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Retirement & Eldercare

You can't kick the can forever when it comes to retirement savings

by
Mike Kilmer
on
1/14/2016
You can't kick the can forever when it comes to retirement savings

Though the idea of retiring may seem as distant as the other side of the planet, the truth is that it can sneak up on you pretty quickly. This is particularly true for young people, who tend to believe that preparing for the future can wait until they are older. Unfortunately, choosing this path often leaves people panicking as they get older and wishing that they had started saving incrementally when they were younger and had plenty of time. Still, people who find themselves concerned as they age are in a better position than those who ignore the issue completely: these people make the mistake of assuming that the money that they’ll receive when they are old enough to collect Social Security will be enough to cover their expenses – they couldn’t be more wrong.

The Retirement Reality 

What people don’t spend enough time thinking about is how much they’ll actually receive in Social Security (assuming that they are eligible for it in the first place), and then calculating whether they’d be able to live on it. The simple exercise of comparing the amount of money you’re likely to receive in annual Social Security income with what you currently earn – or with the government’s standard for what the poverty level is – can be eye opening. For this year, the government has set the 100% poverty level at $11,770 for a single person and $15,390 for a married couple. The Social Security Administration has provided a Retirement Estimator on their website that allows you to enter some personal information and get a quick estimate of the payments that you are likely to receive once you are eligible to receive them. If you take the time to visit the site you’ll see that the calculator provides the opportunity to modify all sorts of inputs about what you expect to earn in different years and when you think you’ll retire, and when you receive the estimated income figures you may be surprised at how little it actually is. Living on just that amount of income is not going to be the retirement that you likely envisioned.

Some people who have not taken the time to start their own retirement plan will still get the benefit of plans that have been started on their behalf by their employer, as a result of their membership in a union, or in a plan that is funded by the government. If you have one of these plans you can determine what you expect to receive from it with the amount you expect to receive from Social Security, and this figure may be a bit more palatable. If you do the math and still think that it’s going to be hard to live on, then it’s time to start thinking about giving your retirement reserves a boost.

When interest rates are high and the stock market is stable like it was a decade or two ago, saving for retirement was straightforward and relatively simple, but now interest rates are almost flat, making it much harder to grow your money. Unfortunately, since you can no longer count on your money growing quickly, it becomes much more important to set aside a larger percentage of the money you’re making.

Saving is hard – it means that you have less to spend on yourself today. The government understands that, and in order to make things easier and encourage you to save, it has created certain tax benefits and advantages for doing so.

The most popular tax advantage plans:

  • 401K Plans – These are offered through employers, and are retirement plans that allow each worker who participates to take up to $18,000 of their pre-tax income per year and contribute it to the plan. Those who are 50 or older are permitted to set aside even more – up to $24,000 per year – in order to encourage them to save for retirement. Not only does this represent a sizeable contribution each year, but the government also permits the employer who is offering the plan to make their own contribution and match a percentage of what the employee puts away for themselves, which creates a larger savings and contributes to growth.
  • Health Savings Accounts – Though these plans started out as a method of assisting with paying medical expenses for people who had high-deductible health insurance policies, over the years these accounts have been modified so that they can now be used to supplement retirement plans. Though this option is only available for those who have already reached the limits of how much they are permitted to put into other retirement plans, individual contributors are allowed to set aside as much as $3,350 per year, and families can save as much as $6,750 with their HSA.
  • myRA Accounts – These accounts are specifically created to encourage those who have only small amounts of money that they can set aside to do so. With a minimum opening deposit of just $25, these government-administered plans then permit people to add as little as $2 per month in order to maintain an account. Individuals who have limited resources can take advantage of these retirement vehicles and save incrementally, and once their account has reached the age of thirty years or has reached a balance of $15,000, they then switch it into a commercial Roth IRA account.
  • Roth IRA – Owners of Roth IRA accounts are permitted to deposit as much as $5,500 into their account each year and then deduct that amount from their income. Taxpayers who are 50 years of age or older are permitted to set aside up to $6,500 in order to allow them to make up for lost time in establishing a retirement account. Though the amount that can be deducted may be impacted by income (higher-income individuals have different thresholds of how much they can contribute, regardless of whether their employer offers a retirement plan or not).
  • Traditional IRA – These plans allow the same tax-deductible contribution levels as Roth IRAs, but contributions are no longer permitted after the age of 70 ½. Like the Roth IRA, there is a phase-out on the amount that can be deducted from taxes that is based on income, but this is specifically applicable to those whose employers the opportunity to participate in a retirement plan.
  • Self-Employed Retirement Plans – For those who are self-employed and therefore do not have employers who can offer them tax-advantaged retirement plans, these plans that are also known as Keogh plans provide the opportunity to set aside up to 25% of their net business profit specifically for their retirement. These contributions reduce the amount of income that can be taxed by reducing net profits, effectively allowing 20% of net profits to be contributed.
  • Simplified Employee Pension (SEP) – Though the contributions to SEPS are similar to those established for Self-Employed Retirement Plans, they differ in that the accounts that the contributions are held in are IRAs. This leaves the self-employed individual or employee in control of their funds. Contributions to SEPs can be made after year end and still be applied to the prior year’s income.

Determining what retirement plan is best for you and your family requires a careful assessment of your individual needs, as everybody has different income, different expenses, and a different idea of what their lifestyle after retirement will be. There are a number of life events, including the number of children that you choose to have, whether you plan to pay for their college, whether you want to purchase a home, and what the condition of your health is that can have an impact on how much can be saved. 

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Mike Kilmer

Mike Kilmer

R. Michael Kilmer, CPA, CVA is a CPA based in Winchester, VA. Mike started Kilmer & Associates, CPA, P.C. in 1998 and understands the challenges of operating a business. He uses this real-life experience to assist clients with the opportunities and challenges that they face. In addition to possessing the expertise and technical skills required by the profession, he takes time to listen to clients concerns and communicates with straight talk in an understandable way. By combining technical expertise and real-life experiences, Mike is able to assist clients with solving their problems and complying with regulatory requirements.

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