GOD’S MONEY and YOU: A Brief Introduction to Saving for Retirement
When I daydream of retirement, I have visions of sleeping in, cooking at a leisurely pace and not
having to get up at an ungodly hour to workout. I like to keep busy, so I also dream of doing all those things I can barely get to now. What do you plan to do when you retire? While many would readily have an answer, a smaller number could say with confidence that they will be financially ready for it. For some women, retirement may be a distant concept, rarely thought about. For others, it may be a very present thought and sometimes the cause of worry.
Whatever your age, income or marital status, planning and saving for retirement is something that is worth taking time out for.
It is a widely documented fact that women on average live longer than men. On average, a woman aged 65 is expected to live up to the age of 86.6; 2.3 years longer than a similarly-aged man. In addition, over the course of their working lives, women earn less than men and, as such, have less income available for saving. Women earn less due to pay disparities between genders for equal work and because they often have to leave the workforce to be caregivers for children and elderly parents. These are two big reasons why women have to pay close attention to planning for retirement. While it is impossible to cover all the intricacies of retirement planning in one article, I hope to provide a brief overview in this piece and hopefully, provide some direction to anyone who may need it.
The terms 401(k), IRA, 403(b), SEP IRA, IRA and Roth IRA are heard quite often whenever retirement is discussed. Each of these terms refers to vehicles by which one can save for retirement. Below, I group them into broad categories for easier discussion.
1. 401(k): While the name sounds daunting and abstract, the 401k is an employer -sponsored plan, typically administered by a third party contracted by the employer. The name “401k” simply refers to the section of the Internal Revenue code that authorized the creation of the plan. Employees enroll in the plan and contribute a certain portion of their pre-tax income to the plan. Employers often provide a fixed or matching contribution to the plan. This employer contribution may vest immediately or after the employee has been with the company for a defined period. The funds contributed are then invested into the stock market. If you happen to be employed by a public education organization or a certain type of non-profit, this plan would be referred to as a 403(b) plan. It works in the same way but it’s just named after a different section of the Internal Revenue code.
2. Individual Retirement Account (IRA): An IRA is a savings account that can be opened with a financial institution – you can open this type of account on your own. The money put into an IRA can then be invested in stocks, bonds or mutual funds to grow your savings. There are several types of IRAs: traditional, Roth, SEP and SIMPLE. The traditional and Roth IRAs can be opened by individuals while the SEP and SIMPLE are for small businesses and self-employed persons. Contributions to an IRA can be either pre-tax or post-tax, based on the type of account.
The accounts described above all have different contribution limits, withdrawal restrictions and eligibility requirements. They also offer different tax advantages. Despite these differences, they have one thing in common: they help grow your money and take advantage of the power of compounding interest. Compound interest is that which is earned on the principal plus interest, dividends and/or capital gains. In retirement savings accounts, interest is earned not only on the principal but also on the interest earned on your principal. This allows your money to grow at a much faster pace than if interest were earned solely on the principal. It is important to note that the earlier you begin to save, the more you stand to benefit from compound interest!
In subsequent articles, I will take a deeper look at the various retirement savings accounts. Until then, here are a few suggested action items that may help.
If you have not previously given any thought to retirement, please take some time out today to start doing so. Assess where you are and determine what your course of action should be. If you can afford to do so, book a session with a financial planner. Otherwise, you could have a conversation with someone in your circle who may be able to help.
If you are married, have a conversation with your spouse. Make sure you know how much you currently have saved for retirement and discuss your retirement saving strategy and goals.
If you already participate in a 401(k) or 403(b) plan, check to see if your plan provides complimentary access to a financial advisor. If it does, contact them and get advice on how to invest your contributions. They will assess your risk profile and provide recommendations for where to put your money for maximum return.
Resources:
This website is full of resources covering all aspects of financial planning. www.choosetosave.org
A short article that provides great perspective on saving for retirement: http://www.daveramsey.com/blog/the-truth-about-retirement/
Editor’s Note: Loema is an alumna of University of Baltimore where she earned both an undergraduate Accounting degree and an MBA in Finance. She works full time for a local biotech company as Controller, running the accounting department. She is also a CPA, licensed in the state of Maryland. If you’d like to see an article on a particular financial topic, please let us know. Loema desires to address subjects that are of particular interest to you.
