Where do you want to spend your retirement years? On a beach in Mexico? A secluded hunting camp in the woods? Or perhaps just at home with your family? Whatever your retirement dreams may be you’ll definitely need some money in the bank to afford it.
While it’s important to start saving for retirement from a young age, it’s best to start now. Whether you’re 21 or 51, start saving now! Of course, your age will determine how much you need to save and what methods you should use, but the important part is putting money away for later in life.
What Plans Are Available?
The 401(k) Plan
Pensions are a thing of the past. Many companies now offer company-based 401(k) plans. If you drive for a company then it’s possible that you may qualify for a 401(k) retirement plan. If that’s the case then take advantage of it, especially if your company offers an employer match. You should always contribute enough to meet the employer match. Anything on top of that is just icing on the cake.
2016 Contribution Limit: $18,000
2016 Catch-up Limit (Age 50+): $24,000
The SEP IRA
If you’re not driving for a company then chances are you’re an owner-operator, which means you don’t qualify for a 401(k) plan. A Simplified Employee Pension (SEP) IRA is the perfect 401(k) plan alternative for self-employed or small-business owners. There are a few caveats with a SEP IRA, like only the employer can contribute to the plan and the contribution rate must be the same for each qualifying employee. For 2016 you are allowed to contribute up to 25% of employee compensation or up to $53,000, whichever is less.
2016 Contribution Limit: 25% of employee compensation or up to $53,000
Traditional or Roth IRA
An Independent Retirement Account (IRA) is another alternative retirement savings account that comes in two main forms: traditional and Roth. With a traditional IRA you pay taxes on the money you withdraw during your retirement years. A Roth IRA is just the opposite – you pay taxes now and not later when you withdraw money. In both cases your money grows tax-free.
Both types of IRAs have their pros and cons so it’s important to talk with a financial planner to determine which type may best meet your needs based on a lot of factors, such as age, income, and tax bracket. As a general rule of thumb, if you are in a high tax bracket now because of your income and expect to be in a lower tax bracket during your retirement years, it makes more sense to invest in a traditional IRA.
If you’re just starting out as an owner-operator and not making a ton of money right now then a Roth might be your best bet. Remember, if you just left a company with a 401(k) you can roll that over into an IRA.
2016 Contribution Limits: $5,500
2016 Catch-up Limit (Age 50+): $6,500
Of course there are many other retirement savings plans available, but the above three are the most common plans people use to save for retirement. Now that you know where to put your money, let’s talk about how to maximize your savings this retirement.
How to Maximize Your Savings
The best time to start saving for retirement is now. Compound interest is a beautiful thing. In a world with no pensions, changing retirement ages, and questionable social security checks, it is extremely important to be proactive about saving for your golden years. Saving for retirement might not be as gratifying as purchasing a house or taking the kids to Disney World, but your 70 year old self with thank you later.
The trucking industry can be tough, especially if you’re an owner-operator. You’re responsible for finding your own clients and running a profitable business. Sometimes it’s tough to pay the bills. However, the most important bill that you should pay first is yourself.
Also Read: How Aggressive Should I Be With My Retirement Planning?
If you are currently driving for a company with a 401(k) plan then make sure you are enrolled. If they offer an employer match make sure you contribute enough to meet that match, whether it’s 2% or 10%. Just do it. You probably won’t even miss it out of your paycheck.
If you don’t qualify for a 401(k) plan then open a SEP or IRA account. Better yet, open both. As small business owners you can contribute up to 25% of your income to your SEP plan up to $53,000. Most people won’t be able to contribute that much, but review your personal and business finances and pick a reasonable percent to start.
If you really want to maximize your retirement savings then open an IRA, either traditional or Roth, and max it out. The more money you put in, the more that money will grow through interest and appreciation.
Remember if you have ever had a 401(k) plan in the past then you should roll it over to an IRA. Don’t forget about it. You should proactively manage your money to ensure that you are getting the most out of it.
Wouldn’t it be amazing if you could max out all your retirement accounts in 2016? Unfortunately most people can’t. Start with something. Maybe it’s 5% or 10%. Something is better than nothing. Once you have a baseline, you should increase your contribution by 1% each year until you reach the maximum.
2016 is a great time to start saving hard for your retirement goals. You can never be too proactive about your future finances. And remember, you can still contribute to your 2015 IRA accounts up until April 15th.