Are you saving enough for retirement? You know, “the golden years”... the time when you kick back, relax, and enjoy a life of leisure? Studies show that a very large percentage of people who answer that question with a nod are actually mistaken. Ouch!
Whether or not you are saving enough depends partly upon the lifestyle you expect to have at retirement age. There are some general rules you should be following to help ensure that you can focus on your newfound hobbies - not whether you can afford to replace your aging Buick.
The general rule of thumb has been to save 10 percent of your income for retirement, but for women, that percentage needs to be bumped up to 12 percent. (Attribute it to our longer life expectancy!)
But it’s not enough simply to tuck away your 12 percent into a savings account and then expect to retire comfortably. All savings methods were not created equal. Investing wisely is the key to retiring comfortably.
First, the smartest thing you can do is invest as much as you can of your pre-tax income before Uncle Sam and the state get their share. For example, if you pay 28 percent of every dollar you earn to federal taxes and another 9 percent for state taxes, 37 percent of your earnings are gone before you have even touched them. But there is a way to pay yourself first - tax-deferred retirement plans. The three workhorses of tax-deferred retirement plans are the 401(k), the SEP IRA, and Individual Retirement Accounts (IRAs).
✷ The 401(k) is a company-sponsored plan where employees elect to defer a portion of their salary, up to $14,000 a year in 2005. The employer usually matches the contribution up to a set amount. It’s free money, but only if you contribute.
✷ The SEP (Simplified Employee Pension) IRA, which may be the most relevant for the majority of women dentists, is a traditional IRA that may accept an expanded rate of contribution (as high as $42,000 in 2005). It is owned by the employee, who may be self-employed.
✷ A traditional individual retirement plan (IRA) is a personal retirement savings program toward which eligible individuals may contribute both deductible and nondeductible payments. The traditional IRA allows you to make contributions, up to $4,000 each year - $8,000 for a couple - in 2005, with the benefit of a tax-deferred build-up of income. The Roth IRA, on the other hand, is an after-tax retirement savings program whereby qualified distributions are received income tax-free!
Retirement options are complicated and require much more space than a single column to explain. I will be focusing on each plan individually in future columns. In the meantime, send me an email if you would like more information on any of these plans, and I will send you some details.
Whichever plan you use, make certain that you allocate your dollars wisely. The biggest mistake people make where retirement plans are concerned is placing money into their accounts, then failing to move it into the right mix of stocks and bonds. By default, undesignated monies go directly into a money market account, which currently pays only about 1.5 percent in interest. How you allocate your funds when you are 30 should differ from when you are 50. A financial advisor can help you select a proper mix of stocks and bonds.
Just remember, if you ever wonder whether or not you are saving enough, save a little extra for good measure! And recall the adage, “Better safe than sorry.” ■
Kathy B. Paal, MBA, CFP, RFC, CTFA
Ms. Paal is a certified financial planner at Heritage Financial Consultants in Lutherville, Md., and is an investment advisor representative, registered representative, and licensed insurance broker with Lincoln Financial Advisors Corporation, a registered investment advisor and broker-dealer (1300 York Road, Lutherville, MD, 410-339-6675). You may email Kathy at [email protected].
