Are you ready for retirement? It may seem like a long way off, but financial independence is a long game. You won’t be able to grow your nest egg overnight. And even if you love your job, you probably won’t be able to do it forever. That’s why we created this retirement guide for anyone who needs help charting a financial course from now until the day you collect your last paycheck. From paying down debt to understanding your retirement account options, each section includes a practical tip to help you get started now. If you have any questions or want more personalized advice, call or visit any of our seven locations in Muncy, Hughesville, Clarkstown, Montoursville, Watsontown, Avis, and Linden, PA.
In 2019, Americans’ total household debt reached $13.67 trillion, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data. This astronomical figure includes every type of debt, from mortgage and auto loans to credit card balances and education debt. Whether you differentiate “good” debt from “bad” debt, it’s clear that paying it off is part of most Americans’ budgets and retirement plans.
At the same time, we hear over and over again that we should save for retirement and start as early as possible. So, which should you prioritize: increase your monthly payments to pay off your debt faster, or take advantage of the free money in your employer’s matching contributions to your 401(k) account?
Many personal finance experts, including Dave Ramsey of the popular debt snowball method, recommend getting out of debt before you to start to save for retirement. On the other hand, you may get a higher return on your investment account than the interest rate you’re paying on a student loan, for example. In this case, some experts would tell you to contribute to your retirement account while you pay off your student loan because you could still get a higher return on your investment overall.
Make a list of all your debt accounts and the corresponding interest rates. If you’re not already making and following a budget each month, read our article on meeting financial goals by setting a budget. The bottom line is that having a plan you can stick to, whether that means prioritizing debt over retirement savings or not, will make you feel more in control of your finances and more optimistic about reaching your goals.
Employer-Sponsored Retirement Accounts
More than 50 million American workers participate in a 401(k) plan through their employer. If your company offers a 401(k) match on a certain percentage of your contributions, this is the best way to start saving for retirement. Here’s what you need to know about your employer-sponsored plan:
There’s more than one type of employer plan. A traditional 401(k), in which you can contribute pre-tax income, is the most common type. The average employer match is up to half of 6 percent, meaning that if you contribute 6 percent of your gross income, your company will throw in another 3 percent, aka the free money part of it. Most employers also require a minimum number of years of service before employer contributions are fully vested. This means you will forfeit any company funds if you leave before the minimum time requirement. The rest of your account balance, though, is yours to keep and transfer to a new retirement account. (Make sure you do that or you could face tax penalties for an early cash out.)
A 403(b) is the non-profit version. If you work in public education or the non-profit sector, you’ll have a 403(b) instead of a 401(k) but the premise is the same: contributions are not taxed until you begin to withdraw money from the account in retirement.
Some companies offer the choice of a Roth 401(k). As with a Roth IRA (more on IRAs in the next section), a Roth 401(k) allows you to make after-tax contributions and enjoy tax-free withdrawals in retirement. This means your money can grow untaxed and, if you end up in a higher tax bracket at retirement, you’ll have gotten a better deal on the tax rate you paid as well.
Find out if you’re eligible to participate in an employer-sponsored retirement plan. If you are, set up an automatic deduction from your paycheck. Ideally, you’d contribute the minimum amount needed to get your full employer match. But any amount, however small, is better than nothing.
Self-employed or otherwise uncovered by a 401(k)? Not to fear! We’ve got you covered in the next section.
What are the benefits of opening an IRA?
An Individual Retirement Account (IRA) is another option for retirement savings. About one-third of Americans have one. You can use an IRA as your primary retirement account (if you don’t have access to an employer-sponsored 401(k), for example) or as a supplementary account along with your company plan.
What are the different kinds of IRAs?
A tax-deferred account, similar to a 401(k). Your contributions are tax-deductible and you don’t pay income tax on your funds until you begin to receive payments in retirement.
A tax-free account, similar to a Roth 401(k). Pay income tax on your contributions now and receive tax-free payments in retirement.
Specifically designed for business owners and the self-employed, the Simplified Employee Pension Individual Retirement Account offers a larger annual contribution limit of either 25 percent of your income or $56,000.
Note that you can keep both a traditional and a Roth IRA account as long as your total contributions to both do not exceed the maximum annual limit.
Should you open an IRA with your bank?
