Planning for Retirement
By Amanda Jakl
“He who fails to plan, plans to fail” is an old proverb that seems like it could be referring specifically to retirement.
Retirement is sometimes treated as an afterthought, especially for those with a couple of decades before they hit that golden age. There is no road map on how to successfully reach retirement. With the disappearance of pensions, it’s every man for himself. Few people save enough to be comfortable in retirement and too many think that Social Security will be their main source of income. It’s that false hope in a deteriorating system as well as lack of specific goals that are leaving many hard-working Americans in financial dire straits.
Dorrie Nienow, who has been with Schneider Community Credit Union for more than 30 years and now serves as its president, has noticed this trend. “I’ve seen people retire on their Social Security and aren’t making it because they didn’t plan ahead or think about their future retirement,” she says.
But not to lose hope, she says that planning and education are the keys to a successful retirement. “Do we know that Social Security is going to be here in the next year or next five years?” asks Nienow. “We don’t know, so you have to prepare.” Given the economic times, it is possible that the Social Security system may not exist 25 years from now, making it crucial to start planning today.
The average savings rate in the U.S. is just 3 percent, nowhere near enough for the average person to retire on. When asked where people should invest their money, Luke Thomas, an owner-operator who’s been driving for almost 25 years, half-jokingly replies, “Put it in the back yard in a Mason jar.” You can’t blame Thomas for his slightly cynical attitude; he lost quite a bit of his savings when the market crashed in 2008. He also doesn’t see his fellow drivers able to set aside any extra money, because their extra cash is wrapped up in their livelihood.
“Most of them I talk to, all they’re thinking about is keeping their truck from being repossessed and how they’re going to pay for fuel,” he says. “A lot of them will tell you that they’re not going to retire, they can’t afford to retire.”
It can be argued that anything is possible with the right planning.
For those that own their own business, there is no outside HR department making sure that they have a retirement plan in place. The 401(k), the favorite buzzword in retirement, is usually limited to businesses, so owner-operators have to create their own plan.
“You really have to advocate for yourself now,” says Noel Snyder, office manager for Schneider Community Credit Union.
It can be difficult to know what to do in order to fund a comfortable retirement when you’re the one in charge. Thomas, who is about 20 years from retirement, points out that the market is recovering more slowly than he would like. “It’s starting to come up some,” he says, but reluctantly adds, “I have no idea. I’ve been trying to figure out the last year or two what to do because basically right now, most owner-operators will work until we die.” It’s easy to feel helpless when it comes to the future, but let’s walk through some of the initial steps to starting a retirement plan.
A Penny Saved …
Whether retirement is 10 years away or 25 years, first you have to figure out how much money you’ll need in retirement, how long you will need it, and whether you’ll collect Social Security. These numbers won’t be exact – you can’t predict the future, after all – but you’ll need a ballpark figure to start planning. See sidebar.
Next you’ll choose your retirement “vehicle,” which is financial lingo for account. Keep in mind you can have more than one vehicle. Many banks and credit unions offer retirement accounts; usually the differences between them are the fees they charge to maintain the account and the variety of accounts offered. Wachovia, Bank of America and Fidelity all offer a large variety of retirement accounts, so whether you’re an owner-operator or drive for a company that doesn’t offer a retirement plan, you should be able to find something that fits your situation.
If you’re an independent owner-operator, consider a Simplified Employee Pension Individual Retirement Account (SEP IRA). These accounts are ideal because they are simple to set up and have very low administrative fees. They are similar to a traditional 401(k) in that account holders choose where they want to invest their money, such as stocks, bonds, mutual funds and ETFs. An important aspect of the SEP IRA is you may have to contribute to employees’ accounts as you do your own. Not an issue if you don’t have any employees.
A husband-and-wife driving team might consider an Individual 401(k), sometimes known as the Indie 401(k), Solo-k or Uni-k. The Individual 401(k) is ideal for a small business (and is considered an employer-sponsored plan) where only the partners will be participating in the retirement plan. Compared to other plans, the Individual 401(k) offers high contribution limits, so if you haven’t started saving, this could offer you a way to set aside large sums of money to help catch up. Another benefit of this account is the ability to borrow against it; you can borrow 50 percent of the account balance or $52,000, whichever is less. If you make less than $260,000 annually, this might be the plan for you.
If you want to avoid an employer-sponsored plan, a Roth IRA might be better for you. Thomas chose to open a Roth IRA, rolling over a 401(k) plan he had with a previous employer before he became an independent driver. Roth IRAs are simple to open and usually require only one simple form if you are rolling over money from another retirement account. While other retirement accounts give you the tax break when you deposit money, the Roth IRA allows your withdrawals to be tax-free during retirement. Your contributions to this kind of account cannot be deducted when filing your taxes. Another restriction of the Roth IRA is contribution limits: $5,500 for those 49 or younger, $6,500 for those over the age of 50. Income limits for participation are $181,000 for married couples filing jointly.
But it isn’t all bad news for this account. For tax-deferred retirement accounts, distributions must start at age 70 1/2. Not so with the Roth. Your money can accumulate and be left to your family if you choose, or you can start using your money as early as age 59. You can also have this account in addition to a regular tax-deferred account. So if you think taxes are only going to increase, setting up a Roth IRA with tax-free distributions might be the way to go.
These are just a handful of retirement accounts. It is important to find a banking institution you feel comfortable with and make an appointment to open a retirement account. While many banks and credit unions offer online setup, opening an account in person may be the best route. Talking to a financial expert face to face can offer you peace of mind. Snyder offers this advice: “It’s important to go with someone you know, somebody you can talk to, somebody you trust.” This is your retirement. Take control of it, and it will take care of you in your golden years.