Planning for your Retirement while in your

20’s

Which would you rather have?

OR

Would you be willing to give up this each week

To live in this?

If you invest $20 a week starting at age 20, you would save up $45,000 by age 65.

If that same amount of money is invested at a 10 percent return rate, you will have over

$820,000 by age 65

Source: “The Under 40 Financial Planning Guide” by Cornelius P. McCarthy

Can’t afford $20 a week?

If you put $5 away every week from age 20 to 30 then increase to $20 every week you will

still retire with about

$500,000

Source: “The Under 40 Financial Planning Guide” by Cornelius P. McCarthy

Presentation OutlineWhat is retirement?

Why should you save nowDifferent Types of Retirement Plans

Pension Plans401(k)IRA’s

How should you start your retirements savings?

Why should you save now?

Social Security not meant to be only source of income when you retire

Social Securities future is not certainYou will need to save to support yourself for

20+ years if you plan to retire when your 65. Life expectancy is increasing.

Rule of thumb: During retirement you need 60-80% of annual pre-retirement income to live comfortably.

ExampleUsing the rule of thumb:

You earn $65,000 a year before you retire

$52,000 (65,000 x 80%) is needed yearly to support you in your

retirement

If you retire at 65 and expect to reach age of 85, you will need

$1,040,000 (20 x $52,000) for retirementSource: www.careonecredit.com

What are my choices for retirement?

There are several basic forms of Retirement Plans

Pension Plans401(k)IRA’s

Pension PlansEmployer backed retirement plans.Employers contribute to planEmployers decide where money is investedSpells out in advance how much money you

will receive upon retirementMany younger adults are not being covered

by these plans (msn.com)Require long career with one employer and

are unrealistic for today’s employee

401(k)Retirement plan offered by your employerContributions are deducted straight from your

paycheckEmployers also can contribute money or match

your investment You can decide where your money is investedUnlike pension plans, the money is yours even

after you leave the company

401(k) Tax Advantages

Money you contribute to your 401 (k) comes straight out of your paycheck before income taxes are deducted.

This is an advantage because:

If you make $50,000 a year and contribute $3,000 into your 401(k), your taxable income

for the year is $47,000.

401 (k)Why choose this over a savings account?

You don’t pay taxes on your investment or earnings until you withdraw money for retirement, when you are at a lower tax bracket.

It’s more difficult to withdraw the money so there is less temptation to spend it. Money can be withdrawn for emergency situations.

401(k)Requirements for enrolling in a 401(k)

Most companies require you work for at least one year before enrolling

You’re at least 21 years old Can put aside 2-15% of your paycheckMaximum contribution amount per year:

$15,500 (govt. regulation)

401(k)

Why limit the amount you can invest?

The government puts a limit because they want to keep the tax revenue flowing in.

Remember, they don’t receive taxes on the money you put into your 401(k) until you pull

it out many years lat

401(k)

       

Age Participate % of pay Avg. balance

Median balance

18-25 (Gen Y) 31.3% 5.6% $3,200 $1,280

26-41 (Gen X) 63.1% 7.2% $31,240 $14,730

42 and up (boomers)

72.0% 8.3% $93,190 $44,330

401 K Participation

IRAIndividual Retirement Account

Two Kinds:

Traditional IRA: Deductable and Nondeductable

Roth IRA: Taxfree Varieties

IRA is a personal savings plan that lets you put money aside for retirement

Traditional IRA

What is needed to open up an IRA?

Must have earned income for the year&

Under age 70 ½

Maximum contribution of $2,000 a year

Traditional IRAAdvantages

Can deduct all or portion of IRA contributions from gross income, depending if you are covered by an employer-sponsored retirement plan.

Money contributed to IRA is not taxed until you take money out at retirement

Don’t have to make contributions on a set basis

Roth IRA

Different from traditional IRA which requires you to start withdrawing from account when age 70 ½. Can withdraw at any time after age 59 ½ , but not required

Can’t make contributions to Roth IRA if adjusted gross income exceeds $160,000 married or $110,000 single

Contributions to Roth IRA are not tax deductable

Contributions are made with after tax money, therefore earnings are not taxed upon withdrawal

Roth IRAInvestors don’t have to pay any taxes on

withdrawals at all as long as: Invested money in Roth IRA for at least 5

years without taking and money outOver age 59 ½ when taking money out

ORUsing money to help pay for first home

purchase or other special situation if under age 59 ½

401(k) vs. IRA401(k) Traditional IRA

Can you open an account?

If your company offers a plan

If you have earned income and are younger than 70 ½ years old

Maximum Contribution

$10,000 (govt. limit) $2,000

Employer Match? Sometimes Never

Taxable? Taxed after withdrawal when in lower tax bracket

Contributions are taxed before deposited and earnings are taxed upon withdrawal

Contribution tax deductable?

No Under certain circumstances

5 Retirement Tips for 20-somethings

“The earlier you start, the less you have to save every month”

Matching is Free MoneyTake it with YouDon’t Count on Social SecurityTake Personal Responsibility

Source: U.S. News & World Report

For more information

E*Tradewww.etrade.com

Charles Schwabhttp://www.schwab.com/