Building your retirement buckets: 3 Different plans
Day by day, we work hard—leaving early in the morning and returning late, exhausted. We dedicate long hours to companies that consume our energy and add to our stress. Despite this, we stay because we depend on that income, that money that arrives every two weeks and barely covers our monthly expenses.
We rarely think about saving for retirement. Why? Because we tend to believe that we will always be young and strong, and the day of retirement is far off.
However, something we Latinos could learn from Asian cultures is the practice of saving. They often set aside 20 to 30% of each income for savings and use the remainder for expenses. Unfortunately, this approach is not something our culture has taught us, and this lack of financial education is a key reason many Latin American countries face economic challenges. But what can we learn from the art of saving?
Other cultures like Americans are known for saving diligently specifically for retirement, and they don’t skimp on a single dollar. People in the U.S. understand the role of Social Security, which is supposed to help with retirement. We’re told that each paycheck has taxes deducted, but also that we’re saving for retirement. This is, however, a common misconception.
What is Social Security then…
To clarify, Social Security is not a retirement fund and was never intended to be one. It’s a safety net established by the government after World War II to assist citizens when the economy is struggling. Americans understand that relying solely on Social Security for retirement is like depending on a neighbor to cover your retirement—it simply won’t be sufficient. So what do they do instead?
401K
Employers with around 50 or more employees often set up retirement accounts where employees can invest money in the stock market for long-term growth. These accounts are known as 401(k)s or 403(b)s (for educators). While employers are not required to contribute to these accounts, if they do, it is based on the company’s specific policies. Some employers match dollar-for-dollar, while others contribute a percentage.
The money you contribute to these accounts is deducted pre-tax, meaning taxes are deferred until you withdraw the funds. All contributions and growth are subject to taxes when you eventually withdraw the money.
You can open a retirement account with Fidelity. HERE
Is it worth making these contributions?
Absolutely! I believe that all jobs and states should require citizens to open these accounts to ensure they have financial stability in old age.
How much should you contribute?
In the U.S., you can contribute up to $6,500 per year if you are under 50. After age 50, the limit increases to $7,500 per year. Aim to contribute the maximum allowed and check if your employer is also contributing.
Where is this money invested?
Each company partners with investment firms such as Fidelity Investments, Vanguard Investments, Morgan Stanley, and others. These firms specialize in evaluating portfolios and long-term growth, determining whether your investments are handled aggressively or conservatively.
Most people choose a moderate investment approach.
Can you choose where your investments go?
With a 401(k), your options are limited, but there are other retirement vehicles available.
Traditional vs. Roth IRA (Individual Retirement Account)
When an employer doesn’t offer a 401(k), individuals can open an IRA (essentially the same but without employer contributions).
An IRA is a retirement account designed for use only in retirement. Contributions to a Traditional IRA are tax-deferred, meaning the money grows without immediate tax implications. Contribution limits are the same: $6,500 before age 50 and $7,500 after age 50.
A Roth IRA operates differently. Contributions to a Roth IRA are made with after-tax dollars, meaning you pay taxes on the money before contributing. The benefit is that withdrawals are tax-free in retirement.
Roth IRAs have more restrictions compared to Traditional IRAs. For instance, to contribute to a Roth IRA, your income must be below $153,000 per year for individuals or $228,000 for married couples. Exceeding these limits results in a 6% penalty from the IRS.
Both Traditional and Roth IRAs are invested in the stock market. As individual accounts, you have the power to choose your investment strategy, whether aggressive or conservative.
Finally, there is another retirement investment option known as an Annuity.
How to save Money? It all starts with BUDGETING
What are Annuities?
An annuity is a contract between an insurance company and the client where the client makes payments over a specified period, and the insurer promises to provide lifetime payments or returns on the investment. Annuities can be customized to meet individual needs.
Options include receiving a lifetime monthly payment with the highest amount but without a beneficiary, or a joint annuity where payments continue as long as both individuals are alive, even if the principal is exhausted. There are also term annuities with fixed payment periods (e.g., 10-20 years), where any remaining funds are paid to a beneficiary if the annuitant dies during the term. Annuities can be invested in the stock market or protected by insurance companies, which assume the risk and provide a defined interest growth.
Annuities are a product that is not for everyone, but if you meet the specific qualifications, it can be a great tool for investment and savings for your retirement. The best you can do if you want to open a retirement account is to talk to a Financial Advisor, who will guide you on what you should do to start saving for the long term.
