Baby Boomer Beginners Guide: Retirement Planning Made Simple
Baby boomers are those born in the United States shortly after the Second World War. More specifically, they were born between 1946 and 1964. And they face a number of challenges in the current world economy.
Many baby boomers have reached retirement age already, and for many others it’s a horizon that looms ever closer.
Unfortunately, a lack of retirement planning has become the source of stress and anxiety for what would have been called the “Golden Years” in better times.
While some worry over their short term futures, other bury their heads in the sand. Believe it or not, there are retirees who are blissfully unaware of a crisis.
Perhaps we can blame global economy, perhaps not, but according to a report by Schwartz Center For Economic Policy Analysis, 68% of the working population aged 25-64 in the U.S. did not forego any part of their salary to a planned pension scheme.
In other words, 68% of retirees have placed themselves at the mercy of social security payouts for their pension. What this really means is that a high proportion of baby boomers won’t be able to afford to retire at the legal retirement age.
The good news is that it’s never too late to start planning and that’s what we are going to do. So hang onto your hats and take notes!
In this short guide you will discover:
- how to get an immediate (or darn close to it) increase in savings
- where to invest your money
- leveraging tax breaks and why it might be a good idea to move
Let’s go!
Get an Immediate Rise in savings
Assess your current level of borrowing on credit. This isn’t as difficult as it might sound. Probably the simplest example would be to look at how much you owe on your credit card. The average credit card debt per U.S. household is over $16,000. Unfortunately, credit card repayments are structured with some of the highest repayments there are. If you are paying 25% interest on your card, it’s not difficult to see that your repayments are stacking up – quickly.
By knuckling down and paying off your cards, you are in effect giving yourself an extra 25% income boost that can be used to invest tax free elsewhere.
Where to Invest
Now that you’ve got money that can be invested, it’s time to start investing for your future.
This can be done by making investments in either a
- 401(k) scheme
or
- IRA
401(k) Schemes
A 401(k) is named after an Internal Revenue code and is deferred income plan put in place by your employer.
Although investment options in 401(k)s vary quite a lot, the basic way they work is the same: your employer will take a percentage of your salary before tax and invest it for you. Often, employers will match your contributions in what’s called a defined contribution plan.
Roth IRA
A Roth IRA is set up by an individual who needs to source an investment firm (bank or broker). It’s more flexible, because with a few minor exceptions, investment choices are not limited to those typically made by a plan provider.
Which one to choose?
If you are in steady employment, the 401(k) will offer greater opportunity, as the contribution limits are much higher than those allowed by an IRA.
Leverage Tax Breaks (Where You Live May Be Breaking Your Bank)
Taxation for retirees can make a huge difference in how much of your pension remains untouched.
The most tax-friendly states to live in are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming; where personal income is not taxed. Many other states allow retirees a mix of different tax relief structures.
Some states, like California, New York, Oregan, Montana and Nebraska are definitely tax-unfriendly for retirees.
Check where you live on this handy map of taxes for retirees to get an idea of where might be the least taxed state you might like to live in.
What You Just Learned
- How to get an immediate rise in income
- The difference between a 401(k) and a Roth IRA, and which applies to you
- How taxation in your state may be affecting your net pension income
But you’re not done yet – move now to:
What to do Next
- Get rid of your credit card debt. It’s probably the highest debt you have.
- If you don’t have a pension scheme set up, take action now and do so before it’s too late. Now that you know which type investment package is for you (are you employed by someone else or self employed) – approach your employer or bank with a view to setting up an investment account for your pension.
- Consider which state you want to live in when you retire.