If you decide to open an IRA, you’ll have numerous financial institutions to choose from. Here are the most important factors to consider:
- Ease of investment: Opening an IRA with your local bank means you can walk into any branch and receive personal, face-to-face assistance. Larger investment companies often offer online-access only. Your bank can also help you move from Certificate of Deposit or Savings Account-based IRAs to an investment IRA. In general, you’re likely to receive more personalized service from your bank.
- Required minimums: If you don’t have much to start with, banks generally offer lower minimum deposits to open an IRA. An investment company may require a $1,000 or larger minimum deposit.
- Fees: A savings account or CD IRA usually has lower fees than an investment IRA. Again, the benefit of opening an IRA with a bank is the ability to walk into your local branch and get an in-person explanation of your options and the associated fees.
- Risk of loss: Any type of investment account, including an IRA, comes with the risk of loss based on market fluctuations. A bank IRA with a savings account or CD is FDIC-insured up to $250,000.
Open an IRA account with a low minimum initial deposit to supplement your 401(k) or use as your primary retirement account.
What is risk tolerance and why does it matter?
When you sign up for your employer’s 401(k) plan or open an IRA, you’ll be asked to assess your risk tolerance. This can be a matter of personal temperament, but the most important factor is age. The younger you are, the higher your risk tolerance.
The stock market may fluctuate on a daily basis, but over the long run most experts predict a 7 percent annual rate of return on your 401(k) or IRA account. If you start saving for retirement in your 20s or 30s, you can afford the risk of allocating most of your assets in stocks. They come with the highest risk, but also the highest potential for reward. Remember that you’re not just trying to save a certain amount; you’re also trying to outpace inflation with your nest egg.
Go with index funds or ETFs instead of trying to pick your own stocks. “Playing the market” may seem intriguing, but in reality most individual investors don’t end up beating the average rate of return. Save time and the money you spend on fees by choosing index funds and ETFs (electronically traded funds) for your asset allocation. Another great option is a target-date fund, which will automatically adjust with your age to lower your risk exposure as you get closer to retirement.
Use this free risk tolerance calculator to determine where you fall on a scale of Very Defensive to Very Aggressive.
Why Retire in Pennsylvania?
Now that you understand your options for retirement savings, it’s time to think about where you want to spend your post-work stage of life. When it comes to tax-friendly states for retirees, Pennsylvania may not be top of mind compared to Delaware or Florida. However, the Keystone State offers one large tax advantage to folks in their golden years: it doesn’t tax retirement income.
That’s right - in addition to offering a low flat tax rate of 3.07 percent, PA retirees don’t have to pay state income taxes on their pensions, social security checks, or IRA and 401(k) withdrawals. No wonder our current state motto is “Pursue your happiness.”
Retirees can do just that in PA, whether you already live here or are considering a relocation. Nowadays, many people prefer to “age in place” in their own homes. Here in Lycoming County, where Muncy Bank was founded, there are many appealing features for retirees. In the county seat of Williamsport, for example, you can enjoy the natural beauty of Bald Eagle Mountain, the Susquehanna River, Rose Valley Lake, and Devils Elbow Nature Area. Arts lovers can soak up local culture at the Williamsport Symphony Orchestra, Community Theatre League, and Community Arts Center. There are local breweries and vineyards to explore.
And on the practical side, the largest healthcare system in the area is UPMC Susquehanna, which has hospitals, primary care centers, and other healthcare offices throughout Lycoming County and surrounding areas. There is also a Veteran Affairs Outpatient Clinic in Williamsport.
Brainstorm your ideal retirement. Where would you live? What kind of activities would you do? How much would you travel? Thinking through your retirement goals now can help you figure out how much money you’ll need in your post-working life. It also provides motivation to stay on track with your savings goals.
Learn more about Retirement Savings Account options!
As a longtime community bank, we have extensive experience helping individuals, couples, and families identify and meet long-term financial goals like saving for retirement. Learn more about the variety of savings and retirement-friendly account options we offer, including a 55+ checking account, investment services, and wealth management. Our friendly and knowledgeable employees are always ready to answer your questions. Call or visit any of our seven locations in Muncy, Hughesville, Clarkstown, Montoursville, Watsontown, Avis, and Linden, PA.