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Personal Finance From a Biblical Perspective

What is the Best Age to Begin Saving for Retirement?

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The best age to begin saving for retirement will be different for each person. Some are in a position to do it earlier in life, while others are unable to start until years later. You will be better off if you can start as early in life as possible, but that doesn’t mean that delaying contributions will prevent you from having a comfortable level of retirement savings.

Let’s take a look at the pluses and minuses of beginning retirement savings at various benchmark ages.

Save Money Retirement

Right Out Of school

This is the time in life that most financial planners would say that you should begin saving for your retirement. And in a perfect world, this is when everyone would start saving for retirement. Alas, this is not a perfect world, and whether or not you actually begin saving at this point will depend on where you are in life.

Plusses: There’s no doubt that the earlier you start the more successful your retirement savings will be. For example, if you are right out of school (age 22), earning $30,000 per year on your first job, you contribute 10% of your pay – or $3,000 per year – into your retirement plan, and assuming a 3% annual increase in pay for your lifetime and 8% annual rate of return on investment, by the time you’re 65 years old you will have nearly $1.5 million saved.

In addition, you’ll be getting into a good savings habit early and putting away enough money that if you do have to take a break from retirement savings at some point in the future your retirement will still be covered.

Minuses: As good as that all sounds, beginning your retirement savings right out of high school or college won’t work for a lot of people. For one thing you probably have some debts that needs to be paid and they’re cutting deep into your cash flow.

For another, there are probably a lot of things you need to buy to get started in life, in addition to the need to build up some non-retirement savings at least for emergencies. And sometimes when you’re just starting out in a career field you don’t have the kind of job stability that easily tolerates long-term savings plans. Also, at this very early stage in life, many people just aren’t thinking too much about retirement!

Around 25

This is the age where you really need to start thinking about getting into a retirement plan. You may have missed a few years of contributions that would’ve helped in the long run, but it’s still not nearly too late.

Plusses: At this point life, you’re still not completely comfortable with your position in life but you’re definitely out of the starting gate. You’ve probably pay off some debt, put away some money for emergencies and you’re probably making more money than you did right out of school.

Again let’s assume that you will earn an average of 8% on your money, your income will grow at a rate of 3% per year during your career and you’ll begin putting away 10% of your income each year for the next 40 years. The only difference is that you’re now making $40,000 per year. By the time you turn 65 you will have accumulated more than $1.5 million. The delayed start has caused you to lose nothing up to this point.

Minuses: If you came out of school with larger than average student loan debts you’re probably still paying them off and not a position to make substantial contributions to your retirement plan. This is also a time in life for some when marriage, children and buying a home enter the picture. All can compete with retirement when it comes to divvying up your paycheck

Around 30

For many people this is the best time to begin saving for retirement.

Plusses: For many people, this is the age at which life begins to settle down into long-term patterns. This is especially true if you married and had children and bought your first home when you were in your 20s. You’ve already absorbed the cost shock of those additions to your life and you’ve gained some control over your budget.

Let’s take the same retirement savings assumptions that we used the two previous examples, but now you’re earning $60,000 per year. If you save 10% of your annual pay, by the time you’re 65 you will have nearly $1.5 million in your retirement plan. Because of the higher income that you’re earning at this age, the delay in retirement savings still hasn’t hurt you.

Minuses: By the time you’re 30 it may be difficult to establish the savings habit now that you’re spending patterns are largely set. This will be especially true if you have a family and own your home. Though you’re making more money than you were earlier in your life, your expenses have risen in step.

Around 35

Many people are financially well established at age 35 making it the ideal age to begin saving for retirement.

Plusses: Your biggest advantage here is that you’ve entered the peak earning years of your life. Using the assumptions that we used in the previous examples except that now your making $75,000 per year, if you contribute 10% of your pay annually you’ll have more than $1.8 million by the time you reach 65. Clearly the delay has not hurt you up to this point.

Minuses: It’s ironic that it’s when you enter your peak earning years that you also become vulnerable to job losses. The retirement savings amount we determined above is entirely dependent upon your maintaining that income level (and progressively better) for the next 30 years. If that doesn’t happen, you’ll have less saved than what we’re projecting, only you won’t have the large established balance that you would have had if you would started your retirement contributions earlier in life. Final analysis: you can still do it, but there’s less room for error as you get older.

