Working Longer for Retirement
Most of us will have to work longer than our parents as a result of longer life spans, higher health care costs, uncertain Social Security benefits, and potentially higher income taxes.
Working just a few extra years and holding off on collecting Social Security can make a big difference in the amount of money you collect when you retire. But Social Security should be just one part of your retirement plan.
There are other financial tools that can help you prepare for retirement.
- 401(k) plan. These plans are sponsored by an employer, but are funded entirely or mostly by the employee. You can set a portion of each paycheck aside tax-deferred to invest in retirement-appropriate investments. You don’t pay income tax on the money you set aside until you go to withdraw your money in retirement—all the while, your money is working to potentially grow into a sizeable nest egg. To encourage employees to participate, an employer may contribute up to 6 percent of the amount each employee contributes—called “company match” funds. Be sure to note: The government wants you to keep your money invested for retirement, so it imposes a penalty if you try to withdraw the money earlier than age 59½. Be sure you will not need to access your money sooner.
- Individual Retirement Account (IRA). This is a personal account you can set up, but it works similarly to a 401(k) plan. Each year you can set aside up to a certain amount of your money to invest in retirement-appropriate investments and work toward building a nest egg. In a traditional IRA, you can invest money that has hasn’t been taxed yet. In a Roth IRA, you can invest post-tax money. In either type of account, your deposits are allowed to grow tax-deferred. And as with 401(k) plan accounts, withdrawing funds before the age of 59½ typically incurs a penalty, so be sure you will not need your money sooner.
- Annuity. This is a type of investment or insurance account that lets you invest post-tax funds to grow tax-deferred until such time as you start drawing funds down. Annuities can be structured to either make payments to the annuitant or their spouse for as long as they live, or to pay out funds for a fixed amount of time, such as 20 years. They can provide either fixed periodic payments or variable payments.
Setting a well-rounded retirement plan for yourself now may help reduce the number of years you need to work later. A financial professional can help you determine what’s best for you.