Whether you’re looking to retire in the next ten years or several decades from now, there’s steps you can take today to stay on track – or get on track. Of course, there’s no one-size-fits-all plan for retirement, but this guide does break down some specific strategies for Generation X – those Americans born between 1965 and 1979.
According to a 2020 report by Investopedia, Social Security benefits will cover less than half of the average American’s retirement needs, so having retirement strategies in place is essential. But a 2019 survey by Money magazine found that only half of Gen-Xers had a retirement account, and just 36% reported contributing to one regularly.
Strategies to benefit everyone
Whether you feel prepared or not, and whether you’re one year or a decade away from retiring, there’s tax-advantaged retirement planning products available to you.
First, take advantage of your employer-offered 401(k) or other retirement plan. Often, employers will match a portion of what you deposit.
Second, consider opening an IRA if you haven’t already. And if you do have one, make sure you’re making the maximum annual contributions – which is $6,000 for most working adults.
Third, consider opening a Health Savings Account (HSA) if you have a high deductible insurance plan. An HSA can provide tax-free funds to cover healthcare during your retirement – so check with your HR department and/or tax advisor to learn more. And by the way, Patelco offers HSAs. Call us to learn more about setting one up.
Finally, make sure your existing investments are invested with tax efficiency in mind. Talk to your tax advisor to make sure you’re in the account that’s right for you. In addition, talk to a licensed CFS Financial Advisor* for more ways to invest efficiently and help boost your after-tax returns.
A primer on IRAs
IRAs can benefit pretty much everyone – no matter your age or how much you’ve saved so far.
A Traditional IRA is a special savings account that you set up for retirement at a financial institution like Patelco or at an investment brokerage. You can choose a variety of investments for your Traditional IRA, including stocks, bonds, ETFs, share certificates and cash savings. Like all IRAs, Traditional IRAs are governed by specific regulations and tax laws, so it’s a bit different than a typical savings account.
After you set up your Traditional IRA, you can make contributions, up to $6,000 per year ($7,000 if you're age 50 or older). The cutoff date for contributions aligns with tax deadlines, so you have until tax day to make contributions for the previous year. When you make a contribution to a traditional IRA, the amount of your contribution may reduce your taxable income for the year – check with your investment advisor or tax advisor to see if you qualify.
You can contribute pre-tax or after-tax dollars, giving you immediate tax benefits if your contributions are tax-deductible. The contributions you make to a Traditional IRA account will then grow tax-deferred, meaning that you are only taxed on your earnings once you withdraw. You’ll pay ordinary income tax on these withdrawals.
A Roth IRA is similar to a Traditional IRA, but with different tax advantages. Only after-tax dollars may be contributed to a Roth IRA account. On the upside, once you withdraw from a Roth IRA during retirement, you can do so tax-free. Whatever interest and capital gains you earn in a Roth IRA also grow tax-free. The total you can contribute to all your IRA accounts – whether traditional or Roth – is $6,000.
Are you on track?
It can be hard to know if you’re prepared for something that won’t happen for another ten, twenty, or even thirty years. As a Patelco member, you have access to CFS Financial Advisors at your local Patelco branch. They can help you with a checkup so you can see where you stand. You can schedule a complimentary consultation in person, over the phone or video conference.
So you are starting your retirement savings at 40…
If you’re not on track for retirement, you’re not alone – according to a 2018 study by Fidelity, at least half of Americans are behind. If that’s you, you can save more and make investment decisions with growth in mind. But your most impactful action would be delaying retirement. This gives you a few more years to save, and gives your savings more years for growth before you begin using it for expenses during retirement.
Whether you choose to delay retirement or not, you should consider saving 16% or more of your annual income if you know you’re behind.
You’ve started saving but you’re not quite on track
If you’re not quite on track for retirement, consider boosting your retirement savings – even as little as a 1% increase can have a major impact on your financial wellness during retirement. An ideal amount would be at least 15% or more of your annual income. You may have an employer that provides 401(k) matching, so be sure to take full advantage of that. For an added boost to retirement security, you could also plan to work an extra year or two beyond your planned retirement age.
Congrats! Your retirement savings is on track
If you’re on track for retirement, that’s great news. You can still take advantage of the tax-maximizing strategies mentioned at the beginning of this article.
A reminder about investment products
Although we have some general tax-related information above, we’re not your tax advisor, and your individual tax situation is unique. Please consult your tax advisor before making any tax-related decisions.
* We want to remind you that non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.