I'm 24 and contributing to a simple IRA; what else should I be doing to prepare for retirement?
I am 24-years-old and I'm trying to figure out what to do for retirement. I work as a structural engineer and I earn roughly $68,000 a year. I am currently putting away 11% of my salary into a simple IRA with a 3% company match. At the end of this year, I will have about $23,000 in the account. Is this sufficient, or is there something else I should be doing? I am enrolled in an online Master's Degree program right now. After I make my final payment in January, I will have a little bit more flexibility with my cash.
Excellent start. I suggest steering extra money toward non-retirement savings for the next few years as you'll likely need it for buying homes, getting married and a host of other things young people do. The 11% should be fine, at least for the next few years.
The simple answer is YES; there is more you can be doing for retirement. Actually there is more you can be doing for life! You are a graduate and working at a good job with a very nice salary. According to the Bureau of Labor Statistics for Americans age 25-34 in 2017, the mean salary is $758 per week, $39,416 per year.
You are already taking care of participating in the company retirement plan. Keep doing that. Next, put the maximum amount you are eligible for into a Roth IRA and keep that account invested in a growth strategy. The Roth IRA has the best tax advantage and you have 35 years to make growth investments a terrific option to give you a tax-free pool of funds to use in retirement.
Lastly, do not underestimate the power of an Individual Brokerage account for savings above the Simple IRA and the Roth IRA. It is important to diversify the types of savings one has so that you are building up a pool of capital to use when an emergency or opportunity arises. In other words, do not make the mistake of having all of your savings in restrictive retirement plans. No one knows what tomorrow will bring. With your age, education and pursuit of even higher education it is a good bet that you will find it meaningful to have access to capital. Having capital gives you options and flexibility. Make that capital work for you too. Banks are okay for general living needs, but any excess needs to be invested. An individual brokerage account allows you to invest in a well diversified stock and bond allocation plan for risk management and liquidity so that you have your money working for you until that moment you need to access it.
Once invested you get the added advantage of seeing the annual growth of your capital and that gives you an excellent gage on whether a potential opportunity is worth the risk in the future. For example, if you have created a capital pool and ten years from now you get an opportunity to invest in a business, real estate or some kind of situation where you are expecting a return on your capital -- you will be able to ask yourself "for the risk involved in this venture, is my expected return better than what my stock and bond portfolio has returned?" It's a great way to be objective.
Remember to enjoy life in the meantime. The pursuit of capital by itself does not lead to as rewarding of a life as one might think. You should have a disciplined savings and investing plan, but it also pays to enjoy the fruit of your labor.
That is a smart move to take advantage of the company match as it is "free money." You might also want to start fully funding a Roth IRA (federal tax-free growth and qualified withdrawals). After that, you can put any excess cash in an individual taxable account for shorter-term goals and to help fight inflation. You can diversify risk with low capital by using an ETF portfolio. Learn more about ETFs here.
Congratulations on taking a good solid start on your retirement. I would tell you that I would defnitely not stop contributing but would look to start also contributiong into tax-free accounts like Roth IRA's. You should not only diversify your portfolio but also diversify your taxes. You have plenty of years ahead of you to build up a solid tax free income for your retirement.
Hope this helps!
Richard E. Reyes, CFP www.FinancialQB.com
Congratulations on your strong start as a saver! Being relatively young and having a decent salary may give you an edge on building a substantial retirement fund. The simple answer to your question is that it generally makes sense to maximize your tax deferred savings when you have the capacity. The longer answer is that your total allocation to your retirement savings goal should depend on a number of other factors.
Are you married, or have children (or other dependents)?
Do you have a sufficient emergency fund? Many advisers consider it "best practice" to have an amount set aside equal to 3 months or more of your normal expenses.
Are you currently carrying any debt, like a mortgage, student loans, credit card balances, or an auto loan? Depending on the specifics, it may prove a better use of your resources to pay down debt before further increasing your retirement savings.
Do you have other, interim goals, between now and retirement like buying a home, spending money on a wedding, or similar? If so, it may make sense to set some of your extra income aside in a taxable account, since money contributed to retirement accounts needs to stay in until you are aged 59.5 or older.
Depending on your particular circumstance and answers to those questions, you may find that you do have room and reason to add to your retirement savings. If so, a traditional or ROTH IRA may make sense. People are generally allowed to have both an employer sponsored retirement plan (like your SIMPLE IRA) and a self directed IRA. This page from the IRS website outlines whether contributions to a personal IRA will qualify for an income tax deduction or not, depending on your tax filing status and adjusted gross income (AGI). Whether your contributions qualify, in full or part, for that deduction, you could still enjoy tax deferral on the potential earnings in your IRA from the time of contribution until you withdraw those funds in retirement.
Good luck, and keep up the good work on saving!