Good Financial Reads: Planning for Retirement (Part One)

The pandemic has sent shockwaves through the world both in people’s personal lives and professional careers. From disrupting people’s ability to see family members and go out on weekends to forcing millions of people to go on unemployment and work from home, it’s been quite a ride.

Many people who have been laid off or are working with reduced pay are being affected presently, but the future effects of this pandemic will lead to shockwaves through retirement. Without work, employees are unable to contribute to their retirement funds, and without any sort of employer match, it’s hurting even more. In this article, we will talk about the effects of the pandemic on retirement funds and what the future could hold for these Americans.

Many people think their health care in retirement will be free or close to it because of Medicare. Here is some bad news for you: Medicare is subsidized, but not free.  According to estimates by Fidelity, a single retiree can be expected to pay about $140,000 in healthcare-related expenses throughout their retirement, starting at age 65. For a couple, the expense is twice as much, about $280,000. The sooner you learn the basics about Medicare and its likely costs, the more you’ll be able to plan and cover these costs. 

To evaluate the many different strategies that you could use to withdraw from your taxable (T), tax-deferred (TD), and tax-exempt (TE) accounts, researchers start with assumptions about the values in different accounts, age, desired income level, social security, asset allocation, and market returns. They then try different combinations of withdrawals, taking into account income tax brackets and the different taxability of the different accounts (more on the economics here). The efficiency of each strategy is assessed by measuring the ending balance across accounts or the longevity of the portfolios — how many years of desired expenses was the strategy able to provide?

Employer retirement benefits have evolved. We used to think about the 401(k) or 403(b) plan as a place where we put pre-tax money to grow tax-deferred and get some additional compensation through the ‘employer match.’ Not any more. More and more plans now offer other benefits that are at least as important to help you save for retirement: the ability to make Roth and after-tax contributions. But what are these options and when does it make sense to use them?

Having a strategy to optimize our current resources is crucial to successful retirement outcomes. When it comes to choosing savings accounts, there are many options available, including 401(k), IRA, Roth accounts, and HSA. But how do you choose among them? Read more to find how. Review their key features and how to combine them to improve your retirement plan.

All information in this post is provided for illustrative and educational purposes only and should not be considered tax or investment advice, or a recommendation to buy or sell any type of securities.

Consider some simple numbers about the importance of the long term for retirement.  Say you start saving $10 a day from the day you turn 22 until you retire at age 65. Assuming an average return of 7% per year, you will retire with an additional $904,384. Yes, who knows if you’ll get 7%, but historically that’s not outside the norm with a moderate portfolio of stocks and bonds (like a 60/40).  In contrast, if you wait until age 30 to start saving the $10, you end up with $504,656, assuming the same 7% return. That’s almost $400,000 less. Imagine the freedom the $400,000 can give you. You can retire earlier or you can spend more on things that matter to you. That’s how valuable the long view is.

We live in very different times than our parents. The economy is so interconnected and technology provides the opportunity for us to work when we want, where we want and how we want – as long as we have enough money to support our living expenses. While we should respect the journey our parents went on, we shouldn’t necessarily follow the same one. I’m talking about how much we work and “retirement”.