Retirement is a mainstay of the American dream.
Everywhere you look, people are boldly pursuing a future without the need to work.
And yet, as compelling as the retirement dream may be, reality can seem overwhelming. Let’s face it: retirement often inspires more questions than answers:
- How much do I need to retire?
- Am I eligible for Social Security benefits?
- When should I take Social Security benefits?
- How do I maximize retirement savings on a budget?
- What retirement accounts should I consider?
The list goes on.
In this article, we’ll answer the most common retirement FAQs, so that you can face the future with confidence.
FAQ #1 — How Much Money Do I Need to Retire?
This is among the most crucial retirement questions to explore.
The answer will depend on a number of key variables, including your annual income, your current lifestyle, and your desired lifestyle in retirement.
Ask yourself: “how much money will I spend in retirement?”
Many financial experts suggest your retirement income should be roughly 80% of your current income level.
That number is adjusted down from 100% because you won’t have to cover payroll taxes for Social Security or put money from each paycheck into your 401(k).
For example, if you make $60,000 a year right now, you’ll need to earn about $48,000 to comfortably sustain your lifestyle after leaving the workforce.
While some of this money may come from Social Security income (more on that in a minute), or an annuity (like an insurance plan), a majority of it will likely derive from your savings.
This begs the next question: “how much should I have saved up before retiring?”
While the specific dollar amount will depend on your unique financial situation, certain formulas can help you obtain a ballpark figure.
Many advisors recommend the 4% rule, in which you withdraw 4% of your total investment portfolio during your first year of retirement.
In subsequent years, you’ll withdraw a similar amount (though adjusted for inflation).
While the 4% rule may not be for everyone, it’s designed to provide cash flow to retirees for at least 30 years. In other words, it helps ensure you’ll never run out of money.
FAQ #2 — How Do I Maximize Retirement Savings on a Budget?
It’s never too late (or early) to start planning for retirement.
Whether you’re at the start of your career, somewhere in the middle, or approaching the finish line, these are five practical steps you can take to prepare for retirement:
1. Start Today
Don’t wait to save your money—start today.
Commit to a savings plan that works for you, and stick to it.
2. Set Up Automatic Contributions
Always save a portion of each paycheck, however small it may be.
While saving money can be difficult, automatic contributions can simplify the process.
After all, the money will be taken out of your paycheck and directed straight into your retirement account—without you even lifting a finger.
3. Reduce Your Expenses
Budgeting is a major brick in the wall of retirement.
Look for opportunities to slow spending and eliminate debts. When you reduce unnecessary expenses, you’ll put yourself in a position to enhance your financial freedom.
P.S. Want to learn more about saving money? Check out these seven quick tips.
4. Diversify Your Income
While budgeting bolsters your financial defense, cash flow can promote a stronger offense.
Take advantage of the modern “gig economy” and pursue side hustles for extra income.
There are over 11 million open jobs in America right now, and employers are desperate for top talent like you.
Want to learn more about some great side hustles? Check out these great resources including:
- 5 Great Side Hustles for Immigrants
- 5 Great Passive Income Ideas of Immigrants
- 7 Great Part-Time Summer Jobs for Immigrants
Summer may be over, but these part-time jobs are worth pursuing all year long!
5. Invest Your Money
Why is investing important? Because it’s the best way to capitalize on compound interest.
In simplest terms, compound interest is the mathematical phenomenon where money grows exponentially over an extended period of time.
For example, let’s say you invested $100 at 5% interest.
After the first year, that $100 becomes $105.
After two years, it becomes $110.25.
Then, after ten years, it becomes $162, and after 25 years, it grows to nearly $340.
Not bad, right?
And here’s the best part: that’s how much the original $100 grows if you never add another cent. Imagine how much more the principal will grow if you routinely increased it.
In the words of Albert Einstein, compound interest is “the eighth wonder of the world.”
Take advantage of it by investing your money over the long haul.
P.S. Want to get started in the stock market? Check out this comprehensive investing guide for U.S. immigrants.
FAQ #3 — What Retirement Accounts Should I Consider?
When it comes to investing for retirement, there are three primary options: a 401(k), a traditional IRA, and a Roth IRA.
401(k)
This is an employer-sponsored retirement account, where employees have contributions automatically withdrawn from their paychecks and invested in mutual funds of their choosing.
Many companies offer a 401(k) “match,” where employers provide a dollar-for-dollar match up to a certain percentage.
If your employer offers a company match, be sure to capitalize on it, as it’s the closest thing we have to “free money.”
Traditional IRA
An IRA is an individual retirement account that can be opened at any time, with or without an employer.
Contributions to a traditional IRA are considered tax-deductible. In other words, the amount you pay into your IRA will directly reduce your taxable income.
For example, if you make $50,000 a year and put $5,000 from your earnings into a traditional IRA, your taxable income would then be $45,000.
While the contributions are tax-deductible, your withdrawals will be taxed as ordinary income (i.e., at your current income tax rate when you access the funds).
Roth IRA
Unlike a traditional IRA, contributions to a Roth IRA are not tax-deductible.
In other words, when you use the money that you invested in your Roth IRA, you will have already paid taxes on it.
The good news is, your withdrawals will be 100% tax-free.
The question you should ask is, “do I want to pay taxes now, or pay them later?”
Given the fact that tax rates will continually increase, it may make more sense to pay your taxes today—especially if your peak earning years are ahead of you.
FAQ #4 — Who is Entitled to Social Security Benefits?
Social Security is a federal program first initiated by President Roosevelt in 1935.
Through this program, workers pay taxes into a trust fund that can be accessed after reaching the age of retirement.
In some cases, Social Security benefits are provided as partial replacement income for individuals with disabilities (as well as for their families).
To qualify for Social Security benefits, you must have accumulated 40 credits from covered wages.
As of 2022, one credit is worth $1,510, and you can earn up to four credits in a year.
Keep in mind that the value of each credit is adjusted each year to account for inflation.
Are Immigrants Eligible for Social Security?
Yes: many people who immigrate to the U.S. will be eligible for Social Security benefits, provided they are legal permanent residents, have work visas, and have earned the required number of credits.
If you recently immigrated to America over the age of retirement, you may still qualify for prorated Social Security benefits.
Or, if you recently moved to the United States but do not have the full 40 credits needed for benefits, you may still qualify for Social Security.
In both such cases, totalization agreements held between the U.S. and other countries allow for the combination of work credits in order to receive Social Security.
FAQ #5 — When Should I Take Social Security Benefits?
Age 62 is the earliest you can claim Social Security retirement benefits.
Here’s the catch: the longer you wait to claim your benefits, the more you’ll get paid.
For example, if you turn 62 in 2022, you’ll earn $700 a month in benefits.
However, if you wait until age 70 to claim Social Security, your monthly benefits will be $1,240—77% more than your earnings at age 62.
When it comes to Social Security benefits, patience is profitable.
Moving Forward
While retirement may seem distant, your planning and perseverance will yield dividends in the decades to come.
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