Right Now

What if you’re 40 years old or older and haven’t done anything about retirement savings thus far? Does that mean that there’s no hope for you? Not at all!

You’ll probably need to lower your expectations. You may not have as comfortable a retirement as you might want, but the situation is far from hopeless.

Let’s say you’re 50 years old, you’re earning $50,000 per year, and you decide to save 15% of your income each year, and delay your retirement to age 70. By the time you reach that age you will have nearly $450,000 saved. That, plus Social Security income, and some income from a part-time job or business venture can provide a very comfortable semi-retirement.

Not the retirement you may have envisioned, but far from a bad outcome nonetheless.

What do you think is the perfect age to begin saving for retirement?

Roth Vs Traditional IRA: Which One Is Best For You?

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When the idea of saving for retirement comes up, many people wonder whether a Roth vs Traditional IRA is better for them. There are many similarities between these two investment vehicles, but there are also enough differences to make this question a little more difficult than it seems.

We will look at some of the similarities and differences of these Individual Retirement Arrangements

Roth Vs Traditional IRA

Both a Roth and Traditional IRAs can be great options when it comes to saving money for retirement and a viable alternative to private or stakeholder pension plans. Before we take a look at Roth IRAs, let’s look at a couple of quick points regarding traditional IRAs, so you can better decide which may be the best retirement plan for you.

Traditional IRAs

One of the greatest benefits of a Traditional IRA is the fact that your contributions can grow freely, with the taxes that you owe being deferred until the money is distributed. This means that you receive the benefit of compound interest on all of our contributions, gains, and other earnings!

In most cases, the contributions that you make into a traditional IRA are fully or partially deductible – depending on your circumstances. That means that your taxable income is reduced by the amount that you contribute to a traditional IRA (if it is fully deductible).

An IRA usually provides more freedom than an employee sponsored retirement account when it comes to your investment options. You can invest in individual stocks, bonds, mutual funds, CDs, and even real estate! This helps to make an IRA an extremely attractive retirement vehicle.

Here is something that is usually seen as a negative feature of a traditional IRA. According to the IRS:

You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½.

That’s right – if you do not start withdrawing money from your account, the IRS will charge a 50% tax on the amount that should have been distributed! Before you become too outraged, remember that you received a tax deduction on your contributions, and you are not required to pay taxes on any gains until they are distributed. If you kept the money in your account indefinitely, it would never get taxed…there is no way that Uncle Sam will allow that!

You can read IRS Publication 590 (link to online version) in order to gain more information about Traditional IRAs, including calculating the required minimum distribution.

Roth IRAs

In looking at the “battle” of Roth vs traditional IRAs, there is no need to compare the investment opportunities since they are exactly the same. Unlike their counterparts, Roth IRAs do not give you a tax deduction upfront. This means that you will have to reach the IRA contribution limits with without the benefit of reducing your taxable income for the year.

Like the traditional IRA, your contributions, gains, and earnings will grow without being taxed – allowing compound interest to kick in! However, since your initial contributions were made with taxed dollars, you do not have to pay taxes when you take a qualified distribution from the account!!!

What this means is once you put money into a Roth IRA, you will never have to worry about paying taxes on that money (as long as you satisfy the requirements). For one thing, you have to keep your contributions in the account for at least five years before you can withdraw them with no penalty. Of course, since it is a retirement account, keeping the money invested for more than five years shouldn’t be a problem.

Another thing to consider with Roth IRAs is that you can make contributions to the account even after you turn 70 1/2 (something which you cannot do with a traditional account). On top of this, you are also able to leave amounts in your ROTH IRA for as long as you live. There are no required minimum distributions, and no taxes assessed for failing to make withdrawals – since the initial contributions were already taxed.

Roth Vs Traditional IRA – What’s Best For You?

Here is one of the keys to consider when trying to answer this question:

At what stage in your life will you be paying lower taxes? If now, then go with a Roth and pay lower taxes on your contributions, rather than paying taxes on your distributions when you are paying at a higher rate. If your lower taxes will come in retirement, then go with a Traditional IRA to get the tax break when your taxes are higher, and pay taxes on your contributions once you are in a lower bracket.

There are a couple of things that will affect your tax rate both now and in retirement.

  • The tax code – will future administrations raise taxes in order to pay for government spending?
  • Your income – will you have more taxable income now or in retirement? The answer isn’t as obvious as it might seem.
  • The amount in your retirement accounts – if you have a take several required distributions from large accounts, that can easily push you into a higher tax bracket.

