Pop quiz! What is the average retirement age in the United States?
I’ll give you 5 seconds to answer!
It’s 62 years old! Did you get it right?
You may be wondering why I’m even writing about retirement when it is so far away.
For millennials it is far but not far enough unfortunately.
BUT because there is still time, you can plan it, set it and worry about it later. (Just make sure you have your other finances sorted out first).
By leveraging how much time you have, the less you need to save. And it’s one less item to worry about later on in life.
How does that actually work?
Compounded interest! I will get into the details a little later so you can understand it better.
But before that, let’s take a look at the average retirement age.
And what you can do to save for retirement.
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TABLE OF CONTENTS
The Average Retirement Age
Why is it 62? And not 65? Or 70?
Because you can start collecting Social Security benefits at this magic number.
Is there a catch to this?
Well, here’s a neat little guide from the SSA website to help explain.
If you looked at it, you’ll see that the earlier you start receiving benefits, the less you actually get.
Yep. If you start collecting your benefits at 62, you will get a LESSER amount than if you started collecting at 65 or 70.
And the difference could be as much as $200 or more.
So it’s in your favor to collect the benefit later on in life. Now, if you’re reading this post, you’re probably wondering what other retirement options are available.
Because if you weren’t, there’s still social security.
Okay, so don’t collect social security until after age 62.
But wait. If I collect it after 62 will it be enough to cover all of my retirement expenses?
Probably NOT. And the reason is inflation.
A dollar today is not the same as a dollar 30 years from now.
Which is why you need to cover your bases and have additional income to support your retirement.
After all, you shouldn’t have to concern yourself with money in your retirement.
Because retirement, well should be retirement.
Walking along the beach and just enjoying life.
No stress. No worries.
I will discuss SIX retirement options and some may sound familiar.
Because the moral of the story is:
Don’t put all of your eggs in one basket.
And it applies to retirement as well.
But before we begin, I want to share how I got started with thinking about my retirement.
How I got started Thinking About Retirement Planning
I consider myself very fortunate.
My mother was the one always handling money in my household when I was growing up.
AND she was good at it.
If it weren’t for her and her frugal ways, I wouldn’t have lived in a nice house purchased with her savings. She scrimped and saved while working TWO waitress jobs.
Moms are awesome!
(And this was in the late 1990s.)
So that’s one thing I am very grateful for.
The other is having a teacher in high school who taught me the value of saving for retirement EARLY.
And he wasn’t even teaching finance!. (Mr. Vargas if you’re still out there somewhere. Thank you very much!)
My AP Government teacher gave me and my class one of the best pieces of advice ever.
He said that if you start saving at 18, you will have approximately a million dollars by the age of 65 for retirement.
If you put away this money into an IRA (individual retirement account) with the power of compounding interest.
He even emphasized that the contribution could be as little as ONE DOLLAR A DAY.
I was mind blown and set off to start my retirement planning as soon as I could.
After all, who doesn’t want to retire with a million dollars?
I was eager to learn anything and everything about retirement planning.
What you’ll read below is a compilation of what I learned and gathered over several years.
And organized here by yours truly.
Ready to jump in?
Let’s start with the most obvious one!
Can you guess?
6 Retirement Saving Options & What They Are
1. Retirement Age Social Security
Wondering why I’m starting with this one?
Because it’s the one you are provided the moment you start working for society through a JOB.
Your paycheck deducts money that is automatically collected for social security benefits.
Whether you want to or not. So in a sense, you are entitled to it.
Might as well take advantage of it.
So let’s keep this tip super simple. If you are able to collect this benefit in your retirement, then take it with one caveat.
Maximize the benefits by delaying until you are age 65 or later.
If you really can’t then take the benefits at 62. But my hope is that at the end of this post, you can avoid this scenario.
2. Individual Retirement Accounts (aka IRAs)
Touching back on Mr. Vargas who introduced me and my class to the accounts he mentioned, IRAs.
IRA stands for Individual Retirement Account and ANYONE can open them.
As long as you are over 18 to sign the paperwork.
And I would say these accounts are the second most common retirement option.
When you start to plan for retirement with IRAs, there are generally two types you can open.
Traditional IRA and ROTH IRA.
Here’s how they are broken down with their differences.
What is my preference?
My Preference is ROTH IRA
Because I like the flexibility of being able to pull out contributions in case I need to.
It’s like another emergency stash fund for EMERGENCIES ONLY.
So if I need extra money before my retirement age then I can pull out money that I contributed.
Not the gains. (Don’t touch those as they will be taxed AND charged with penalties. So it’s a double-wammy.)
So don’t do it. It will hurt if you do.
Anyway, the main reason why I chose ROTH IRA is the taxes.
