You are in your 30s and it is just scary…
At this point in your life, you hopefully are a little more put together than you were in your 20s. Your career path is not as foggy and blurry as it was in your 20s and your bank account is not as lifeless as it used to be. Many people in their 30s begin to make major life decisions around this time, whether it is taking out a mortgage on your first home, planning a wedding or having children — all of which are excessively and unreasonably expensive! Your 30s bring along all those grown-up things you wished you were able to do at 13 when your parents would always say, “Enjoy your childhood; growing up is a trap!” The joke is on us now! Most people are not thinking about retirement when they are in their 30s, and it’s a pretty big mistake. It is important to start planning and saving as early as possible for this goal. Every cent you stash away now will grow in a tremendous way, all thanks to compounding interest.
It’s time to start asking some serious questions. For example, what type of lifestyle do you want to maintain during retirement? How much do you need to have at retirement to maintain that lifestyle? At what age do you want to retire? There are online tools available to consumers that offer free advice to help answer these questions, but these tools are generally not reliable. Harold Evensky, founder of Evensky & Katz / Foldes Financial Wealth Management, presented an academic study involving 36 online retirement tools and found that in the attempt to keep the tools simple, they actually destroyed the legitimacy of the conclusions. The tool we use is called MoneyGuide Pro, a robust program that requires time spent answering personal questions such as family longevity, personal health, 401k savings, Social Security, expenses and much more. Our tool gives us the capacity to help with major life choices such as buying versus renting, how much you should actually spend on that wedding, etc. These results are a road map and are not to be interpreted as an absolute answer, since many assumptions are used.
The next step is to decide which retirement vehicle will help you best accomplish your retirement goals. First look to your employer and make sure you are participating in your employer-provided 401k if one is available. If you have the financial ability to maximize your contributions, do it! The max contribution limit for 2016 is $18,000. If not, at least make sure you are contributing the amount necessary to receive the employer match. Think of the employer match as “free money.” It is also important to increase, gradually, your contribution percentage over time and eventually begin saving, as a good rule of thumb, between 10% and 15% of your salary.
After you have exhausted your employer-provided options or in the event your employer does not offer a retirement plan, begin saving outside of work in an Individual Retirement Account (IRA). There are two types of IRAs.
- Traditional IRA: This type of account generally uses pre-tax funds and allows a contribution limit of $5,500 for 2016. The contributions made to an IRA, depending on your current circumstances, may be fully deductible on your tax return. Additionally, these assets are tax-deferred until the time of distribution, typically after age 59½.
- Roth IRA: This type of account uses after-tax funds, which means you have already paid taxes on the money you are putting away but the earnings grow tax-free. The contribution limit for a Roth IRA is $5,500 for 2016. You are not required to cash out a Roth IRA at any time, unlike a traditional IRA from which you must begin distributions by age 70½.
Deciding between a Traditional IRA and a Roth IRA can be a bit tricky, but consider a couple of factors before making a decision. For instance, if you are in a low tax bracket, a Roth IRA is beneficial since you pay taxes on the funds now at a lower rate and the earnings are tax free. If you are currently in a high tax bracket, but expect to be in a lower tax bracket during retirement, then a Traditional IRA is beneficial since the money will be taxed at a lower rate at the time of distribution. Both the Traditional IRA and the Roth IRA have phase outs based on income limits, and depending on where you fall within these limits one may be better than the other. We work closely with our client’s CPA and have our own tax resources to help a client decide on the best option to meet their retirement needs.
Once the best retirement vehicle has been decided on, it’s time to begin thinking about investing your retirement money prudently and efficiently. This may be the right time to speak to a Certified Financial Planner in order to evaluate your risk tolerance levels and analyze your financial health. There is no rule of thumb for investing. Just because you fall into the same age group as others does not mean you should have the same investment allocation. Every person is different and some may prefer more risk (i.e., more potential growth). Others may not be able to tolerate market movement and would prefer a more conservative allocation (i.e., preserving capital and keeping up with inflation). Asset allocations are tailor-made to fit your time horizon, your investment profile and your risk tolerance levels.
Now is the time to learn about setting goals and investing in your financial future. Your 30s are the make it or break it years; let’s make sure you make it!
Feel free to contact Katherine Sojo with any questions by phone 305.448.8882 ext. 243 or email: KSojo@ek-ff.com