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Nerd Wallet

by Kathy Armstrong

Are you saving enough for retirement? You know, “the golden years”, the time when you kick back, relax and enjoy a life of leisure?  It’s possible that a very large percentage of people who answer that question with a nod may be mistaken.

 Ouch! While 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 you can focus on your newfound hobbies – and not whether or not 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 span!)

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, and investing wisely is the key to retiring comfortably.

First, the smartest thing you can do is to 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 7 percent for state taxes, 35 percent of your earnings are gone before you have touched it.

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 the employee elects to defer a portion of their salary up to $18,000 a year in 2016 ($24,000 if you’re age 50 or older).  The employer often matches the contribution (up to a set amount) -- it’s free money, but only if you contribute.
  • The SEP (Simplified Employee Pension) IRA is a traditional IRA that may accept an expanded rate of contribution (even as high as $53,000 in 2016).  It is owned by the employee, who might be self-employed.
  • A traditional individual retirement plan 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 $5,500 each year ($6,500 if you are age 50 or older) in 2016 with the benefit of 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!

I will stress, however, that retirement plans and options are complicated, and require much more space than provided in this single column to explain.  Whichever plan you use, though, make certain that you allocate your dollars wisely. The biggest mistake people make where retirement plans are concerned is placing money into their accounts, but failing to move it into the right mix of stocks and bonds. By default, undesignated monies might go directly into a money market account which currently pays less than 1% in interest.

How you allocate your funds when you are 30 should differ from when you are 50.  A financial advisor can help you in selecting a proper mix of stocks and bonds.

Just remember, if you ever question whether or not you are saving enough, save a little extra for good measure! And recall the adage “better safe than sorry”.



Kathy Armstrong is a CERTIFIED FINANCIAL PLANNERTM professional and works with Heritage Financial Consultants in Hunt Valley.  She is an investment advisor representative through Lincoln Financial Advisors Corp, a broker/dealer (member SIPC) and registered investment advisor, 307 International Circle, Suite 390, Hunt Valley, MD  21030, 410-771-5655.  Neither Heritage Financial Consultants nor Lincoln Financial Advisors is affiliated with Howard Bank. Heritage Financial Consultants, LLC is not an affiliate of Lincoln Financial Advisors Corp.  CRN-1264151-080315

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