I don’t want to deal with them if I don’t have to.
Out of sight, out of mind.
Here’s how it works.
The money you put into the ROTH IRA is POST-TAX. Taxes have already been accounted for and there’s no need to worry about it again.
Not even when you take it out during retirement.
Even on the gains!
And these gains were accumulating over several years!
So that’s why I chose the ROTH and not the traditional.
Where do I start with One?
Okay, you convinced me.
Where do I go to open one? And what do I put into it?
Before you open one, you have generally two places to open one.
Through a bank or through an investment broker.
If you open an IRA at a bank, you can put CDs and cash into it (just like a savings/checking account).
If you open an IRA at an investment broker (Fidelity, Vanguard, T. Rowe Price, Charles Schwab, etc), you have some additional options.
You can put your cash into index funds, mutual funds, stocks and bonds.
And if you don’t do anything, the money will sit in the account and gain interest.
It may feel intimidating with the additional options but your money will go farther if you put it into an IRA at an investment broker.
So I would suggest Vanguard if you want to go through this route.
Vanguard has some of the LOWEST FEES.
Plus, it’s the broker I have been using for the past 5+ years.
To get an account set up, here’s how it generally works. (And I won’t go into too much of the details because it’s similar to opening an account anywhere else.)
But you fill out an online application with your personal information.
And then you may need to verify your identity with some government-issued ID.
But once the account is set-up, the transfer of funds very simple.
It’s done through a bank transfer electronically like ACH.
Ah technology makes everything so convenient.
3. 401K Through Your Employer
The one you just read about can be set-up by yourself but this one is only offered through your employer.
IF they offer one.
Part of the reason why it’s number 2 on the list.
So what is a 401k?
A 401k plan is called a 401k because of the tax law number that governs this account.
And the number is short and simple instead of something like XX-XXXXX-XXX.XX. (Thank goodness! Otherwise the number would be too long to pronounce.)
So an employer who offers this benefit can also decide if they want to match employee contributions.
Meaning if an employee puts in a certain amount, the employer will also put the same amount on your behalf.
It’s like getting FREE money from your employer. You just can’t touch it until your retirement.
Not every employer offers this though so your mileage may vary.
And just so you know, setting up this account requires you to go through your employer’s benefit platform.
Whoever the provider is.
It may seem like a hassle but if your employer offers a 40k plan, I highly recommend taking advantage of it.
EVEN if the employer doesn’t match.
Should You Contribute If There’s No Match?
If your employer matches, it’s the best of both worlds.
But sometimes employers don’t match.
Does that mean you shouldn’t contribute? NO.
You should still do because the contributions reduce your taxable earnings at the end of the year.
Meaning you will pay less taxes.
Because the amount of income on your W-2 at the end of the tax year will account for your 401k contributions.
And it will be less than if you didn’t contribute to a 401k.
So YES, please contribute.
It will reduce your taxes inherently and set aside money for your retirement without too much effort on your part.
It’s a win-win scenario.
4. Health Savings Accounts (HSAs) in Your Retirement Age
Alright, retirement option number 4!
Confused as to how this account comes to play?
Because it sounds like it’s related to health?
Let’s jump right in!
Health savings accounts are accounts you can open alongside a high deductible health insurance plan (aka HDHP).
Since the premiums you pay for an HDHP is much lower than a regular plan, you can set aside some funds for health costs in a separate account.
And this separate account is called an HSA.
The catch is the HDHP plan has to meet certain requirements in order for you to have an HSA.
These requirements are imposed by the IRS (Internal Revenue Service).
What are these requirements?
Usually it’s a high deductible and a relatively high maximum out-of-pocket expenses criteria.
Here’s a great guide by Lively to help explain it.
Now why am I mentioning this account when the focus here are retirement accounts?
Well, the neat thing is… after age 65 this account can be used as an additional retirement account.
And it just so happens that I also mentioned delaying your retirement age until after 62.
So what happens after you turn 65?
You can use the funds from this account for everything. It’s not JUST for health expenses anymore.
And guess what? The limits that you can put into this account just increased for 2020!
Check out the details on the IRS website.
But to save you the trouble:
The limit for 2020 is $3,550 for individual coverage and $7,100 for family coverage.
Compared to $3,500 and $7,000 for 2019.
It’s a small increase but if you invest these savings, the compounded effect can be HUGE!
How do I Set Up an HSA Account?
Just wait one second.
It’s not as simple as you think.
Remember how this account is tied to an HDHP plan (aka high deductible health plan)?
Well if you already have health insurance and it’s not an HDHP then you’ll need to wait until enrollment time to switch.
That’s IF it makes sense for you to switch.
