Contributing to an IRA During Retirement: Walk Carefully
I am more than halfway to retirement. I remember when I first started working and considered how much money I should invest in my 401k. I cannot help but remember how I thought I had time. I thought I had so much time before I really need to start thinking about retirement. Now, it is almost 25 years later and I am seriously considering retiring in the next 10 years.
I cannot help but think of that dumb kid that did not put enough money in my 401k because I had plenty of time. Now, I am trying to figure out how to save more. Now, I am contributing to an IRA, a 401k and investing in stock. There are many of you other there that are only a year away from retiring or are currently retired who are also kicking themselves for not saving more sooner.
You may even be wondering if you should still save money while you are retired. Continue reading as I talk more about how much you should save and when.
Should You Continue To Invest During Retirement?
If you are retired or close to retirement, you may be considering contributing to an IRA and if it is worth it. To be honest, it is never really a bad idea to continue to save money, even if you are retired. Most people who are retired today have some type of part-time job or some other means of income coming in. If you have a source of income, why not continue saving it? Really the question is not should you continue to invest in an IRA, but what type of IRA should you invest in?
If you have some type of income coming in and it does not hurt your current lifestyle to save more money, then you should save more money. Retirement should mean that you get to rest more and have less stress. You want to create a retirement plan that allows you to do that. When you retire, you want a job because you want to, not because you have to.
Let's Talk About Retirement
When thinking about retirement it is never too early. It is never too late to start, either. However, the later you start, the harder it is for you to see your savings grow. That does not mean it is impossible. There are some tips that you should follow no matter what stage you are in when it comes to retirement.
Create a Plan and Put It on Paper
This is one of the first things that you should do. As soon as you put something on paper, it becomes more real. A plan in your head is just an idea. When you commit it to paper, that is when it becomes a plan. As part of your plan, you should decide when you think you are going to retire and how much money you need. If you are already retired, you should think about how much money you will need. Part of this means putting some serious thought into how long you think you will live. I know that can be a bit of a morbid thought, but it is important when thinking about retirement.
Consider Your Health
Think about your health and the health of your immediate family members. Do you think you will live a long and healthy life? Do you think you will live a long life, but possibly need medical care? If so, you want to account for long life or a long life with needed medical attention. Once you have a rough idea of how long you might live, consider how much you need a year to live.
Once you determine how much you need to live (I will address this more a little later), then you know how much money you need for the rest of your years. Depending on how much you have saved will dictate how much more you need to save. Once you know how much more you need to save, you must create a plan for saving that money. This includes considering contributing to an IRA.
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What Is An IRA?
An IRA stands for an Individual Retirement Account. This is an account where you can put money in and it grows without tax implications for you until you decide to withdraw the money. These accounts are intended to be investment accounts where you put money and it sits, and grows for you to use when you are retired.
Choose an IRA that Fits Your Needs
Typically, you can only contribute money to an IRA if you earn that money through employment. Most banks offer some type of IRAs, but depending on the bank, they may only offer a specific one. When you are considering contributing to an IRA, make sure you understand the differences between them all. You should be sure to understand the different tax implications associated with each one.
Know Your IRA’s Penalties
Most of the time, an IRA is used to supplement whatever retirement plan your company offers. You can withdrawal your money from an IRA at any time, however, there are penalties and extra taxes if you take the money before age 59.5. There are exceptions to those penalties. If you are considering withdrawing your money before age 59.5, you should read the rules around taking out your money to see if you qualify for an exception.
Are There Different Types Of IRAs?
Yes, there are a few different types of IRAs. When considering contributing to an IRA, you should understand the differences and ensure you select the correct one.
A traditional IRA can reduce your amount of taxable income in the year that you contribute the money. You do not pay any taxes on the money until you withdraw it.
With a Roth IRA, your contributions are not a tax break, but you are not taxed for the growth in your investment. You can withdraw your money tax-free when you retire. For a Roth IRA, you already paid taxes on the money before you invested it, so you do not have to pay taxes on it twice.
For both a traditional and Roth IRA, you can save up to $6,000 in your IRA account per year. That amount typically goes up each year. If you are over 50, you can save up to $7,000 a year in your IRA. For a traditional IRA, there is no income requirement to contribute to an IRA. Your income does indicate how much of a tax deduction you get for your contribution. For a Roth IRA, there are income limits. Depending on your income, you may not be able to contribute to a Roth IRA, or your contributions may be limited.
