employer match between ages 21 and 65, but cashes out his 401k plan once at age 35 would have $183,618 less in retirement than someone who never cashed out a 401k, according to Government Accountability Office calculations.
"We assume that the individual resumes employment immediately following the job separation and continues his or her own and matching contributions at the same level without interruption," according to the GAO report. "Any interruption in 401k contributions -- such as unemployment or a waiting period before an individual can participate -- would further reduce the 401k account balance at age 65."
Traditional 401k withdrawals before age 55 are subject to an early withdrawal penalty and income tax, which further reduces your retirement savings. "Cash-outs can be especially damaging if taken later in a career when a participant has less time to recover the losses," the GAO found.
The age you collect Social Security
While you can start Social Security payments as early as age 62, you won't get the full amount you have earned until your full retirement age. The full retirement age is 66 for most baby boomers and 67 for everyone born in 1960 or later. A worker born in 1965 who signs up for Social Security at age 62 will get monthly payments that are 30% smaller than if he or she waits until age 67 to begin collecting payments.
"If you sign up before age 66 or your full retirement age, it is discounted, and you are basically shortchanging yourself of getting the full benefit that you earned. That discount carries through your entire life until you die," says Brent Neiser, a certified financial planner and a senior director at the National Endowment for Financial Education in Denver. Checks further increase by 8% for each year you delay claiming up until age 70. "Try to make your Social Security payment as large as possible when you claim it because you are going to have this lasting payment over time," Neiser says. After age 70, there is no additional benefit for waiting to claim Social Security.
Meeting Medicare's deadlines
The standard Medicare Part B premium is $104.90 per month in 2013 for all retirees who earn less than $85,000 ($170,000 for couples). To pay this premium, you need to sign up for Medicare during the seven-month initial enrollment period that begins three months before you turn 65 and lasts until three months after your 65th birthday. If you sign up later, your Part B premiums will increase by 10% for each 12-month period of delay.
"If you do not sign up during your initial eligibility period and you sign up later on, there is a penalty that you have to pay that stays with you the rest of your time you have Medicare," says Nicole Duritz, vice president for health and family at AARP. If you or your spouse is covered by a group health plan due to your current employment, you need to sign up within eight months of leaving the job or the coverage ending to avoid paying higher premiums.
The age you retire
The age you retire has a huge impact on how much money you can safely spend each year. If you retire at 65 and live until 95, your retirement savings need to provide enough income to finance 30 years of retirement. If you delay retirement until age 70 and live the same number of years, you will only need to pay for 25 years of retirement beyond what Social Security provides. Even a part-time job can allow you to draw down your savings more slowly. "For a lot of people, the definition of retirement is not 'not working,' but not doing what they don't like and doing some kind of work that they love," says Christopher Jones, a certified financial planner for Sparrow Wealth Management in Las Vegas.
Remembering to take required minimum distributions
Beginning after age 70 1/2, you are required to take withdrawals from traditional retirement accounts. People who fail to withdraw the correct amount could incur a stiff 50% tax penalty on the amount that should have been withdrawn in addition to regular income tax on the withdrawal. A worker in the 15% tax bracket who misses a $5,000 401k withdrawal could incur a tax penalty of $3,250, including the 50% penalty and 15% regular income tax. If he had instead taken the distribution, he would have paid $750 in regular income tax on the withdrawal.
More from U.S. News & World Report:
VIDEO ON MSN MONEY
Move 7 - Become debt-free before retiring. That's an important retirement plan choice.
Step 7 -Become debt free. Absolutely!
Step 8 - Ignore Lame Stream Media reports about retirement!
Then you can cut back on the anti-anxiety meds. SHEESH!
More of the leftist crap when globalization has sunk this nation starting under the Clinton's collaboration with Wall Street that is destroying our middle class and fast.
Time to can globalization and get these bankers back into banking and Wall Street into the notion that there is no guarantee on returns when one buys stocks at the expense of the company's bottom line; and not one of these CEOs is worth the outrageous monies they receive that has cost American workers their lifeblood.
We need new leaders in Congress that represent people, and not corporations. And if not made in America, tariff the crap out of it.
We work our butts off and our pay checks shrink every year, and now with Obama care, they are killing us off for sure.
I am tired of chasing jobs as an engineer because the government can not budget, something they are paid to do and when they do not, we let them slide, stay in office and take vacations at times when they need to be working and fixing the mess they created.
Working past 65 is ludicrous - especially when these CEOs retire when? And take Congressional pensions - that entire system needs to be canned now and force them to plan and save and retire just like we the people have to.
MSN - whoever writes this BS has an IQ below Bean Dip. This is what happens when you let desk jockeys write without doing some beat-the-street or professional research. Bet from behind the desk and get a real job and see what is killing Americans...not cancer, but academically-driven studies and compassion-less policies and a journalism profession that has forgotten ethics and their true role in society - to tell the truth regardless of who is in office.
I decided a long time ago that my retirement party and funeral are going to be on the same day. The only person who will benefit from my retirement savings is my beneficiary. I will have till work until I die but she will be set for life with her inheritance from me, her parents and grandparents. So in a way that makes me feel happy that she won't have to live through what I am living through and I am putting money away. If gasoline prices would go below $2.50 a gallon which is where they should be life would improve for many. There is no oil shortage so there is no reason except corporate greed keeping it high. The speculators should all be put on an island and forced to live like most of the US population for 5 years so they really know how it feels.
Retire when you can and when it works for you! If you are in a high stress job like I am the sooner the better, or you might not make it to max and most certainly not to the break evn age of 80!
my father collected s.s. at 65 years old & passed away before 66. my brother started at 62 & passes away before 63. I am 58 and no way in hell will I wait for 66 to collect. Bring on the payments as soon as possible. How long are you going to live to?
It appears that if you have not saved enough money to retire and you want to stop doing what you may not like and do something that you do like to do, then you are going to run out of money. This is the writers definition of retirement. It always appears that everyone who retires must continue to spend the same or close to the same amount of money every month as if they were working still and you need to draw funds from a retirement account or savings/investment account just to pay for your existence here on earth.
I have a solution to this concept that you must need to draw funds from savings every month in order to live out your life.
Cut your spending dramatically, move to a place that does NOT cost what you were spending before as a working person. How do you do that is a logical question. I have my plan, and I will be acting on that plan next year within 8 months. I am moving to a place where I can pay for my monthly expenses including health care with less than my monthly pension and social security benefits. I am moving out of the USA and will live in a very nice environment including a swimming
pool and a fully furnished condo that I will rent for a fraction of what I pay now.
It can be done and you do not have to spend all your retirement 401K or IRA money to do it. As one recent article stated, the USA older workers are one of three countries where 65 to 69 year olds still work. Japan and Korea are the other top two.
There is a solution to this if you are willing to move out of the USA.
they just keep rsing it till you wont get social secutrity at all and evertything is so expensive
I'm 56 - can anyone tell me how to find out how much i will get from pensions and also how pension monies will affect the SS dollars I will receive? Can't retire until 66-1/2 but want to get things together ow so i can determine if I can even AFFORD to stop working - ever!
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Saving just a single month of expenses may take longer than you think. See how your savings rate affects how quickly you can build a solid emergency fund.
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