And everyone can be slightly different due to their own circumstances.
But if it makes for you to switch to an HDHP then DO IT.
Because then you can go to any of the HSA custodian providers to set up an HSA account.
I currently use Lively and their platform is easy to use and set-up.
And even though I had my HSA through a previous employer, moving it over didn’t take much effort!
Once you have the HSA account, make sure you actually put money into it.
Because the additional money available to you during your retirement age may be worth it.
What Can You Put into an HSA?
And the answer is….
It varies from custodian to custodian.
Most custodians allow investments into index funds and other securities that are readily available through your usual investment brokers.
Lively, again the one I use, offers investments as well!
But even if you don’t do anything you still get interest in the account.
So don’t miss out by not taking advantage of an HSA if you can.
It’s a dual-purpose account that helps to pay health expenses initially and then can be used as an additional retirement account!
5. Certificate of Deposits (CDs)
Getting tired of acronyms yet?
No? Here’s another one!
CD stands for certificate of deposit and you can open these accounts at a bank.
Now you may heard it from me on a different post about where CDs come into play when it comes to personal finances.
But I’m bringing it back up again.
And for good reason. You can leverage CDs in different ways!
But just keep in mind that unless you have additional income to save, CDs may be further down in priority.
Kind of like this:
How do CDs work?
When you open a CD account, you choose a timeframe. Say 1 year.
In return for the money you put into the 1 year CD, the bank will give you a higher interest rate.
Let’s say it’s 2.55% APR (annual percentage rate).
But the catch is you cannot pull the money back out UNTIL the year is up. Or whichever term you chose.
If you decide to withdraw early, there is a penalty.
So Why Should You Use CDs for Retirement Planning?
I’ll give you a hint.
It’s related to the time commitment for the CD.
Because CDs can be issued as a 1 year, 3 year, 5 year and even 10 year commitment.
They are PERFECT for an additional source of income in your retirement.
You don’t expect to use the income until later on in life (hopefully).
Taking advantage of the longer timeframe commitments.
It goes hand-in-hand.
So don’t forget about leveraging CDs if you maxed out the rest of your retirement accounts.
It’s another potential way to add MORE money in your retirement.
Onwards to the last one!
6. Real Estate Funds (REITs)
This is the last acronym you’re learning about in this post.
I promise. =)
Instead of investing money in physical real estate like a house.
You can buy securities that track the ups and downs of companies who own or finance income-producing real estate.
Just like how a S&P index fund tracks the largest 500 companies on the various stock exchanges.
And these are what REITs are for.
You can buy them just like any other stock or index fund.
Through an investment broker like Etrade, Fidelity, TD Ameritrade, etc.
But it’s more of a long time hold because REITs usually pay dividends.
Which is similar to getting interest on your savings and/or checking accounts.
So if you do buy REITs (and I’m not saying you have to) then keep in mind to hold them for the LONG TERM.
It’s a little more complicated to pick out good REITs so it’s the last one on this list.
But if you do find some good ones then the dividends can really pay off!
And there you have it folks.
The SIX different ways you can save for your RETIREMENT.
THE Power of Compounded Interest
I saved the BEST for LAST.
You thought I forgot about it didn’t you?
At the very beginning of this post, I touched upon compounded interest.
This mysterious concept can accelerate money growth over time.
Well okay, maybe not THAT mysterious.
So how does it work?
I’ll try to make it simple. Regular interest rates work like this.
How Simple Interest Rates Work
You put in money and it grows by a percent.
Let’s try this again with an example. So here’s one.
$100 with interest rate of 10% (oh I wish!) is $10.
So at the end of the day, your $100 is now $110.
Okay, moving on to compounded interest.
How Compounded Interest Works
The concept is interest grows on interest.
Hence the name “compounded interest.”
Back to the example. $100 with a compounded interest of 10%.
First year, it’s $110 (just like simple interest).
Second year, it’s $110 at 10% (gasp! did you notice that?) so it’s now 10% is calculated on $110 and NOT the original $100.
So imagine this scenario being repeated over several years.
Here’s a neat calculator I found to demonstrate this power.
That’s why starting early for retirement planning works in your favor.
You don’t need that much to start if you start early. The power of compounded interest helps account for that.
Starting at 18 is better than starting at 24.
Starting at 24 is better than starting at 35.
I just randomly picked some ages. I think you get the point.
Alright, this post has gone on long enough (it’s almost 3,000 words!).
The takeaway is START PLANNING YOUR RETIREMENT AS SOON AS YOU CAN.
If you remember nothing else.
Thanks for reading!
What do you currently use right now? And how did you get started?
Is this enough information or was something unclear?
Thanks for bearing with the acronyms! Hope you learned something new!