A Savings Incentive Match Plan for Employees, or simple, IRA is typically for small companies of 100 people or less. It is typically set up by an employer. The employer must contribute to the simple IRA based on rules set up by the IRS. The employee can also contribute up to $13,000 a year. Those who are over 50 can contribute an additional $3,000 as a catch-up. Contributing to a simple IRA reduces the employee’s taxable income that year. The money that grows is not hit with taxes. The employee does pay taxes at the time of withdrawing the money.
A simplified employee pension, or SEP, IRA is for those who are self-employed or owners of a small business. A SEP allows the contributor to have a tax deduction on the contributions that he makes. The money is not taxed while it sits in the account and grows. However, when the money is withdrawn from the account, it is taxed. This is typically for an employer and employees cannot contribute to this type of IRA. The maximum amount to contribute is $56,000.
Positives Of An IRA +
One of the positives to contributing to an IRA is that you are still saving money. Many retirees did not estimate properly when determining how long they would live, or how much money they would need. If you are one of those that misjudged one of those numbers, it may be in your best interest to continue contributing to an IRA. If you are able to contribute the maximum amount into an IRA, which is $6,500 for about six years, that gives you a total of $39,000.
If you can keep that money in the IRA over the next 10 years, and if it sees a return of about 4 percent, that could be over $63,000 in 15 years. If you started saving that at age 65 and stopped contributing at age 70, you could have a significant amount of money by age 80. I am not sure how you feel about that, but my grandmother lived well past 90 and was in really good health until about age 90. She would have loved to have that extra money.
Negatives Of An IRA -
One of the major negatives to contributing to an IRA is you may not be able to afford it. That is the point when it just does not make sense. If you are retired and you cannot afford any more contributions to an IRA, you should stop them right now. The purpose of retirement is to be in a position where you can reduce or eliminate your work and still be able to live. If you cannot do that because you are contributing to an IRA, you should just stop now. Honestly, that is the key piece of information for you when deciding if you should continue contributing to an IRA. Can you afford it?
The maximum amount you can contribute is $6,5000, which breaks down to about $542 a month. That could be a lot of money to some people. Of course, you do not have to make the maximum contribution. Maybe you can afford that much per month, but you can afford $300 per month. If you can afford it with no real hardship then you should continue to contribute. If you cannot afford it at all, then do not do it.
Possibly, Better Investment Choices
Before you decide that contributing to an IRA is how you want to proceed, you should understand that there are other methods of investing your money. At the end of it all, you may still decide that an IRA is a way for you to go, but at least you will make that choice with a complete understanding of your options. When you have all the information, you can make better decisions.
401k
I am going to start with an easy one, the 401k. This is a retirement plan that is offered by an employer to an employee. Some employers include a 401k in their employee’s benefits package. It is considered a perk of working for certain companies. Now that most companies have done away with pensions, the 401k has taken its place.
As an employee, you decide how much money you want to be taken from your check each month. It goes from your check into your 401k account before taxes are taken out of your paycheck. This reduces the amount of money on which you pay taxes because your taxable income is reduced. Some employers match your contributions up to a certain dollar amount or percentage. If your employer matches, you should put at least that much money in your 401k.
Mutual Funds
Mutual funds are something that you must go through a bank or a broker to invest in them. A mutual fund contains a small piece of many companies. They are a diversified mix of stocks in many companies and they typically are a low-risk investment. Another bonus of mutual funds is that you do not need a lot of money to invest in the mutual fund. However, you will not see a huge amount of growth. If you have a lot of time to wait for it to grow, a mutual fund may be a great option. But, if you are looking for a faster return on your investment, these funds probably are not the way for you to go.
Certificates of Deposit
CDs, or certificates of deposit, are a low-risk way to invest money. You are giving money to the bank and promising to keep it in this account for a set period of time. That period of time can be anywhere from three months to five years. The longer the amount of time you leave the money in this account means the higher the interest rate is on your account. You can take your money out before the end of the term, but you face severe penalties. CDs are federally insured so you do not have to worry about losing your principle.
How Do I Determine How Much Money I Need?
You will probably hear some financial experts say you need about 80 percent of your income before retirement as your income after retirement. This means that many of us will not feel like we have enough money when it comes time for us to retire. I have already started thinking about what is my second career going to be because I do not think I will be able to retire when I retire. Perhaps you are thinking about a retirement IRA.
The good news is there are many tools available online to help you determine how much money you will need to retire. There are retirement calculators and estimate tools available. If you use 80 percent of your income as a guide, looking at all of your savings plans, will you have that much of your income for say twenty-five years?
