Iowa retirement planning

Saving for Retirement on a Modest Income

Saving for retirement may be smart, but it’s getting harder for many people. Just how big your nest egg should be and how long it might last will depend not only on what you save and invest, but also on how you spend it once you do retire. Here’s how to look for ways to trim costs and keep items in solid condition to stretch retirement dollars.

Saving for your golden years can be a challenge for anyone, but it can be a larger challenge for moderate-income earners. This may apply to you if you often end up not having much money left after covering your basic expenses each month and you may not feel comfortable investing in an IRA without a significant initial deposit.

Despite the out-of-control inflation and dire economy as a whole, there are some tools available to help moderate-income earners get started with saving for retirement. If you are concerned about whether you can save enough in time for retirement, Johnson Wealth and Income Management can help provide Iowans with the tools that can make it easier to save and invest for retirement.

Are Iowans Really Struggling?

A recent survey found that most Iowans see inflation as a critical issue, and an overwhelming majority, 84%, think the country is headed in the wrong direction. However, due to the nature of spending and saving by Iowa households, most say their finances are about the same or better!
Forty-two percent of respondents to a new Des Moines Register/Mediacom Iowa Poll say their financial situation has remained about the same. Another 22% say they are better off than they were a couple of years ago, and 1% aren’t sure.

Those numbers are down slightly from where they stood during a November 2020 Iowa Poll, when 49% of respondents said their finances were about the same as they had been a couple of years prior. Twenty-three percent said at the time that their finances had improved. So it appears Iowans needn’t be panicked when it comes to falling behind on their savings. But the question remains…

How Much Do You REALLY Need?

Many retirees report that their expenses in the first few years are not only equal to but sometimes exceed what they spent while working. One reason for this is that retirees simply may have more time to go out and spend money.

It’s common for retirees’ expenses to go through three distinct phases:

  • Higher spending early on
  • Modest spending for a long period after that
  • Higher spending near the end of life, due to medical or long-term care expenses

Of course, future expenses are hard to predict. But the closer you are to retirement, the better idea you probably have for how much money you’ll need to sustain your current standard of living—or support a different one. Johnson Wealth and Income Management’s Fiduciary Amanda Johnson explains:

Some people believe that they need to hit a certain goal or number in their 401k before they “could” retire. Holding onto that number will set you up for unattainable results. The truth is it really does depend on what your goals are in retirement. Do you want to travel internationally with your sweetheart and see the world? Or are you more of a homebody, someone who would enjoy having the time to garden or volunteer? You see, all of these possibilities come with a varying price tag.

Asides from having a Fiduciary to teach and guide you along the way, start out by using one of our Financial Calculators. These free online tools can help you paint a better picture of what your retirement might have in store.

Save By Default

A survey conducted by The Association for Financial Counseling and Planning Education® (AFCPE),found that 37% of Iowans have less than $5,000 saved or invested for retirement. The survey also found that almost half of all respondents have no retirement savings at all.

A great way to help combat this shortfall is to automatically enroll in a 401(k) plan. Automatic enrollment is an effective tool to help increase the number of Americans saving for retirement. It allows employees to be automatically enrolled in a 401(k) plan and increase their savings rate over time. This helps ensure that Americans, particularly low income Americans, have a simple pathway to boost retirement savings. Automating your savings will ultimately help ensure that you don’t miss out on the benefits of compound interest and compounding growth.

Secure a Pension if Available

Landing a job that offers a pension plan is like finding a needle in a haystack these days. If you work at a job that offers one, you can retire with a promised monthly income that will help reduce the need to save on your own.

Pensions often apply to teachers, fire and police personnel, military personnel, and people who work for the U.S. or a state government. Some private companies, such as Coca-Cola, still offer pensions. If you pay off your mortgage when or before you retire, and you also secure retiree health care or Social Security benefits, the pension may allow you to retire without savings.

Open an IRA

If you don’t have access to a 401(k) at work or there’s a waiting period before you can begin contributing, you can get valuable retirement saving tax breaks by opening up an IRA. Most economists will tell you that it is far easier to get people to save money for retirement through a payroll deduction at work instead of requiring them to open up an IRA on their own.

However, if the employer does not offer any type of retirement plan, or if the employee prefers to open an IRA on their own, it is still possible for these individuals to gain valuable tax benefits. In order to qualify for these benefits, an individual must meet certain criteria such as age requirements and earning limits depending upon whether they are single or married filing jointly.

A Roth IRA is a great way for Iowans to create tax-free income from their retirement assets. Yet, keep in mind that when you convert your taxable retirement assets into a Roth IRA you will generally pay ordinary income tax on the taxable amount that is converted.

Don’t Withdraw Money Early

One of the biggest mistakes people make when close to retirement (or any age) is withdrawing funds from their retirement accounts. That’s because withdrawals from traditional 401(k)s and IRAs before age 59 ½ trigger a 10 percent early withdrawal penalty and income tax on the amount withdrawn.

About 1.5 percent of assets each year leak out of 401(k) plans when participants cash out as they change jobs, take hardship withdrawals, withdraw funds after age 59½ or default on loans. You can help avoid the taxes and penalty when you change jobs by leaving the money in your old 401(k) plan, moving it into the 401(k) plan at your new job or rolling it over to an IRA. Individuals of all income levels are eligible to convert to a Roth IRA.

Consider Moving Your Retirement Date Back

Retirement is something most people look forward to regardless of how much you love your chosen profession or how successful you’ve been. However, due to the global pandemic, nearly 68 million Americans are reconsidering when they’re going to retire, according to a recent Edward Jones survey.

Arguably the most important reason to retire later is Social Security. The sooner you start to take Social Security, the lower your benefits will be. If you plan to continue working until your benefits reach their maximum at age 70, delaying your claim will result in greater monthly payouts. What’s more, giving the financial effects of COVID a chance to rebound and the economy a chance to heal can provide a clearer picture of both the potential income stream from your investments and the amount of income you’ll need to retire comfortably.

Avoid High-Cost Investments

Money is the lifeblood of your retirement account. But if you don’t pay attention to how it’s spent, you could find yourself with a small fraction of what you need to live comfortably in your golden years. If you need to boost your retirement saving’s longevity to supplement Social Security and other sources of guaranteed income, an investment portfolio should be high on your list.

Similar types of investments often charge vastly different fees, and unnecessarily high costs can significantly reduce your retirement account balance. Many individuals make investing missteps, such as putting their money in mutual funds with high fees, which could substantially shrink their assets over time.

To help ensure that you’re making smart financial decisions that will help you achieve your goals, here’s a list of five common mistakes people make when investing:

  1. Not diversifying enough
  2. Investing more than they can afford to lose
  3. Putting all their eggs in one basket
  4. Selecting an investment based on past performance
  5. Not paying attention to fees

How Johnson Wealth and Income Management Can Help

It’s never too late to start planning for retirement. Working with a financial professional can help Iowans like you build retirement plans that fit their needs and risk tolerance.

The American Dream is built on the idea that hard work will lead to success, but this isn’t always the case. Even if you follow all the rules and do everything you’re supposed to, life can still throw you a curveball—which is why it’s important to have a plan in place when things don’t go as expected.

Whether your retirement is decades away or just around the corner, the retirement income advisors at Johnson Wealth and Income Management can provide you guidance every step of the way. Together, we will make a plan to help maximize your savings and determine how long your retirement income will last during your retirement years. We believe financial planning isn’t just about making money—it’s about managing finances, creating goals, and achieving them. Whether you need help building up your emergency fund or figuring out how much money you need for retirement, Johnson Wealth and Income Management can help.

Contact us here today to learn more about our retirement saving strategies.

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