Investing for Beginners: A Shift in Retirement Planning

Are you nervous about being properly prepared for retirement?  No doubt you have heard the concerns over whether Social Security will remain solvent.  Unless lawmakers act, the Social Security fund will only be able to pay seventy-five cents on the dollar by the year 2033.  Although Social Security will likely exist in some form when you are ready to retire, living strictly off of Social Security checks will be extremely challenging.

Over the past 10 years I have spoken to individuals from every socioeconomic status and of varying financial literacy.  While I share in some small degree their triumphs in financial success and sorrow in financial setbacks, never am I more disheartened than when I speak to someone in their retirement years who is facing both the physical strain of medical challenges and the emotional stress of financial calamity.

How is it, that so many seniors reach this point unprepared?

A significant shift has taken place over last few decades as companies have eliminated traditional pensions, placing greater responsibility on the individual for preparing for retirement.  Although this shift has occurred, few Americans approaching retirement age have adequately saved for their golden years.

Taking Responsibility for Your Retirement

What steps can you take now, to put yourself firmly on the path towards preparing for retirement?

First and foremost, make sure you have an accurate household budget.  Have a clear picture of your total disposable income and a comprehensive list of your monthly expenses.  By truly understanding your cash flow, you can maintain confidence that regardless of market fluctuations which may affect your retirement accounts, you can meet your monthly expense demands.

Secondly, you must ensure you have a properly funded emergency savings.  Although an emergency fund is a very personal decision based on one’s risk tolerance and income security, experts suggest having 6 to 9 months living expenses at all times.

Once you have mastered these first two steps, you can then turn your attention towards saving for retirement, knowing you have managed to mitigate the risks from many of the unpredictable events that occur in life.

Options for Retirement Savings

The first place you want to look for starting your retirement investments is through your employer.  Check with your HR office to see if they offer a 401(k), and whether they match contributions.  If so, at a minimum you want to invest whatever percentage of your salary maximizes the matching employer contribution.

For example, if your employer offers a 50% match on up to 6% of contributions, by contributing 6% of your salary to your 401(k), your employer will add an additional 3%, bringing your total contribution to 9%.  For 2013, the maximum contribution to a 401(k) is $17,500.

Don’t have access to a 401(k) through your employer?  Look at opening an IRA, or Individual Retirement Account.  This type of account allows you to take advantage of valuable tax sheltering just as a 401(k) does.

There are 2 types of IRAs: Traditional IRA and Roth IRA.  With a traditional IRA, you contribute money into the IRA before it is taxed, and Uncle Sam turns a blind eye to any growth of the account until you start taking withdrawals.  With a Roth IRA, you make after-tax contributions, and the account grows tax-free.  In addition, once you start making withdrawals at retirement age, your withdrawals are tax-free.

For both a traditional and Roth IRA, the maximum annual contribution for 2013 is $5500 (if you are 50 years old or older, you can contribute an additional $1000, for a total of $6500).  Check with your financial institution, as most offer IRA products.

Whether through a 401(k) with your employer or an IRA, the sooner you get started the better.  There are calculators throughout the Internet (such as this one with, which help illustrate the point that the longer you procrastinate saving for retirement, the harder it is to reach your retirement goal.

Check back with us next month, as we continue to provide articles covering a wide range of topics on Investing for Beginners.





photo by: Tax Credits
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About Johnathan Rockwood

Johnathan Rockwood is a Financial Counselor for The Mesquite Group. He graduated from the Naval Academy with a BS in Economics and is currently pursuing his MBA. During his 10 years as a helicopter pilot in the Navy, Johnathan developed a passion for assisting others in learning about personal finance. As a Command Financial Specialist in the military, he provided countless financial seminars as well as one-on-one consultations. In addition, he currently manages investment portfolios for several clients. He is married and has two daughters.