This question comes often, mostly from folks in their 50’s and 60’s. An age where most are starting to think about retirement. The simple answer is it is never too late to save for retirement.
This question comes often, mostly from folks in their 50’s and 60’s. An age where most are starting to think about retirement. The simple answer is it is never too late to save for retirement. There will, however, be some obstacles that may limit your options. There are many savings instruments out there, 401(k)s, IRA (traditional & Roth) , annuities, taxable brokerage accounts, money markets, real estate, and many more. Let’s outline each of these and what they do.
What is a 401(k) plan?
A 401(k) is a retirement savings and investing plan that employers offer. A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested in funds of the employee’s choosing (from a list of available offerings). 401(k)s have an annual contribution limit of $19,500 for 2021 ($26,000 for those age 50 or older). Employees contribute money to an individual account by signing up for automatic deductions from their paycheck. Depending on the type of plan you have, the tax break comes either when you contribute money or when you withdraw it in retirement.
What is an IRA?
An individual retirement account (IRA) is a savings account with tax advantages that individuals can use to save and invest long-term. An IRA is like a 401(k) account. However, the 401(k) plan is an employee benefit that can be obtained only through an employer. Any person with earned income can open an IRA retirement savings account to save long-term and enjoy the tax benefits they offer. An IRA can be obtained through a bank, an investment company, an online brokerage, or a personal broker.
Traditional IRA
In most cases, contributions to traditional IRAs are tax-deductible. That is, if you put $6,000 into an IRA, your taxable income for the year decreases by that amount.
Roth IRA contributions are not tax-deductible, but qualified distributions are tax-free. You contribute to a Roth IRA using after-tax dollars, but you do not have to pay any taxes on investment gains. When you retire, you can withdraw from the account without incurring any income taxes on your withdrawals. Roth IRAs also do not have RMDs (Required Minimum Distribution). If you don't need the money, you don't have to take it out of your account. You can still contribute to a Roth IRA if you have eligible earned income, no matter how old you are.
What Is an Annuity?
The term annuity refers to an insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a fixed income stream in the future. Investors invest in or purchase annuities with monthly premiums or lump-sum payments. The holding institution issues a stream of payments in the future for a specified period or for the remainder of the annuitant's (person who receives an annuity) life. Annuities are mainly used for retirement purposes and help individuals address the risk of outliving their savings. Annuities are designed to provide a steady cash flow for people during their retirement years and to alleviate the fears of outliving their assets. Since these assets may not be enough to sustain their standard of living, some investors may turn to an insurance company or other financial institution to purchase an annuity contract.
What’s a brokerage account?
A brokerage account is the type of account used to buy and sell securities like stocks, bonds, and mutual funds. You can transfer money into and out of a brokerage account much like a bank account, but unlike banks, brokerage accounts give you access to the stock market and other investments.
You’ll also see brokerage accounts referred to as taxable accounts, because investment income within a brokerage account is taxed as a capital gain. This is compared with retirement accounts (like IRAs) that have a different set of tax and withdrawal rules and may be better for retirement savings and investing.
There are a range of licensed brokerage firms — from pricier full-service stockbrokers to low-fee online discount brokers — where you can set up a brokerage account. Many brokers allow you to open a brokerage account quickly online, and you generally do not need a lot of money to do so — in fact, many brokerage firms allow you to open an account with no initial deposit. However, you will need to fund the account before you purchase investments. You can do that by transferring money from your checking or savings account, or from another brokerage account. You may also be able to mail in a check. You own the money and investments in your brokerage account, and you can sell investments at any time. The broker holds your account and acts as an intermediary between you and the investments you want to purchase. There is no limit on the number of brokerage accounts you can have, or the amount of money you can deposit into a taxable brokerage account each year. There should be no fee to open a brokerage account.
What Is the Money Market?
The money market refers to trading in very short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers. The money market is one of the pillars of the global financial system. It involves overnight swaps of vast amounts of money between banks and the U.S. government. Most money market transactions are wholesale transactions that take place between financial institutions and companies.
Individuals can invest in the money market by buying money market funds, short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills. For individual investors, the money market has retail locations, including local banks and the U.S. government's Treasury Direct website. Brokers are another avenue for investing in the money market.
What is Real Estate Investing?
When you think about real estate investing, the first thing that probably comes to mind is your home. Of course, real estate investors have lots of other options when it comes to choosing investments, and they're not all physical properties. There is rental property, REIT’s (Real Estate Investment Trust) and REIG’s (Real Estate Investment Groups). Let me explain further.
If you invest in rental properties, you become a landlord—so you need to consider if you'll be comfortable in that role. As the landlord, you'll be responsible for things like paying the mortgage, property taxes, and insurance, maintaining the property, finding tenants, and dealing with any problems. Although it is a great way to diversify and have rental income, it can be a hassle. As the pandemic has shown how landlords struggled with all the moratoriums set in place by the government.
A REIT is created when a corporation (or trust) is formed to use investors’ money to purchase, operate, and sell income-producing properties. REITs are bought and sold on major exchanges, just like stocks and exchange-traded funds (ETFs).
REIGs are sort of like small mutual funds for rental properties. If you want to own a rental property but don’t want the hassle of being a landlord, a real estate investment group may be the solution for you.
These are all great ways to diversify your portfolio but what happens when you have done none of these and you are 55 or 65 years old? Is there still hope? Yes, but you don't have any time to waste, so it's important to make the most of every day.
First, don’t waste another day. Start today, right now! Even if you feel defeated and that you don’t have much time, you can save more than you think. And we all know something is better than nothing.
Second, start investing. Find any extra cash in your budget to put towards retirement, don’t just simply save it in savings account, invest it. Let’s say you have 10 years left until you retire, and you start investing today with $300 a month. With a 7% annual rate of return on your investments you will have $50,000 saved by retirement age. Now that may not be enough to buy a beach house in the Caribbean, but it is certainly better than $0.00, isn’t it?
Third, realign your expectations. Depending on your age and how close you are to retirement, you may not be able to save hundreds of thousands of dollars, but you must keep reminding yourself everyday that something is better than nothing. Cut current expenses (chances are not all your expenses are essential), consider delaying retirement or getting a part time job once in retirement, selling or downsizing your home. These may be uncomfortable sacrifices that need to be made to create a comfortable retirement. Saving for retirement may be more challenging if you are off to a late start but it doesn’t mean it’s impossible. Remember, the best time to start saving for retirement was 10 years ago, the second-best time is today.
