Retirement at 65 has been a longstanding norm for U.S. workers, but older investors believe that not only is such an outcome unfeasible, but they’re likely to face more challenging retirements than their parents or grandparents.
This is according to recently released survey results from Nationwide, with a respondent pool that included 518 financial advisers and professionals, as well as 2,346 investors ages 18 and older with investable assets of $10,000 or more. The survey follows other ongoing research into the baby boomer generation as it approaches “Peak 65.”
The investors included a subset of 391 “pre-retirees“ between the ages of 55 and 65 who are not retired, along with subsets of 346 single women and 726 married women, Nationwide explained of its methodology.
Seven in 10 of the pre-retiree investors said that the norm of retirement at age 65 “doesn’t apply to them,” while 67% of this cohort also believe that their own retirement challenges will outweigh those of preceding generations.
Stress is changing the perceptions of retired life, especially for those who are closest to retirement, the results suggest.
“Four in 10 (41%) pre-retirees said they would continue working in retirement to supplement their income out of necessity, and more than a quarter (27%) plan to live frugally to fund their retirement goals,” the results explained. “What’s more, pre-retirees say their plans to retire have changed over the last 12 months, with 22% expecting to retire later than planned.”
Eric Henderson, president of Nationwide Annuity, said that previous generations who observed a “smooth transition” into retired life do not appear to be translating to the current generation making the same move.
“Today’s investors are having a tougher time picturing that for themselves as they grapple with inflation and concerns about running out of money in retirement,” Henderson said in a statement.
The result is that more pre-retirees are changing their spending habits and aiming to live more inexpensively. Forty-two percent of the surveyed pre-retiree cohort agreed with the idea that managing day-to-day expenses has grown more challenging due to rising costs of living, while 27% attributed inflation as the key reason they are saving less for retirement today.
Fifty-seven percent of respondents said that inflation “poses the most immediate challenge to their retirement portfolio over the next 12 months,” while 41% said they were avoiding unnecessary expenses like vacations and leisure shopping.
Confidence in the U.S. Social Security program has also fallen, the survey found.
“Lack of confidence in the viability of Social Security upon retirement (38%) is a significant factor influencing pre-retirees to rethink or redefine their retirement planning strategies,” the results explained. “Over two-fifths (43%) are not counting on Social Security benefits as much as previously expected, and more than a quarter (27%) expect to receive less in benefits than previously anticipated.”
The survey was conducted by The Harris Poll on behalf of Nationwide in January 2024.
When you think about retirement planning, you may feel like you’re doing alright, especially if you’re contributing part of your monthly paycheck to your employer-sponsored 401(k) plan. You may even have visions of growing old by the ocean or tapping into your Bohemian side with some global travel.
But to truly live the retired life you dream of, rather than scraping the bottom of your savings accounts, you need to be well-prepared. While a 401(k) is a great start, there are other tools you can take advantage of to diversify and maximize your retirement savings.
That’s where a Roth IRA comes in.
This tax-friendly retirement account can not only bolster your retirement money but can also help relieve your future tax burden. An IRA does come with a few rules attached to it, plus some eligibility requirements. However, when used wisely, it can really work to your advantage when it comes time to retire.
We’ll take you step-by-step through everything you need to know to make sure you qualify and how to use a Roth IRA to its fullest.
What is a Roth IRA?
A Roth IRA (Individual Retirement Account) is a type of retirement savings account that allows you to save and invest money for retirement on a tax-advantaged basis.
Contributions to a Roth IRA are made with after-tax dollars, meaning you cannot claim a tax deduction for the money you contribute. However, once the money is in the account, it can grow tax-free, and you can withdraw it tax-free in retirement.
This can be extremely beneficial because the money you contribute to a Roth IRA should grow (ideally substantially) between when you put cash in and when you start to take it out. But since you pay income taxes on it the first time around, you don’t have to do it again, even though the amount is larger.
You get to pick the investments in which to place your Roth IRA funds, such as:
How does a Roth IRA work?
A Roth IRA comes with many tax benefits, which is why it’s so popular these days. Even if you have a 401(k), it’s a great tax-advantaged addition to your retirement plan. And if you’re self-employed or don’t have a 401(k) at work, it’s a good start to investing for your retirement goals.
Here’s how a Roth IRA works:
Eligibility: To be eligible to contribute to a Roth IRA, you must have earned income and your income must fall below certain thresholds.
Contributions: You can contribute up to a certain amount each year to a Roth IRA, depending on your age and income. Contributions are made with after-tax dollars and are not tax-deductible.
