Retirement Plan Contributions
It’s Never Too Soon to Think About Retirement
Retirement. It may not even be on your radar, especially if you’re several years out from retirement age. But starting to prepare for retirement now can make a huge difference 35 or 40 years down the road.
Primary Sources of Retirement Income
Today, most people rely on two primary types of retirement income.
Social Security: This money you pay into a general government managed account from every paycheck you earn. When you retire, you get a portion of that money back for the remainder of your life in the form of monthly payments. Social Security takes into account your 35 highest earning years to calculate what your monthly income will be when you retire.
Qualified employer retirement plan: The second form of income often come from a qualified employer retirement plan, such as a 401(k) or 403(b). You contribute a portion of your earnings to managed investments that will hopefully increase in value over time. In addition, employers may match a percentage of your contribution, which is free money that may also help increase your account’s value.
Though less common, pensions and Individual Retirement Accounts (IRAs) are additional sources of retirement income for some people. Only About 12% of private sector workforce employees have a pension plan, which is a defined retirement benefit where a company sets aside additional money that is paid out as monthly income for life, based on years of service to the company; after a period of time the employee becomes “vested” and 100% of that money is theirs. However, many companies have phased out pension plans over the past 10 to 20 years, opting for retirement plans such as a 401(k) or 403(b) instead.
And for people who are self-employed, or their employer doesn’t offer a qualified retirement plan, they can set aside money in an IRA, using pretax dollars or a Roth IRA, using after-tax dollars to invest in managed funds.
If you have a qualified retirement plan through your employer but reach your contribution limit, you may consider contributing extra money to an IRA.
To maximize the benefit of any of these long-term retirement income sources, you need to start early, stay the course and continue to increase your contribution amounts over time.
It’s important to remember that you are in control when it comes to retirement preparation. Either through your employer’s retirement plan or an IRA, it’s up to you to determine how much to contribute to your account, how much to add to your contribution amount year after year and how your contributions are invested.
Compounding Is Key
Hesitating Can Be Costly
How does compounding work? When you invest your money, you have a potential to earn more money, not only on your investment but also on any earnings from those investments. Compounding is the growth of these primary earnings and the earnings themselves.
However, compounding needs time to work. By starting early on in your career, the sooner and faster your accounts have the potential to grow.
Putting off participating in a retirement plan comes with a cost. Waiting can mean the difference in tens or even hundreds of thousands of missed dollars in your retirement account 35 or 40 years from now. To determine how the cost of waiting can impact your retirement, try our Cost of Waiting calculator.
Once you learn these powerful concepts of starting early, compounding and the cost of waiting, it can change your retirement preparedness behavior.
Starting early makes a big difference. Hear what Pete the Planner has to share.
1. The Average 401k Balance By Age, https://www.personalcapital.com/blog/retirement-planning/average-401k-balance-age/, Amin Dabit, CFP®, August 6, 2021.
Note: OneAmerica® is the marketing name for the companies of OneAmerica. Products issued and underwritten by American United Life Insurance Company® (AUL), a OneAmerica company. Administrative and recordkeeping services provided by OneAmerica Retirement Services LLC, a OneAmerica company, which is not a broker/dealer or investment advisor.
Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. These concepts were derived under current laws and regulations. Changes in the law or regulations may affect the information provided. For answers to specific questions, please consult a qualified attorney, tax advisor, or financial professional.
Investing involves risk, including potential loss of principal.
The views and opinions expressed by Peter Dunn (aka Pete the Planner) are solely his and do not necessarily reflect the views and opinions of the companies of OneAmerica. Pete the Planner’s content is for overview and informational purposes only and is not intended as tax, legal, fiduciary, or investment advice. Pete the Planner is not an affiliate of any OneAmerica company.