Monthly Investment Message: August 2018

Barbara O’Neill, Extension Specialist in Financial Resource Management

Rutgers Cooperative Extension

August 2018

What You Absolutely Need to Know About Retirement Planning

What are your long-term financial goals? Most people, whether they prefer to choose to use the “R” word (retirement) or not, want to have financial security in later life. This means having enough savings to pay for household bills, health care expenses, and fun activities. How can you invest enough to feel financially secure in your 60s, 70s, 80s, 90s, or beyond? Consider the following eight suggestions:


Understand Key Retirement Planning Factors- There are seven key factors that affect the amount of savings required for financial security in later life. Most of them are included in online calculators. The key factors are: 1. current age, 2. projected retirement age, 3. assumed life expectancy, 4. other sources of retirement income (e.g., Social Security and/or a pension), 5. annual income desired in retirement, 6. amount of money already saved, and 7. investment risk tolerance (i.e., comfort with taking investment risks).


Use Retirement Savings Calculation Resources– A useful retirement savings planning tool is the American Savings Education Council’s Ballpark Estimate, which can be completed online or in a downloadable “paper and pencil” format. The Ballpark Estimate has six easy steps and allows users to determine their annual retirement income goal and life expectancy with an assumed 3% constant real (after-inflation) rate of return.


Estimate Later Life Living Expenses- Expenses that may go down or stop in later life include retirement savings plan contributions, work expenses (e.g., commuting), clothing and housing expenses, and federal and state income taxes. Expenses that may go up include life and health insurance premiums, medical expenses, and expenses for leisure activities.


Diversify Investments Among Industry Sectors– Key industry sectors for stock investments include building, capital goods (e.g., machinery), consumer cyclicals (e.g., cars), consumer staples (e.g., food), energy (e.g., oil), financial services, health care, materials (e.g., paper), technology, transportation, and utilities.


Save in an IRA- Individual retirement accounts (IRAs) are a personal retirement savings plan available to people with earned income (i.e., a salary and/or net income from self-employment). IRAs are available from a variety of vendors including banks, brokerage firms, and mutual funds. IRAs are not an investment per se but, rather, a tax-deferred retirement savings account into which various types of investments are placed.


Understand Both Types of IRAs– Traditional IRA contributions may be tax-deductible depending on adjusted gross income and access to an employer retirement savings plan such as a 401(k). Earnings accumulate tax-deferred until withdrawal. Investors may begin penalty-free withdrawals at age 59 ½ and must start taking taxable withdrawals at age 70 ½. Roth IRA contributions are made with after-tax income. Contributions are not tax-deductible and may be withdrawn without penalty. After an account is open five years, earnings are tax-free at age 59 ½. Traditional IRAs can be converted to a Roth IRA with taxes due for the year of the conversion.


Save in Employer Retirement Savings Plans- Types of plans include 401(k)s for corporate employees, 403(b)s for educators and non-profit employees, section 457 plans for state and local government employees, and the Thrift Savings Plan (TSP) for federal government employees and service members. Advantages of saving in employer plans are a federal income tax write-off for the amount contributed, automated savings from workers’ paychecks, matching contributions by some employers, and portability when changing jobs.


Scale Up Your Savings Over Time- Young adults in their 20s should set up an IRA and/or employer retirement savings plan upon landing their first full-time post-secondary school job. Good investments to start out with are an index fund and target-date (life-cycle) fund; i.e., a fund with the year of a worker’s expected retirement in the title (e.g., ABC 2060 fund). In their 30s and 40s, savings amounts should be increased up to the maximum annual contribution allowed by law. At age 50, additional catch-up contributions can be made.

Check out our Archived Monthly Investing Messages