Saving for retirement is a lot like making a road trip playlist. You have to think about what future you wants to hear, who’s in the car with you, and (at the risk of sounding morbid) how long the playlist needs to be to get you to your final destination. Lucky for us, that’s where the finance DJs experts come in.
Misty Lynch is the Head of Financial Planning at John Hancock, so she knows a thing or two about making your golden years well, golden. We teamed up with her to answer the biggest retirement questions you guys asked us on Instagram. Annd play.
For when you’re balancing future goals with current debt…
Is it better to contribute to my 401(k) or pay off my student loans? Once your grace period is over, you should definitely start repaying your student loans. If your budget is tight, make saving a few months’ worth of expenses a priority. This will help you stay on track with your loan payments even if you lose or change your job. When you feel your income is steady and you have room in your budget It’s a great idea to take advantage of your 401(k) plan at work. Some employers will match your contribution, so see what that percentage is and try to invest that amount. As your debt goes down you can increase your investment in the 401(k), but it is a great idea to get started as early as possible.
For when you’re not sure how you’re doing compared to everyone else…
I’m in my mid-30s & only have $15,000 in retirement. How do I catch up? If you are in your mid 30s, you still have a lot of time and income-earning years ahead of you. If you have a 401(k), you can save up $19,000 per year for retirement. If that’s too much, try to save what you can and increase it by small percentages each year.
How much money should I have saved at different ages (30? 40?)? A popular theory is to have half of your salary saved in your retirement account by age 30, 2x your salary at 40, 4x at age 50, and 6x in your 60s. Unfortunately, most Americans are behind on this. So another thing you can do to help your financial future is control your expenses. If your expenses are low, you may be able to live comfortably in retirement with what you’re able to save. Many people increase their spending right alongside their income but being careful about this will give you more money available to save and less financial stress in the future.
Psst…lots of you asked about how much you should save by a certain age. John Hancock has a non-overwhelming decade-by-decade article that helps you break it out.
For when you want to hit a target…
What percent of each paycheck should be saved – and should that change with age? If you can get in the habit of saving 10-20% of every dollar you make when you start working, you will set yourself up for financial success. Good habits are important, so if saving money becomes a part of what you do with each paycheck, it will be easier to increase those amounts as your income grows (not just expenses)!
What is a good annual retirement salary target? Retirement doesn’t always mean your expenses will drop substantially. More free time could mean increased or equal expenses during the first few years. And health care costs or other needs may increase later in retirement. Plan to need about 70-90% of your annual income in retirement to live your current lifestyle.
For when you keep seeing the same acronyms pop up...
What’s the difference between a SIMPLE IRA and Roth IRA? A SIMPLE (hint: Savings Incentive Match PLan for Employees) IRA is an employer-sponsored retirement account. Employers are required to contribute on the employee’s behalf regardless if the employee contributes or not. These are often used for self-employed or small business owners. A Roth IRA is a retirement account that an individual is in control of (not their employer). You must have earned income (aka money from paid work, like wages, salary, or tips) to start one and the maximum contribution is $6,000 ($7,000 if you are over 50) for 2019. You fund these accounts with money you already paid taxes on and if you use it for retirement, you do not pay taxes on the investment growth. Pro tip: There are income thresholds with Roth IRA so, depending on your tax filing status and income, they may not be an option. Check the IRS website if you’re unsure of your eligibility.
Roth vs. Traditional IRA: Which is the better option? This depends on your situation. If you’re just starting out, have decades until retirement, and are under the IRS income thresholds, a Roth IRA may have the best tax advantages for you. On the other hand, if you’re in a high tax bracket now and want to defer paying taxes on your contribution until you’re earning less in retirement, a Traditional IRA would be the way to do it. The contribution limits are the same for both accounts ($6,000 or $7,000 if you are over 50) so it is a draw in that area.
For when you have retirement work perks…
Should I keep two separate 401(k)s or combine? This depends on the accounts themselves. If you have a particular fund that is available in your old 401(k) that you really want to keep, sometimes it makes sense to keep that money where it is and start saving in your new 401(k) separately. That way, you can get any new employer matching contributions. If you aren’t attached to a fund in your old plan, combining the 401(k) accounts might make sense to keep things simple. Another option would be to roll the old 401(k) into an IRA and have that be the account you consolidate into. This account can be opened where you want to do business. Your employer (or future employers) do not have control over the investment choices or need to be contacted in order to make changes or distributions giving you the most control.
What happens to my 401(k) after I leave my job? A few things could happen. If your balance is lower than the company’s threshold (i.e., $1,000) they may distribute that to you. Most likely your balance will stay right where it is in the 401(k) until you move it out. There will be no more contributions and some of the fees the employer used to cover may be passed on to you since you are no longer employed. You can choose to move it into your own IRA account or a new employer’s 401(k) plan.
There are more retirement answers where those came from. Head over to John Hancock to start planning for your golden years now, so that the only thing you need to do when you get there is to listen to the sweet sound of financial bliss.
PS: These responses have been edited and condensed for clarity.
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