How do 401(K)s and Social Security impact my retirement?
As you get closer to your retirement years, you’re likely to have many considerations around your financial standing that you did not have previously. From your investments to your retirement accounts, or even how to manage your social security once you start receiving it, there is a great deal that comes with this new phase of your life.
Learn how to factor these items into your retirement planning
As you get closer to your retirement years, you’re likely to have many considerations around your financial standing that you did not have previously. From your investments to your retirement accounts, or even how to manage your social security once you start receiving it, there is a great deal that comes with this new phase of your life.
But when planning for your future finances, do yourself a favor by not waiting until that next phase of your life is upon you. Have a plan in place as early as possible, and if you are reading this now and have not yet started your retirement planning efforts, then it is time to get started.
There is no big secret to planning for retirement, it just takes some considerations, some planning and some dedication toward that plan. And sure, there is a significant amount of information out there, and it might seem overwhelming to navigate through some of it, but here are a few basics regarding some of the standard savings vehicles that could play a role in your retirement for the better.
401(K)
A 401(K) is a retirement savings account that is employer-sponsored. And yes, this can even include individuals who are self-employed. These types of savings plans have become increasingly common over the years and so it is likely that if you are not at least familiar with the concept, you are maybe even participating.
But like most financial savings vehicles, 401(K)s don’t take on a one-size-fits-all approach. Instead, there are ins and outs to be familiar with and consider so you can make the most of your 401(K).
For instance, some employers will match an employee’s deposit amount, or at least will match up to a point. That means if you are putting five percent of each paycheck into your 401(K), your employer is putting that much money in as well. If you are lucky enough to be in a situation like this, there is no reason not to take full advantage and put in as much as you can.
Essentially, this is free money coming your way. Think of it is a reward for smart financial behavior. Now, your efforts toward saving have been doubled. There are also tax advantages to these accounts as well, which could benefit your current financial situation in addition to your financial situation in the future.
When it comes to withdrawing these funds, it is worth the wait. If you begin to withdraw from your 401(K) before the age of 59 and a half, there will be an early withdrawal penalty, which could mean a 10 percent fee or other applicable fees. On the other hand, you are required to start withdrawing from the account once you reach the age of 72.
Social Security
Another retirement plan you’ve certainly heard of are the benefits affiliated with Social Security. This federal program is designed to supplement partial income for retirees and their spouses. But social security benefits go beyond just the individual, and can provide these funds to those who qualify, such as spouses, and in some instances spouses of those who have since separated or passed away. Those with disabilities and children can qualify for these benefits as well.
Your Social Security benefits accumulate throughout your life based on your paychecks, which are removed and set aside by the IRS. These funds are then entrusted to the Social Security Trust Fund.
Over your lifetime, the Social Security Administration will monitor your wages, and select the 35 highest-earning years to establish an average that will be paid out to you monthly. These payments are known as average indexed monthly earnings.
Withdrawals from social security can begin at age 67 if you were born after 1959, or 65 if you were born after 1938. Additionally, you can start collecting your Social Security benefits at the age of 62 if need be, but your monthly payment will be a smaller amount as the length of your withdrawal period has been lengthened.
Insurance
It’s no secret that your needs will change as you age, as will your health-associated risks to certain factors. While an ongoing emergency fund is important, having insurance coverage during your retirement years is crucial. And to make sure you are prepared financially for insurance in these years, you must plan ahead of time.
Your medical costs are likely to increase with older age. And while this might seem like a burden late in life, knowing it ahead of time allows you the proper time to do your research and prepare yourself financially.
It is true that there are federal programs like Medicare that you can turn to, but having a solid long-term insurance plan in place to have you covered from whatever might go wrong is a smart move, and one that you will be glad you chose in these later years.
Plan head
It cannot be stressed enough: retirement should be a time of relaxing and achieving those long-sought after goals. You don’t want to spend your twilight years in a constant consideration regarding your finances. Plan ahead of time and save money for yourself through efforts of your own, but also by taking advantage of some of the programs you have available to you.
Sources:
“Social Security Benefits,” Investopedia, April 2021
https://www.investopedia.com/terms/s/social-security-benefits.asp
“Understanding Your 401(k) Benefits,” Investopedia, November 2020
“Retirement Planning,” Investopedia, November 2020
https://www.investopedia.com/terms/r/retirement-planning.asp