Look at Your Bills and Debt
One you can do is look at the bills you have today. Will you still have all of these bills when you retire? If you have a mortgage, can you pay it off before you retire so you do not have to worry about that? Take a look at your other debts and make a plan to have most, if not all of those debts paid off before you retire. If you reduce your bills by more than 20 percent, that means you should have no problem living off of 80 percent of your income. I am sure you are thinking like me, which is I do not want to have any bills when I retire. While that is a nice goal, I am not sure it is possible. However, we can reduce as many bills as possible.
Continue with the Savings Accounts
Part of your plan now should be to reduce as much debt as you can and save as much as you can. That means you continue contributing to an IRA and any other forms of investments you have such as a 401k. If you are currently saving money in a savings account, you should continue to do that. However, if you still don’t have a savings account, but are considering opening one, here are some great options worth considering:
How Do I Manage My Money?
I am sure that you know that financial management means more than just contributing to an IRA. For those of you that do not quite understand what is money management, I am going to tell you. It is simply the process of understanding your income and your expenses and how they relate to one another. It is creating a budget that makes sense for you and where you are in your life. It is sticking to that budget and your financial goals even when things get hard and you want to take that trip even though it is not currently in your budget.
Know Where Your Money Goes
Good money management is understanding where your money is going all the time. It is knowing the items on which you are spending money and being in control of your spending. It is not allowing your money to control you. It is also understanding your debt and knowing the difference between positive debt and negative debt. It is also getting rid of all the negative debt and reducing the amount of positive debt. Even though it is a positive debt, it is still debt. Good money management is having your money work for you and not you working for your money.
How Do I Know My Net Worth?
It does not matter what stage of life you are in, it is important to have some understanding of your net worth. Basically, your net worth is all the money and the valuable items you have, which are considered assets, subtracted from the money you owe to others, also known as all of your debt. Those to which you owe money can be banks, other lenders, and even friends.
It is fairly easy to determine your net worth. You add up the value of cars, houses, investments, money in all bank accounts, and anything else that has monetary value. This includes all the money you have been contributing to an IRA. Once you have that number, you then subtract all the money you owe in all the various places such as houses, cars, credit cards, loans, and any other money you owe. The amount that is left over is your net worth.
How Do I Increase My Net Worth?
Since I like giving out good news, I am going to give you some good news right now. You can increase your net worth. It does take some work, though. One of the fastest ways to do this is to reduce the amount of debt you have. One biggest item that decreases your net worth is your debt. By simply reducing it, you are increasing your net worth. It is that simple. Now, I did not say it was easy. I just said it was simple.
You can also be smarter about any future debt that you obtain. For example, you want to buy a car. Do you need to buy a car, or is it just a want? If you do not need it, maybe you wait another year and save up the money. Whatever money you have in a year, you put towards the down payment of a car. This may not eliminate the need for a car loan, but it can reduce the amount you borrow.
You should also focus on reducing the amount of credit card debt you have. You should pay as much as you can each month towards your credit card bill in an effort to reduce it. You can work on increasing your assets by contributing to an IRA in an effort to save for your retirement. It is like a win-win for you, you increase your assets and your net worth all while saving more money for your retirement.
Should I Have A Budget?
You should always have a budget. It does not matter your stage in life. It does not matter if you are retired, close to retired, or if you just started working. It does not matter if you are contributing to an IRA, or a 401k, or investing in stock. No matter where you are in life, you should have a budget. You should have a clear understanding of your monthly income and expenses. You should make sure that your expenses are less than your income. If they are not, you need to reduce spending. You will not make it during retirement if you do not learn to live within your means right now. You cannot learn to live within your means if you do not know what they are.
You should write down all your income in one column. In a separate column, you should write down all of your expenses. Add up both columns. You then subtract the expenses from the income to see how much you have left each month. Hopefully, you have a positive number. If you do not it is definitely time to cut your spending. Even if you have a positive number, you should take a look at your spending and see if you can make any reductions.
Conclusion
When we get to a point where we are looking closely at retirement, it can be a scary place. I would imagine we will begin to feel as though we do not have enough money saved. We may even feel like we will never be able to retire. I watched many people work much longer than they should have because they felt as thought they did not have enough money to retire.
I do not want to be in that place. I am sure you do not, either. It does not matter how close you are to retirement, you should continue contributing to an IRA as long as you can afford to do so.