As 2020 has been a rough year for many, this year should make it clear to you that your retirement needs to be thought of early and often. Many people who have enough funds to retire early, 2020 have made that decision much easier for them. If you’re not close to retiring early but do have a good retirement plan and a decent amount of funds available for retirement, wouldn’t 2020 be less stressful for you?
Every person and every business owner needs to discuss their retirement plans with their CPA and advisor as soon as possible. It’s a lot easier and cheaper to retire when you had a 30-40-year plan compared to a 10-20-year plan.
An Individual who is 25, making 50k a year, annual contributions to retirement of 10% or 5k a year, would have about 1.5 million set aside for retirement by the age of 65. This person would only put about 200k of their own money into retirement (average growth 7%).
Now, an individual who starts saving to retire at the age of 45, with 10% annual contributions (same as above) would need to make 260k a year to be able to set aside 1.5 million by the age of 65. Also, this would cost this person 520k of their own money to be able to get to 1.5 million (average growth 7%).
The 2nd person would need to use 320k more of their own money to get to the same place at the same age. The earlier you can start saving for retirement the easier and better the path to retirement will be. If you think you don’t make enough to start saving for retirement, this illustration shows that you can retire a millionaire without having a huge salary.
So, how do you get there? How do you save up that much money? There are multiple vehicles you can use to get to that amount, each of them has their advantages and disadvantages.
First you can contribute to a pre-tax account, like IRA or 401(k)s. These accounts will save you money now. For example, when you contribute 10k a year to an IRA of 401k you will immediately be saving money, since it’s a pre-tax account you won’t be paying tax on this amount. The savings for this annually would be $1,000-3,700. If you would do this for 40 years, you would save between 40k-148k. You would be taxed on the distributions when you take out the money after retirement. So, you have to believe that the tax bracket you’re in now will be higher than the one when you retire.
But if you don’t want to play that game of guessing on what the tax brackets will be when you retire, then you can contribute to a Roth account. These are great, you don’t get the benefit of a tax deduction now but you won’t get taxed when you take the money out. All of the interest you earn, according to our first individual above, would be in the neighborhood of 1.3m and will be withdrawn to you tax free.
But what if someone wants to rely on Social Security? Well, it won’t be enough to live on, especially if inflation continues on the path of 2% per year. Then, will Social Security be there in 20, 30 or 40 years away? Business owners can sacrifice larger social security in the future to save money now, which if you put that money into a retirement account, will pay 10 times the amounts that social security would.
Tax strategies will vary from person to person and if you’re a business owner they are very lucrative and flexible. At Apex Business Consulting we feel EVERYONE needs to have a plan and EVERYONE can retire a millionaire.