There are other things to consider but since they are pretty much impossible to quantify, we will leave them for another discussion.

Photo Source: goodfinancialcents.com via Jeff on Pinterest

Reader Questions

  1. Based on your situation, which IRA is best for you?
  2. What do you think about having one of each?
  3. At what point did you/will you start saving for retirement?

This post is a part of the Roth IRA Movement that my blogging buddy Jeff Rose at Good Financial Cents put together. The last time I checked, there are almost 150 websites that will be posting about the benefits of Roth IRAs! Even though the information is pretty standard, I am confident that each post will be different, because of the voice of the individual writing it! You can read my other post (which takes a more personal and informal look at this question) on my weight loss and debt repayment site here: Why Roth IRA is better than Traditional for us

IRA Contribution Limits for Both Roth and Traditional

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Below you will find the IRA Contribution Limits for 2017, 2016, and 2015. Unfortunately, there were no adjustments made to the 2016 contribution limits of IRAs – both Roth and Traditional. Therefore, Roth IRA contribution limits and Traditional IRA contribution limits will remain the same as this year.

Combined Traditional and Roth IRA Contribution Limits:

201720162015
Traditional IRA Contribution Limit$5,500$5,500$5,500
Roth IRA Contribution Limit$5,500$5,500$5,500
IRA Catch-Up Contribution $1,000 $1,000 $1,000
Total IRA Contribution Limit for Those Over 50$6,500$6,500$6,500

For those of you who will be under 50 years of age at the end of the year, the total of your Roth IRA Contribution Limit and your Traditional IRA Contribution Limit is $5,500. However, if your total taxable compensation for the year is less than $5,500, then your IRA contribution limit is equal to the amount of your taxable compensation for 2017.

The maximum deductible contribution to a traditional IRA and the maximum contribution to a Roth IRA may be reduced depending on your modified adjusted gross income.

IRAContributionLimits

As with the 401k, if you are 50 years of age or older before the end of 2017, then you will be allowed to make a “catch-up” contribution in the amount of $1,000. This will bring your IRA contribution limit to the lesser of $6,500 or the total of your taxable compensation for 2017. This limit can be split between a Traditional IRA and a Roth IRA but the combined limit is $6,500.

For those of you who would rather contribute to an IRA over a 401k because of the added flexibility, please keep in mind that you should still contribute an amount to your 401k that will allow you to take advantage of the full 401k employer match. If not, then you are essentially throwing away free money!

Be sure to refer to these charts from the IRS (linked above) for those who are covered and those who are not covered by a retirement plan at work. Also, see how your Modified AGI affects the amount of Roth IRA Contributions that you can make for 2017.

photo by o5com

Many New Jersey Residents Will Have Until May 11th to File Their Tax Return

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According to the IRS, many of the victims of the severe storms, flooding, mudslides and landslides that began on March 12 in New Jersey will qualify for tax relief.

According to the IRS press release, “The President has declared Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset, and Union counties federal disaster areas qualifying for individual assistance.”

For taxpayers who have a residence or a business in one of the counties listed above, the IRS has extended the deadline for filing your 2009 individual income tax returns, making tax payments and making contributions to an IRA (for tax year 2009) from April 15th to May 11, 2010.

For all employment and excise deposits due on or after March 12 and on or before March 29 the IRS will waive the failure to deposit penalties, as long as the deposits were made by March 29.
Additionally, the IRS has also announced the following:
If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the Postponement Period.
IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.

For a look at the original press release, click here.

To schedule your appointment with KNS Financial for tax preparation, please send an email to taxes@knsfinancial.com or use our contact form located here: http://knsfinancial.com/contact-us/

For more information on taxes click here.

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Important Facts About the Savers Credit

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For taxpayers who make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA), you may be eligible for a tax credit.  Here are several things you should know about the Savers Credit:

  • The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:
    • Single, married filing separately, or qualifying widow(er), with  income up to $27,750
    • Head of Household, with income up to $41,625
    • Married Filing Jointly, with income up to $55,500
  • To be eligible for the credit you must have been born before January 2, 1992, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.
  • If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

Another thing to realize is that when you are figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. See Publication 590 and Publication 4703 for more information.


For more information on taxes click here.

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