We all have many different goals in mind for our futures. One goal for many people is to retire. As an independent contractor, the task of funding a retirement is entirely your responsibility so it’s important to make it a priority. Someone once told me, “…start now, pay yourself first, and enjoy the benefits of compounding interest. If you don’t start now, you will never start, and you’ll miss out on the value of time.” I found this to be great advice when thinking about retirement.
If retirement is a goal in your future, why put it off? Starting sooner rather than later is important because every day counts, and you will be more likely to achieve your goals. Starting now will create good habits for your future, and allow you to benefit from extra time and significant tax advantages. Time can either work for you or against you when it comes to saving for retirement.
How to get started funding a retirement:
Create a budget. A budget allows you to see how much you make, and where all of your money is going. If you don’t have enough money, oftentimes it’s one of two possible problems: you either don’t make enough money, or you are spending too much of the money that you make. For most of us, it is the second problem that we need to fix.
Reduce unnecessary spending. Figure out the difference between things you “need” and things you “want”, and cut back your spending accordingly. Take leftover money for what you don’t “need”, and put it into a retirement account and/or emergency fund. There are many different ways to cut out unnecessary spending. Nobody said retirement planning was going to be easy, but the sacrifices you make now will lead to a more comfortable future.
Establish an emergency fund. Once you have freed up some money by cutting back on spending, you can begin your emergency fund. This amount should be enough to cover all of your bills and expenses for six months, should a situation prevent you from working and earning income. Having this money set aside will prevent you from dipping into your retirement account if an emergency occurs.
Next, propose these questions to yourself and your financial advisor: 1) Where am I financially? 2) How much will I need when I retire? 3) What will my social security retirement benefit be?
What to Look for in a Retirement Account
Once you’ve done all of the above, the next step is figuring out what kind of retirement account will work best for you.
Types of retirement accounts:
IRA is short for Individual Retirement Arrangement. Although there are several different types of plans, here are the three most common. There are many details for each type of arrangement, so be sure to speak with a financial advisor when choosing the best IRA for you. A financial professional will also be able to help determine your eligibility status. Choosing the right plan can be the key to the secure retirement you’ve dreamed about.
Traditional IRA. This is a way to save for retirement that gives you dollar for dollar reduction on your taxable income for your contributions up to $5500.00 ($6500 if you’re age 50 or older). The amount that you have in your traditional IRA, including earnings and gains, is not taxed until the funds are withdrawn. Withdraws are allowed after you reach the age of 59½. A 10% additional tax penalty applies if you withdraw from your traditional IRA before reaching that age.
Roth IRA. This is a way to save for retirement that is funded with after-tax dollars. The same contribution limits apply to this plan as with the Traditional, as long as you are eligible for a Roth IRA. Eligibility can become complicated based on income, marital status, and living situation. You cannot deduct contributions to a Roth IRA on your taxes to reduce taxable income, but withdraws at age 59½ are tax-free as long as you’ve held the account for 5 years. If one should withdraw before age 59½, things get a little tricky. There are many rules and details regarding tax penalties in this situation, so do your research and talk to your financial advisor.
401(k). This is a qualified profit-sharing plan that allows employees and employers to contribute a percentage or portion of their wages into an individual account. Contributions to a 401(k) are excluded from the employee’s taxable income. Contribution limits and details can be found here.
Retirement, like any good collection, builds in value and quantity over the years. It is impossible to create the amount of savings you need to retire if you wait to think about it for another 20 to 30 years. However, if you start now you can take advantage of the time, and use the full value of your hard-earned money. Little by little you’ll see your savings grow, and over time you’ll benefit from tax advantages, compounding interest, and you can start dreaming about what to do with all of it when you retire!