Will You Taper Before You Retire?

Next up on CovingtonAlsina’s Hierarchy of Financial Priorities is retirement. It’s a concept that has changed dramatically and continues to evolve. We used to work at one company for our entire life, retire, and collect a pension for a short time before passing away. Compare that with a 20- to 30-year retirement today, most likely without a pension. As the population ages and more jobs are shifting to knowledge work versus manufacturing or manual labor, we start to see a trend of tapering instead of retiring. 

There are three sources of satisfaction in retirement and one common source of dissatisfaction. To be happy, you generally need good health, an active social network, and enough money to be comfortable. All of these require an investment when you’re working. 

The first step in saving for retirement is typically your employer-sponsored plan, like a 401(k). At the bare minimum, you should contribute enough to get the full employer match. It’s free money. How much to save depends on how much you’re starting with, how long you have until retirement, and what you want retirement to look like. There are numerous calculators available online, including one on our website. In general, look to save 10-15% of your income, including any employer contributions. 

Another type of tax-advantaged account that you can use for retirement savings is an Individual Retirement Account or IRA. There are limits around who can contribute based on income and whether or not you have a plan at work. If you’re eligible, you can contribute $6,500 a year to an IRA. You can open an IRA with an advisor or do it yourself online. An advisor will usually cost more, but you’ll be getting the advantage of professional advice. Many advisors also include financial planning as part of their work for clients and have other value-added services. 

How much and where to save varies from person to person. A broad road map would be to save enough for the match in your workplace plan. Additional money available should pay down debt and build emergency savings. After that, fund your Health Savings Account if you are eligible, then a Roth IRA. If you still have discretionary income available to save, discuss adding more to your employer’s plan or opening a regular investment account with your advisor.  

If you have a Roth option in your plan at work (we’ll tackle Roth versus traditional accounts in another column), remember that the Roth IRA income limits don’t apply to your 401(k), and the employer match is not dependent on contributing to the traditional 401(k); you’ll get the same match either way.  

A final note is that it is never too early to start saving for retirement. Once your child is making money, including babysitting, lawn mowing, or other side jobs, they can open a Roth IRA.  

You can find great resources and calculators and register for our educational events on our website at www.covingtonalsina.com.  If you have questions, email us at info@covingtonalsina.com.  We’ll continue in the next column with a discussion on saving for college and other goals.  

CovingtonAlsina is a Registered Investment Advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. 

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