January 1, 2019
Turbo Charge Your Retirement
Q: I’m in my 40s and haven’t saved nearly enough to prepare for retirement. How can I “turbo-charge” my retirement savings to catch up?
A: The good news is that you still have a lot of peak earning years ahead of you. Many people don’t hit their professional stride until they reach their 40s, 50s and 60s, and they have their best earning years, by far, late in life. If you qualify for a traditional pension, so much the better, because many systems use your highest-paying three or five years to calculate your benefits. These traditional pensions, however, are getting quite rare.
The bad news is this: Interest rates are at or near record lows. That’s great for borrowers, but it makes things a lot harder on savers. Chances are, you will need to save a lot more money to generate a given level of retirement income than your forebears did a generation or two ago.
Here are some principles:
Rein in spending sharply. Learn to enjoy cooking, rather than eating out. Cut back on cable TV packages and take up exercise instead. The lower your monthly expenses, the more free cash flow you will have available to invest. All solutions to your problem start with this one step.
Pay down consumer debt and credit card debt. With credit card interest rates in the high 20s for some people, this is often the very best return on your investment you can get. Every dollar you pay down in credit card debt sooner or later nets you a return on investment equal to the interest rate on the card – with no risk, and no taxes due.
Next, make sure you are making the most of your tax-advantaged retirement savings opportunities. Are you working for someone else? Increase your 401(k) contributions. Maximize your IRA or Roth IRA contributions if you are eligible. Own some annuities, which are tax deferred (but gains are eventually taxed as income), and some people buy and hold mutual funds or ETFs. These aren’t tax-deferred, but index funds are very tax-efficient, and if you hold them longer than a year, they are taxed at more favorable long-term capital gains rates, rather than ordinary income rates.
Do you own your own business? Can you start one? If so, you have some additional options: You can form and contribute to a SEP IRA, or simplified employee pension plan. This plan allows you to contribute up to 25% of your income from the business into a SEP IRA, or up to $49,000 per year, tax-deductible. No taxes are due until you take the money out. Some businesses may be better off forming a SIMPLE IRA or Solo 401(k), depending on the specifics. Consult a qualified financial adviser with experience in retirement planning to find out which alternative is most appropriate for you and which will enable you to maximize your contributions.
Still have more money to sock away? An experienced life insurance agent can help you create a life insurance-based retirement savings plan. Premiums aren’t deductible, but they grow tax-free, and if you structure the property correctly, you can access the cash value tax-free later in life to supplement your retirement income. Meanwhile, your family gets a tax-free death benefit if you die, and the waiver of premium feature available will provide the unique benefit of continuing your scheduled premium contributions if you are disabled – making it the only retirement plan that “self-completes” in the event of disability.
These plans work best for those who are in good health and can pass a medical exam, get a “preferred” rating or better from the life insurance company, and who have substantial free cash flow to sock away, funding the policy up to the legal limit, which your life insurance adviser can calculate for you.
Want more ideas? If you are self-employed and have your own business, you have few or no employees and a steady stream of cash flow, you can make nearly unlimited tax deductible contributions to an insured pension fund, under Section 412(i) of the Internal Revenue Code. (Make sure you have an experienced adviser working with you on these. This might not be a job for your nephew who is just getting started in the life insurance business.)
Are you renting? It might be time to buy. That may sound expensive now, but interest rates are extremely low as of this writing. If you’re in your 40s, you will have that 30-year mortgage paid off in your 70s. At that time, you may want to convert the equity in your home to a stream of income via a reverse mortgage. It’s not for everyone, but if you rent rather than buy, you won’t have that option. You can make that decision when you get there.
Above all, save money. Squirrel money away every way you can. Cash is still king, and there’s no substitute for healthy cash reserves in your credit union account, whether in checking, certificates or other conservative savings options. You might not get a great return, but it’s safe, secure and steady. Most of your success is going to come from controlling spending decisions, rather than from making brilliant investment decisions. Set things up so you don’t have to be brilliant to succeed. Just prudent.
You do that by reducing expenses and saving money. Check out Interior FCU’s IRA options and Savings Accounts to start planning your future.
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