Investment options: You can invest the money in your Roth IRA in a variety of ways, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
Tax benefits: Earnings on your investments grow tax-free, and you can withdraw your contributions and earnings tax-free in retirement as long as you meet certain conditions.
Withdrawals: You can withdraw your contributions to a Roth IRA at any time without penalty. However, you may owe taxes and a penalty if you withdraw your earnings before you reach age 59 1/2 and have not held the account for at least five years.
Roth IRAs can be a valuable tool for saving for retirement, especially for people who expect to be in a higher tax bracket in retirement than they are now.
How much can you contribute to a Roth IRA?
As long as you meet certain income requirements (which we’ll discuss shortly), you can contribute up to $6,000 a year to your Roth IRA. That number jumps to $7,000 if you’re at least 50 years old, helping you catch up financially and get ready faster as you approach retirement.
Plus, there are no minimum Roth IRA contribution limits when you turn 70 ½. So, you can use your Roth IRA as a way to provide your family with an inheritance.
Ready to retire early? A Roth IRA can help.
You can start making tax-free and penalty-free IRA withdrawals before you reach the traditional retirement age because you’ve already paid taxes. However, you have to pay taxes and potentially penalty fees on your earnings if you withdraw those early.
Plus, Roth IRAs aren’t just for retirement.
You can also use your funds for qualified education expenses without having to pay penalties or taxes. So, you can help pay for your own or your child’s college tuition, just as you would with a 529 plan (or in addition to it).
Although there are contribution limits, you get a lot of flexibility when you choose a Roth IRA. And when you have financial goals at any stage of life, flexibility is key.
What’s the difference between a traditional IRA and a Roth IRA?
If you’re at all familiar with retirement terminology, you may have heard of an IRA before. But there are a few key differences between a Roth IRA and a traditional IRA.
The most significant difference is when you pay your taxes. Unlike Roth IRAs, a traditional IRA allows you to take a tax deduction the year you actually contribute. So if you’re attempting to drop into a lower tax bracket or lower your overall tax payment, your traditional IRA contribution can help you do that.
Of course, there’s a catch.
When you start to take withdrawals when you retire, you’ll have to pay taxes on the full amount — including your earnings. But that’s not necessarily a bad thing.
If you’re established in your career and already earn a lot of money, you may expect your annual income to drop when you retire. You’re probably not going to withdraw your entire balance at once, so your tax rate might not be that high compared to where you are now.
Minimum Distributions
Speaking of making withdrawals from your account, you have to start taking the required minimum distributions once you hit the age of 70 ½. The minimum amount is based on a formula from the IRS comparing your age to your life expectancy.
If you want to take out funds from traditional IRAs before you reach the age of 59½, you’ll have to pay a 10% penalty on top of your income tax.
Still, like most investments, it’s good to have a diverse mix of products to help you now and in the future. You may want to consider having both a traditional IRA and a Roth IRA, particularly if you want to start lowering your annual federal tax burden.
Tax-Free Distributions
You must have a Roth IRA account opened for 5 tax years to be able to take any distributions, including earnings, that are tax-free. Furthermore, you are only eligible to take tax-free distributions for death or disability, after age 59-1/2, or for a first-time home purchase.
Roth IRA Eligibility Requirements
Unfortunately, there are restrictions on opening a Roth IRA, particularly for high-income earners. Depending on how much you make, you may be restricted on how much you can contribute, or you may not be able to make any contributions at all. Furthermore, you can only contribute earned income to a Roth IRA.
So, where do cutoffs start?
Single Tax Filer
Let’s look at single tax filers first.
For single tax filers and heads of household, you’re allowed to make the maximum contribution if you earn no more than $146,000. You can contribute a reduced amount if you earn more than $146,000, but less than $161,000. If you earn $161,000 or more, however, you can’t make any Roth IRA contributions.
Joint Tax Filer
Now let’s take a look at those married filing jointly.
You can make the maximum contribution if you earn up to $230,000 and a reduced amount if you earn between $$230,000 and $240,000. Once your annual income reaches $240,000 or more, you’re not eligible to contribute anything. Your modified adjusted gross income (MAGI) is what is used to determine IRA eligibility.
Depending on your anticipated income track over the course of your career, it may be worth opening a Roth IRA as soon as possible. That way, you can ensure that you contribute as much as possible while you still meet the requirements. You also give your investments as much time as possible to grow and compound before you’re ready to make withdrawals.
