Your retirement goals and plans are important, but you will never reach them unless you have a career with which to fund such pursuits. Having a stable and lucrative career is fundamental to the retirement saving game. If you don’t earn enough then you are going to have an awfully hard time saving for life after you stop working. Thus, it’s wise to make focusing on your career a part of your financial and retirement savings plans. This means making sure that you stay relevant both in your field and at your place of employment. You can do so by staying on top of the latest trends and best practices as well as keeping an eye on the industry in which you work. Who is doing what? How is your company performing relative to others in the field? Are your skills up-to-date? If you work for a large corporation, you should keep track of what the company is doing and how they operate. Is management consistent in its decision-making? Are there particular hiring and promotion trends you’ve noticed? How is the company discussed in the media? Answers to questions like these can give you a sense as to whether you may need or want to consider making a move to another company or another industry. Such a move can pay dividends as you may end up in a better paying position or at a company that is trending upwards with more opportunities for professional growth. A mid-career move can also be a personally and professionally revitalizing moment that can help to rejuvenate your career and allow you to refocus your goals. It can be easy to set your career on cruise control, especially after a few decades in a particular field, but that can be setting yourself up for heartbreak and pain. For example, you may overlook a looming layoff or may not see the signs that your employer is in a downward spiral. Remember, your earned income is what drives your retirement savings and financial plans, so it’s vital that you maintain it (as well as take advantage of opportunities to increase it) as best you can.
If you have a lot of money saved up in an IRA, you may find yourself thinking about tapping into it before you need it. Maybe you had an emergency that requires some extra funds or your want to splurge a bit as you get near retirement. Whatever you decide to do with your money, just make sure it’s not prohibited by the rules governing IRAs. Prohibited transactions include those in which account owners act in a self-serving manner or in which the account owner uses the money to enrich himself/herself or other “disqualified person.” A disqualified person includes the accounts owner, the account owner’s spouse, any lineal descendants of the account owner, or people who help in the custodial care and maintenance of the account. In other words, the money in an IRA account should only be used to enrich the account itself and not people associated with it. So, if you want to clean out your IRA, go to Las Vegas, and go all-in on one poker hand with the hopes of doubling your earnings–which you would then put back into the account within the 60-day rollover window–then go right ahead. You won’t get in trouble for that. However, if you decide to invest $5,000 of your IRA in your child’s new business, then you’re really in for some trouble! It can be a fine line and what may seem like a harmless investment could open up a world of hurt for you and your finances. Prohibited transactions are not punished lightly as the tax-deferred status for the entire IRA is lost and the IRA is considered to be fully paid out. Furthermore, the entire balance of the IRA could be subject to tax and an early distribution penalty. That can be a heavy sentence, especially if you have a lot of money saved up. If you are unsure as to whether an IRA transaction you are considering is prohibited, you should speak with a certified financial planner or retirement specialist. If you are nervous about such a transaction, you’re better off erring on the side of caution and avoiding it altogether.
Throughout your career, your yearly income will rise from time to time as you get promoted or move to new jobs as your career advances. Chances are that money will be put to use paying for many of the expenses that come along with being an adult or having a family (i.e. a mortgage, car payments, college tuition, etc.). But what about if you have some of that income left over? Aside from saving it, you should also consider putting some of it towards your retirement savings. Remember, bumps in income present a great opportunity to increase retirement fund contributions and help you to build up your retirement savings. Also, just as a tip for if/when you get an income bump, that doesn’t always mean your lifestyle spending has to increase as well. If you can maintain your lifestyle while your income increases, then that will free up more of that income for savings and–dare I say it–a little fun (i.e. a vacation). In summary, take advantage of raises and income bumps and put some of that money towards your retirement savings. If you have questions about how much you should be saving for retirement or creating a plan for that extra income, you should talk with a certified financial planner.
Deciding how much of your yearly income to set aside for retirement is not an easy task. The amount you choose will most likely be influenced by certain factors, including your yearly earnings, whether you have a family to support, and other expenses (i.e. mortgages, medical expenses, car payments, etc.). Furthermore, the amount you save may fluctuate from year to year with some years providing you with the opportunity to save more and other years you may make only your baseline amount. What’s important is that you set a baseline that allows you to save enough to meet your retirement goals and benchmarks. That baseline amount should also be flexible and you should strive to increase it as time goes on. As you move through your career, and presumably reach higher income levels, the amount you are are able to save should increase too. You may start off saving–in your early or mid-twenties–around 5 percent of your yearly income. However, as you progress, that yearly amount should increase as well, preferably towards the 15-20 percent yearly range, where it should ideally remain for the remainder of your career. There may be times when you find that you have more money at the end of the year than you expected or you find that your yearly income has increased to a point where you can put aside more than that 15-20 percent, in which case you should strongly consider investing more money in retirement. Remember, the more you can save for retirement, the more comfortable a retirement you can live.
If you are considering taking money out of your Roth IRA before reaching age 59½, you will need to understand the Roth IRA distribution rules. The rules require that all contributions come out first and are tax and penalty free. Next comes conversion amounts. Contributions on distributed on a “first in, first out” basis and they are income tax free. However, any conversion taken out before reaching the 5-year holding period gets hit with a 10% early distribution penalty, barring any other exceptions. Once a conversion has been held for 5 years, it is not subject to that 10% early distribution fee. After you have taken out the basis, which the Roth IRA owner always has access to, the Roth IRA then distributes the earnings, which are always taxable and always subject to the 10% penalty if taking the distribution before age 59½. If you are considering taking a distribution from your Roth IRA before age 59½, you should speak with a certified financial planner or retirement expert to make sure you are doing so in a manner that limits penalties and will not hurt your savings.