By: Kris Kazian
Saving for retirement & the future is a bit like building a three-legged stool. When we begin our careers, retirement looms like a distant oasis, the place where we’ll enjoy our reward after years of hard work. We’ll relax, and spend the rest of our lives traveling, living large, and doing all the things we put off while we were working. But do you know the retirement savings you will require to live that life of relaxation?
The trick is reaching that retirement savings oasis – and, with any luck, finding what we’re hoping for. Despite our best early-career intentions, life has a way of happening and can have a dramatic effect on our future. We must be very intentional in our efforts if we have specific goals and expectations for retirement and it’s never too early – or too late – to start.
Calculating your future
Making retirement dreams come true involves calculated planning, hard work, sacrifice, and solid investing. All sorts of factors can influence your plans along the way, such as your marital status, whether your spouse also has a career, the number of children you have, the size and cost of your home(s), the trucks and boats and other toys you might buy, and the lifestyle you choose during your working years. Have some fun today, but don’t forget to secure your future. It’s like building a three-legged barstool.
The first leg of this barstool starts with initial contributions to your 457 deferred compensation and/or the 401 account your employer may provide. The concept of making your money earn money and compound over time is powerful. The sooner you can get a large dollar amount working for you, the better financially prepared you’ll be in retirement. I’m not advocating eating Ramen and Ritz crackers to make this happen, but beginning to contribute as soon as you can will allow you to grow that nest egg without ever missing the money. Work to increase that contribution every chance you get – such as when you receive step raises and promotions – to maximize that pre-tax contribution. Contribute early and often.
How do you save for healthcare costs?
Saving for retirement and future healthcare costs is the second, and very important, leg of the stool. Many of our agencies cover the lion’s share of our healthcare costs while we’re working so we experience serious sticker shock when we get closer to retirement and are forced to consider what independent health coverage is going to cost us. Encourage your organization to create a Post Employment Health Plan (PEHP) or Retirement Health Savings (RHS) to help develop another tax-exempt basket for healthcare costs. Having that in place will help you save for future healthcare costs while preserving some of your 457/401 for the traveling and fun things you’ve planned. The beauty of healthcare plans is they are tax-free, both going in and coming out.
Do you understand how your pension works?
The last leg of your barstool is fully understanding how your pension works. I’ve worked in three states and have one guaranteed pension from Illinois, a significant 401A contribution from my Arizona employer, and now, living in Colorado, I plan to continue working to be eligible for a reduced pension. Not all pensions are alike, so it’s important to understand all the nuances of how each works, particularly as many states have gone to multiple-tier pension plans that can be quite confusing. No one wants to discover that the retirement benefits they’ve counted on aren’t there.
Tax implications by state
There are also specific state taxing implications you should investigate before deciding where you will finish your career and begin your retirement. I didn’t pay close attention to that detail and I’m regretting it. Had I continued to live in Illinois or any of a few other states, my pension would not have been subject to state taxes. In Colorado, I pay a five percent state tax on my pension, which reduces my take-home pay.
The ability to develop a solid roadmap and detailed plan when saving for retirement is not easy but what’s harder is looking backward after 30 years and regretting that you didn’t have a solid understanding of your retirement plan. Don’t wait until you’re 50 to review your options and make sound decisions. The sooner you can look at the big picture and begin to fund the many tax incentive-based investment options available, the sooner you can maximize your success in retirement.
How to make it to the end of your career with financial success
We all want to end up having achieved the dreams we had as recruit firefighters, not finishing our careers hating to come to work, but unable to retire. Start saving today. Take the first step in saving for retirement by increasing your 457/401 contribution by $25 after you finish reading this article.
I am not a financial guru and haven’t made every financial decision correctly, but I have had the opportunity to watch the ups and downs of the market over the past 30 years. I’ve also watched my retirement planning ebb and flow and seen the brothers and sisters who did it right and the ones who didn’t.
Get your three-legged bar stool firmly on the ground and consult a financial professional for retirement planning and investment decisions.
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