Tips for Saving for Retirement — Even When Budgets are Tight
Even before the pandemic the majority of Americans didn't have a retirement account. For many, saving for retirement is now harder than ever.
As the coronavirus pandemic lingers, with forced business shutdowns and the resulting lost wages, the most immediate problem most people face is how to pay the bills. How to save for the future and for retirement is not a priority for a lot of people right now.
Almost half of Americans polled during a recent Pew Research Center study indicated that they had lost their jobs or seen their wages cut. The hardest hit during the shut-downs have been Hispanic Americans, with six in 10 reporting lost wages or jobs. More than half of Americans between ages 18 and 29 and almost half of those between 30 and 49 also said they had lost wages or jobs.
So why should individuals worry about contributing to a retirement account now — especially when their immediate problem may be how to pay their bills?
If you've planned for emergencies and have at least short-term funds on hand, you should try to continue to save for retirement. Adding to your savings now means a much healthier bottom line in the long run because of the compounding nature of interest. Money that goes in now will have more time to mature and earn interest.
But what if you don't even have a retirement plan, let alone the money to keep funding it during hard times? Well, there's always social security, you say. But experts warn against relying on Social Security alone to sustain you in your retirement years. The Social Security Board of Trustees estimates that they will run out of money entirely by 2034, at which point Social Security will only be able to pay out as much as it collects in payroll taxes.
Unfortunately, even before the pandemic, the Aspen Institute, an international nonprofit think tank, was reporting that the majority of Americans don't have a retirement account.
Getting Your Finances in Order
So what should you do if you don't think you have enough money to save for retirement?
Experts say the first thing you should do is to set your priorities straight. Make sure you have an amount equal to at least three to six months of expenses set aside in case of emergency. If not, start saving now.
Second, don't tie up your cash with large expenditures. Even with 0 percent financing on some loans, you are still taking a chance if you work in an unstable industry.
And lastly, if you have an individual retirement account and are worried about paying bills right now, you may want to hold off making contributions since you have until April 15, 2021, to make a contribution for the 2020 tax year.
If you are interested in starting a retirement savings account, it's fine to start small. The importance of saving any amount and doing it consistently can’t be overstated. Even saving 1 percent of your pay helps. If you can then increase that 1 percent annually until you’re saving the maximum annual amount, that's even better. The maximum individual retirement account (IRA) contribution for 2020 is $6,000. For someone who is age 49 and younger, you only have to save $500 per month to max out an IRA. For anyone older than 50, you can save up to $7,000.
There are two main types of IRAs — traditional and Roth. A traditional IRA allows you to make a tax-deductible contribution now; you pay taxes when you take the money out for retirement. However, if you already contribute to a 401(k) plan at work, you may be prohibited from claiming a tax deduction on an IRA contribution if you earn too much.
With a Roth IRA, you fund your account with after-tax dollars. When you retire, you pay no taxes on the money you withdraw. Consider setting up an automatic transfer into your retirement account so you don’t have to remember to make a deposit.
For more information on setting up an IRA that suits your particular situation, please give us a call.
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In this issue:
This Just In...
Your Life Insurance Options During the COVID-19 Pandemic
Health Benefit Options for Those Who Are Disabled
Tips for Saving for Retirement
— Even When Budgets are Tight
Depression — No Excuse Not to See a Doctor