There are several considerations for retiring comfortably. At a minimum, you should work to fully fund your retirement account(s), own your home, have no debt, and have emergency funds set aside. This step-by-step guide empowers you to take control of your retirement plans by building a holistic financial portfolio. Don’t keep any debts off the list. The key here is to determine exactly where you stand financially. This creates what is known as a “balance sheet.” It lets you see everything about your finances. Once you know what you have and owe, you can set realistic goals for balancing them out and getting ahead. Matching contributions are free cash. Some people do not take advantage of them, because they don’t understand the time value of money or don’t believe they can afford to have their take-home pay reduced. However, it pays to maximize your contributions. If your employer were to match you dollar-for-dollar on the first 5% of your contribution, you would immediately be earning a 100% return on that 5%. Consider that 401(k)s grow tax-deferred in your 401(k) until you begin taking distributions—usually after age 59 1/2. There is a high possibility that if you don’t contribute enough for employee matching, it could cost you millions of dollars over the length of a career.
Rank your debts by interest rate: From your balance sheet, rank all of your debts by the interest rate you are paying, starting with the highest.Allocate as much as possible to debt pay-down: Decide how much you can dedicate to debt reduction each month.Attack the card with the highest interest: Pay the minimum balance on all credit card debt except the highest-ranked one. Pay as much as possible on the highest-ranked card until it has been completely paid off.Eliminate debts one by one: Cross each card off your list, and put the plastic in a drawer when you finish paying it off. Don’t cancel the card; it lowers your credit score and increases the interest rate. Don’t charge to it again.Keep going: Continue this process until all of these accounts are paid in full.
There are other methods for paying off your debts, but the debt-avalanche works well. Remember that you shouldn’t abandon your cards altogether—credit cards can be a valuable financial tool when used responsibly. Contributions—subject to annual limits—are made with after-tax dollars. Roth IRA contributions can also be withdrawn at any time without any penalty. Once you reach age 59 1/2, withdrawals of earnings are tax-free as long as your account has been open for five years. In other words, if you purchased $10,000 worth of a stock through your qualified Roth IRA and held it for 20 years, you could sell your shares at retirement, and you would owe Uncle Sam nothing—even if that stock grew to be worth millions of dollars. Additionally, the interest paid on your mortgage is tax-deductible, and you’re permitted a lifetime capital gains tax exemption of $250,000 (if you’re single) or $500,000 (if you’re married) if you sell your home at a profit. Consider your house to be an investment. For example, if you put 20% down on a $100,000 home, you’ve spent $20,000. If it appreciates 4% ($4,000) over the next year, it will worth $104,000. If you had purchased a stock for $20,000 and received $4,000 in value in one year, you would have an investment with a 20% return rate—an excellent return for the money.
Mortgage paymentsInsurance costsUtility billsGroceriesFixed payments (e.g., car payments or student loan payments)Minimum payments on credit cards
The objective for your emergency cash reserve is safety, not return. The simplest option is to park the funds into savings such as a money market account. If you are interested in generating income, consider building a laddered certificate of deposit (CD) portfolio. To build a laddered CD portfolio with a reserve of $12,000, you could go to your local bank and open six CDs as follows:
$2,000 30-day (1 month) maturity$2,000 60-day (2 month) maturity$2,000 90-day (3 month) maturity$2,000 120-day (4 month) maturity$2,000 150-day (5 month) maturity$2,000 180-day (6 month) maturity
As each CD matures, roll it over into a new six-month CD. In short order, you will own six separate six-month CDs, one of which will mature every month. Investing allows you to further diversify your portfolio, allowing you to mitigate the risks of all of the financial plans you’ve been making. You can also reduce your investing fees by using online discount brokers. However, in case you’re not comfortable with that option, many brokerage firms offer both traditional and online options and allow the client to choose. Many colleges and universities offer professional certification programs. For example, New York University’s School of Professional Studies offers certificates in finance, entrepreneurship, management, technology, and other areas. Many different courses and certification programs are available online. One excellent option is to enroll in basic accounting and finance courses. Although the cost may be several thousand dollars, the knowledge you would gain can make a significant difference in your income if applied wisely, paying for itself many times over. There is nothing magical about wealth building; it is achieved through a culmination of small, disciplined choices. Keep your mind on the larger goal as you navigate everyday decisions, and you will find yourself making good progress. It’s vital to ensure that you contribute enough to meet your employer’s matching criteria—this maximizes your account’s earning potential with money you didn’t have to earn.
How Much Can I Put Into an IRA?
Roth IRAs and Traditional IRAs have the same annual contribution limits. The maximum amount can change annually, so be sure to check each year for changes. For 2021 and 2022, the maximum contribution for both types is $6,000 if you’re age 49 or younger. If you’re 50 or older, you can make catch-up contributions and contribute up to $7,000 per year.
How Much Should I Save for Retirement?
There are many factors to consider, such as health care, living expenses, and hobbies when retiring. If you want to maintain the lifestyle you have before retiring, the 80% rule is an excellent guide—you should have enough in your account to annually withdraw 80% of your current salary for the number of years you expect to be retired. There are other methods, but each one depends upon your goals and circumstances.