And since you can use a Roth IRA for a greater range of purposes than other types of retirement accounts, you give yourself greater financial flexibility in the future. It isn’t just about setting up a contribution each year and forgetting about it until you retire. Instead, a Roth IRA can be an active part of your near-term and long-term financial plans, like going back to school or retiring early.
How to Open a Roth IRA
Just about anywhere you conduct your financial business, whether it’s at a bank, credit union, online broker, or even a robo-advisor. Compare your options to make sure you’re getting low fees and good customer service.
Check for mutual funds with no transaction fees and ETFs that are commission-free. Some financial brokers still charge high prices for these fees. So, it’s important to make sure that you’re choosing one who will save you money in the long run. After all, those fees can really start to add up over decades of managing your Roth IRA.
Most brokers also allow you to rollover other accounts into your IRAs (both traditional IRAs and Roth IRAs). If this is a service you may need somewhere down the road, make sure your IRA broker is sophisticated enough to handle it.
Some robo-advisors, for example, may not accept rollovers. And if you leave a job where you’ve had a 401(k), you’ll want to make sure you have somewhere to put it once you’re gone.
With a bit of research and comparison, you can find a convenient, low-cost way to manage your Roth IRA over the years.
Where to Open a Roth IRA
To open up a Roth IRA, you need to select a brokerage firm. You may be able to do this at a financial institution you already work with, or you could explore other options. Both online and brick-and-mortar banks can serve as a broker. It really depends on where you want to house your investment and the type of fee structure you prefer.
Start with a bank you already use, but don’t be afraid to compare their offerings and fees to other financial institutions. It’s important to maximize your earnings so that you can retire comfortably.
How do you manage a Roth IRA?
What exactly do you need to do once you’ve opened a Roth IRA? You want to start by making contributions. You can roll over funds from a traditional 401(k) or traditional IRA, but you’ll be required to pay taxes on that money, so make sure you can handle that extra financial burden.
For 2024, you can still make a contribution to your Roth IRA for the previous year until the tax filing deadline of the following year. For instance, if you haven’t contributed the maximum amount to your Roth IRA by December 31, 2023, you have until the federal tax filing deadline in 2024 to make your contribution for 2023. The specific date of the tax filing deadline can vary each year, so it’s important to check the exact deadline for 2024.
Once you start funding your Roth IRA, it’s time to decide how you want to invest that money, just as you would with any other investment. The type of risk and diversity you select should be based on your own risk tolerance, as well as your age. If you’re in your 20s, you can pick much more aggressive investments than if you’re in your 50s.
For a low-cost approach, experts recommend either index funds or ETFs, which allow you to buy stocks and bonds that track broader markets.
Bottom Line
A Roth IRA can be an effective part of your retirement strategy, particularly considering all the tax advantages that come along with it. For the most effective retirement savings plan, look at all the options available to you. Then, see how each piece fits in the puzzle. As you inch closer and closer to retirement, continually reevaluate how you invest your savings.
For example, if you’re expecting a raise or promotion in the upcoming years that will bump you out of the income range for contributing to a Roth IRA, it may be wise to max out your contributions while you can. If you get a job with an employer that matches your 401(K) contributions, make sure you’re taking full advantage of that perk.
Constant reevaluation is necessary to make sure you’re benefitting from your retirement tools as much as possible. And you want to make sure that you’re taking care of your finances now and in the future. A Roth IRA truly is a favorite because regardless of where you are in life today, you can provide yourself with a lot of room to maneuver around whatever comes in life.
Ultimately, retirement planning is like a math equation — you input several variables and estimate whether what you’ll have will pay for what you will need in retirement. The challenge is that many of the variables are future values that are unknowable today.
But that doesn’t mean you can’t make some educated guesses. So let’s examine the “what you’ll need” part of the equation — that is, how much the retired life will cost you each year — to see if we make the murky crystal ball any clearer.
How much do retirees need?
The standard rule of thumb is that retirees need 70 to 80 percent of their pre-retirement income. Fortunately, we can examine how spending changes as we age by looking at the Consumer Expenditure Survey that is produced every year by the U.S. Bureau of Labor Statistics. That can help us figure out if this 70-to-80-percent estimate has any basis in reality.
The following table highlights average income and expenditures of households led by people in different age groups. (I selected particular categories from the much larger Consumer Expenditure Survey.)
