Thursday, April 22, 2010

Retirenment for 30 year olds

So Elisa asked in my comments from my last post "What do people our age do to get ready for retirement?"

She also called me an HR Guru. She SOOO doesn't know me.
I prefer HR Ninja. It sounds most mysterious.

Anyways - Good question Elisa and way to inspire a new post!

First - I must warn you, I'm not a financial planner. I don't pretend to be one, nor do I play one on TV. Although it would be cool if I did because hi, I'd be on TV.

Second - my advice works for me and my family. I don't know if it will work for yours. Basically, don't sue me for my advice please.

In terms of preparing or thinking about retirement there are some steps I recommend.

1. Be debt free.

I can not stress this enough, do not carry debt and certainly do not go into retirement with debt. This is the single biggest thing you can do to make your retirement more manageable. I personally am a fan of Dave Ramsey but whatever motivates you to be debt free do it if you can.
I am not debt free. It's a goal of mine and Micah and I are working hard towards it. This is my #1 step. Get rid of debt.

2. Know what kind of retirement you want to have.

Micah and I are homebodies. We like to hang out in our home. We also like to travel but when we travel, we travel big. We want to go to Rome, Europe, Ireland, Asia and all the places in between. We want to travel well and not scrimp and we want to be able to do a lot of that when we are retired.

Conversely, my ex-husband and his soon to be new wife want to retire in an RV traveling the US.

Their financial needs are obviously going to be different than ours. And that's okay. Just know what kind of retirement you want to have because this will help you figure out what kind of savings and how aggressive you need to be about it.

My insurance/banking company, USAA, has a REALLY cool calculator that helps you to figure out how much you should save per month in order to live the lifestyle you want when you retire. According to them I should be actively saving $1900 a month. I don't make $1900 a month. But slow and steady I say.

A good rule of thumb is to budget out approximately how much you think you'll need in retirement using a standard budget, adjust for inflation (inflation calculator here) and then you'll know about how much your need per year to retire. Use an investment calculator if you would like to figure out how much you need to save to try and achieve that. (Investment calculator here)

3. A brief pause to discuss Social Security (SS)

People prior to our generation, that is, people over the age of say, 40, can comfortable say that they will probably receive Social Security benefits when they retire. We can not say that.

For several years now there have been warnings that Social Security wont be solvent and able to pay financial benefits sometime between 2037 to 2041. I wont be retirement age then (although I would love to earlier than that I'm sure) so I may not see any money from there.

Now, to be fair, that may just be nay sayers and pessimists and social security may never cease to exist. I'm not counting on it.

I plan with the idea that I wont be able to draw SS. If I'm wrong then I'll have extra money when I retire. If I'm right then I wont be stuck eating dog food at 80.

Social Security is a tax that employees pay based on their gross wages. The percentage is 6.2% of their income up to $106,800 with a maximum yearly contribution of $6621.00 for 2010.

The money that you contribute today is used to pay the benefits of those folks who have already retired, it is not held into an account for you later and you will not get back dollar for dollar what you contribute but the amount that you get from social security is based on your yearly earnings. That is a complicated mess that I adore but don't have time for. You can figure it out by going to the SS website here.

4. Know what your options are

So, baring massive amounts of money from Social Security, what are your options in terms of saving money for retirement?

Well, the most popular choice is 401k.

In the US a 401k is a retirement savings plan allows a worker to save for retirement and have the savings invested while deferring current income taxes on the saved money and earnings until withdrawal. This money is taken from an employees wages in a percentage usually. This kind of plan generally an employer sponsored plan and employers have the option of matching a portion of the money contributed by the employee. The majority of 401k plans allow employees to select how they want their money invested in a range of options that vary from employer to employer.

I personally like the 401k for savings because it lowers my taxable income now which is lovely and when I AM taxed on it chances are good I will be at a lower tax bracket due to not working and being retired. Also, my employer currently matches dollar for dollar up to 6% of my income that I choose. To put that another way if 6% of my income were $100 per paycheck and I put that into my 401k, my employer does the same thing.

Not employers match or match this much. I've seen and worked for companies who provide less or don't match at all.

When it came to choosing HOW to invest that money I went with a fairly aggressive investing strategy and I keep my money away from my employers stock. Not that they aren't great, they are, but their match is given to me in employer stock and I don't want to be heavy with it in case something goes wrong. Like, say, WorldCom or MCI type stuff. (Oh hey, my company WAS WorldCom and MCI back in the day.)

Then there are IRA's. IRA's or Individual Retirement Accounts are fantastic and you can open one up at many financial institutions. Generally there are two main types of IRA's, Traditional IRA's or Roth IRA's.

A Traditional IRA is an IRA where the contributions are tax deductible, based on your income bracket, and only the withdrawals on money that was earned above your contributions is taxed.

A Roth IRA is an IRA where you pay taxes on the income you contribute but the withdrawals on the income are 100% tax free.

Honestly, for most people an Roth IRA makes the most sense but you want to really research it to be sure of what works best for you.

I personally have a Roth IRA and I have contributions going to 4 investment strategies currently within it including precious metals and medical technology. I opened my IRA with USAA but lots of banks and companies have them.

Stocks. I don't know a whole lot about investing in individual stocks. Keep moving along.

Annuities. I hear they are a good thing, I've been researching them but don't have any yet. This website gives some pretty clear information on what they are.

Traditional Savings Account. These keep your money pretty liquid and accessible but you lose out on any true interest that could be made. At a traditional bank or even a credit union interest rates on savings accounts are currently running on average 2% of less. My credit union in Alaska has an interest rate of .46%. Ouch.

Very few companies offer a pension anymore. In 2007 only 21% of private sector companies offered a traditional pension. Many companies have frozen their pension plans or restrict new employees from participating.

Micah's grandmother receives money from her late husband's pension plan. It's something in the range of $200 per month. Employees who were eligible for our pension plan before it was frozen get around the same amount if they take a monthly distribution (based on years worked and annual salary pre-freeze).

On the flip side, if my Ex does his 20 years in the military then he stands to get a pretty significant amount of his income in pension, roughly 50% of his base salary once he leaves the military. That's not the worst thing ever frankly.

5. Re-evaluate

Twice a year I sit down and review my retirement strategy and plan. I go over the numbers, see how items we have are preforming (or not) and make adjustments. Don't let your plan stagnate, it needs to be able to change and flow with what is happening around you. When you make changes to your circumstances or are thinking about them, be sure to consider how that will affect your saving strategy and make adjustments accordingly.

And PS: Elisa, your HR Guy/Boss is a pretty smart guy. If he says you're fine, I would believe him. :)



Wow, I read all of it (in three sittings), and understood maybe a third of it. I'll pass it along to my cute HR guy. And in the meantime, I'll be thankful I married someone who, like you, not only understands all that stuff, but likes to read about it and talk about it and do whatever needs to be done with it.

I told him once that he better not die before me, because what would I do financially? He said I'd be fine with his life insurance, but that I should really hope he dies at work, because then I'd really be sitting pretty. I told him I'd rather be sitting old with him.


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