EXPENSE ITEMS
AGE 25-34
AGE 35-44
AGE 45-54
AGE 55-64
AGE 65-74
AGE 75+
Income before taxes
$59,613
$76,128
$79,589
$68,906
$49,711
$31,782
Avg. number of persons per household
2.9
3.3
2.8
2.2
1.9
1.6
Average annual expenditures
$46,617
$55,946
$57,788
$50,900
$41,434
$31,529
Food at home
$3,338
$4,255
$4,369
$3,681
$3,213
$2,643
Food away from home
$2,753
$3,227
$2,861
$2,387
$1,935
$1,230
Housing
$16,845
$20,041
$18,900
$16,673
$14,420
$11,421
Apparel and services
$2,087
$2,040
$1,966
$1,571
$1,186
$708
Transportation
$8,231
$8,763
$9,255
$8,111
$6,086
$4,288
Health care
$1,800
$2,583
$3,261
$3,859
$4,922
$4,754
Entertainment
$2,251
$3,058
$3,088
$2,683
$2,341
$1,374
Reading
$61
$80
$104
$126
$147
$135
Education
$839
$963
$2,094
$917
$240
$140
Pensions and Social Security
$5,151
$6,664
$7,227
$5,932
$2,261
$763
Personal taxes
$1,055
$1,992
$3,323
$2,295
$1,116
$144
Factors that reduce living expenses among retirees
As you study the table, you notice that expenditures peak somewhere between age 45 and 54 — then they gradually decline. Here are some of the reasons that drive the trend:
Fewer people under the roof. Eventually, kids leave the house and you wind up spending less money on food, utilities, education, and Febreze. Also — and this is the sad part — a spouse will pass away. When a two-person household goes down to a one-person household, expenses drop by approximately 30 percent.
We eat less as we age. As our metabolisms slow down, so does our need for calories. Another unfortunate reason some older people eat less is that they find it more difficult to go shopping and to cook meals.
The mortgage eventually gets paid off. Roughly 55 percent of households in the 45-to-54 age group have a mortgage, whereas just 13% of the 75-and-older group still have that monthly payment.
We just slow down. As we age, we spend less on entertainment, clothes, travel, and other semi-discretionary expenses. As a writer and former English teacher who is married to a writer, I was heartened to see that expenditures on reading generally increase as we age, with just a slight dip after age 75.
We don’t save for retirement forever. Once you retire, you’ll stop paying the 7.65 percent FICA tax that pays for Social Security and Medicare (15.3 percent if you’re self-employed) and you’ll stop contributing to your 401(k)s, IRAs, and other savings vehicles. This alone could shave 15 percent to 25 percent off your pre-retirement expenses.
Uncle Sam likes older people. Senior citizens pay much less in taxes, for several reasons: They receive a higher standard deduction, most Social Security is not taxed, and other sources of income — such as qualified dividends, municipal bond interest, and long-term capital gains — are taxed at lower rates than ordinary income. Plus, as you can see from the first row in the table above, income declines as we age, which puts most older people in the bottom two tax brackets.
Not every expense decreases as we age — notably, health care costs increase. Also, there’s a legitimate question about whether senior spending declines out of choice or necessity — i.e., retirees would spend more if they had more. However, for many of the categories, the spending declines are the logical result of getting older and not working anymore. Thus, on the whole, the evidence indicates that the old rule of thumb that you’ll need 70 percent to 80 percent of your pre-retirement income in retirement has its foundation in reality.
How to translate statistics to your retirement plans
However, while the average retiree spends less than the average 50-year-old, this is not the case for every retiree. Many spend quite a bit more, especially in the first few years of retirement, as they fill their newfound free time with travel, hobbies, classes, and other forms of recreation. Others see their income needs drop to half of their pre-retirement income. So when it comes to your own financial planning, especially once you’re within a decade of retirement, it’s important to look at and refine your budget, estimating how much you’ll actually need after you kiss the working world good-bye.
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Laughter and hooting filled the house as my wife had Karen and a few other friends over for a mid-morning tea. (Such are the joys of retired life.) The chirping of a cell phone rose from the pile of purses on the sofa. Nobody paid it any attention — whoever it is can leave a message was the general sentiment. Sure enough, the chirping stopped. But then they heard it again. The girls noticed it, paused, but went right on with their story.
Then the phone chirped again. “Whose is that? Don’t answer it!” After the ruffling of half a dozen handbags, Karen held up her little chirper. “Sorry, guys. It’s Rick.” Then she added, firmly, “I’ll call him back later.” Back into its pouch in the purse the phone disappeared, just like a little kangaroo.
It rang again. “Hey, Karen, maybe you should see what Rick wants.”
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