For young’uns like us, old age and retirement couldn’t seem further away. And yet the thing about retirement is it goes way smoother if you prep for it in advance. Which is why all of us—yes, even you fresh-faced recent graduates—need a retirement plan.
The term “retirement plan” itself is a bit misleading. It suggests there’s a singular, one-size-fits-all tool for preparing to live out your sunset years in the lap of luxury. In reality, not only is there no one single retirement savings tool that works for everyone, but most people use multiple “retirement plans.”
Join me, dear readers, as I guide you through an entirely-too-detailed tour of the most common forms of retirement plans. Keep your hands and arms inside the vehicle at all times and please don’t feed the wildlife.
Employer-sponsored retirement plans
Ah, the mysterious 401(k). This is usually what springs to mind when people think “retirement plan.”
Quite simply, a 401(k) is a retirement savings plan sponsored by your employer. It allows you to save and invest a piece of your paycheck before taxes are squeezed out of that piece. Many employers have a 401(k) match, which means they’ll contribute an extra chunk of money to your 401(k) every pay cycle, matching a percentage of the contributions you yourself are making. All of this gets invested over the years, so the total sum in the account rises steadily over time like a delicious dough ball of financial freedom. Only when you retire and withdraw the funds will you pay taxes on the money in your 401(k).
Your 401(k) contributions are automatically deducted from your paycheck, so all you have to do is spend a few minutes opting into the program when you’re hired, and then maybe a few more minutes bumping up your contributions every time you get a raise over the years. If you switch employers, you can roll your plan over into a new account in another couple of minutes. It’s pretty low maintenance, so your lazy ass really has no excuse not to opt in.
If you work for a nonprofit, you have what’s called a 403(b) instead, which functions much the same except the administrative costs are lower. This is because nonprofit companies are exempt from certain administrative processes. But for all intents and purposes, the two work the same.
Yet there’s a dark side to the 401(k). Even the dude known as “the father of the 401(k),” Ted Benna, has gone on record saying he created a “monster.”
Doesn’t exactly inspire confidence, does it? Benna didn’t intend for the 401(k) to take care of everyone or even be Americans’ primary method of saving for retirement. He thinks the plan is too complicated, and that people avoid opting in because of the complexity. He has also been critical of the fees associated with maintaining a 401(k) plan. Which is why you also need…
Individual retirement plans
Most Millennials I know do not have an IRA of any kind. This is because it is viewed much like the Burning Bush: awesome and powerful, but completely mysterious and baffling.
Yet there’s no reason why you should be afraid of an IRA. Unlike Moses’s pal the god of the Old Testament, it’s not going to cast you down into a fiery oblivion if you cheat on it with other retirement plans. And unlike the 401(k), it’s not in any way linked to your employer, so you don’t need to worry about rolling it over or continually increasing your contribution for the employer match.
An IRA is still an investment account, so it’ll rise along with the stock market, neatly handling that pesky matter of inflation for you. Some IRAs require a minimum dollar amount to open an account (usually about $1,000), and all of them have a limit on how much you can contribute during a single year ($5,500, or $6,500 if you’re over age fifty).
There are two basic kinds: the traditional IRA and the Roth IRA. The biggest difference concerns taxes. With traditional IRAs, you avoid taxes when you put money in the account. With Roth IRAs, you avoid taxes when you take money out of the account.
One thing an IRA and a 401(k) have in common is they both rely on you to opt in, choosing your own future financial well being over whatever momentary financial whim has currently caught your eye. That’s a lot of responsibility for some people. Which is why you also have…
Let’s address the elephant in the room before it tramples us: Social Security may or may not be around when you retire. And some people may or may not think that’s a good thing. I personally look at that line on my paycheck deducted for Social Security and force myself to think, “How nice that I’m doing a little to support my grandparents in their dotage. I should call my Nonna and Nonno to remind them of why I’m their favorite grandchild.” But however you feel about Social Security, it currently exists, and for that reason alone I’mma ‘splain it to you.
When you work for money, you pay taxes into the Social Security system. These taxes are deducted directly from your wages and other earnings. There’s no action required on your part. Once you retire, you can apply for the Social Security benefits you earned over a lifetime of work. And then—whether or not you’ve bothered to save anything else for retirement!—you’ll receive a monthly check from the Social Security Administration.
Not so much. The amount of your Social Security benefits depends on three factors: 1) the number of years you worked, 2) how much money you made at your jobs, and 3) the age at which you retire. So the longer you work and the more money you make, the higher your Social Security benefits will be.
Remember: this is money you earned that the Social Security Administration helpfully set aside for you to protect you from yourself. Patronizing as that sounds, millions of Americans really need that kind of enforced retirement savings, as the Social Security Administration reports that 23% of married couples and 46% of single people receive 90% or more of their income from Social Security.
Start right the fuck now
Let me be abundantly clear: if you do not currently have at least one retirement plan of some kind, you need to stop what you’re doing and go start one right the fuck now. Do not pass go. Do not collect $200. Do not assume you have all the time in the world because—and let me be clear—you do not have time to fuck around here.
I’m not being melodramatic. In order for all of these retirement plan options to work, they require two essential ingredients: money and time. The more money and time you feed into them, the better off you’ll be once you’ve grown your bingo wings and joined a water aerobics class. (I can’t fucking wait for retirement. I’m going to be the best cooky old lady the world has ever seen. My embarrassing antics will be the stuff of legends. )
Even if you don’t have a lot of money to contribute at the moment, getting started with even a little will a) put you in the habit, b) allow that pittance to grow with the Law of Compounding Interest to keep up with inflation, and c) be so much better than nothing.
Because when it comes to saving for retirement, the numbers are decidedly not on your side. And the longer you wait to start contributing, the more money you’re going to have to funnel into the fund on an annual basis. Observe this depressingly nonsense-free graph from Begin to Invest that shows how much you’ll need to contribute to reach a million dollars depending on at what age you start saving.
Debunking your lame excuses
Still not convinced? Fine. I’ll humor you, you stubborn yet adorable motherfucker, by debunking your favorite lame-ass excuses. THE THINGS I DO FOR LOVE.
“Retirement is decades away. Why should I worry about this shit now?”
Listen… fool? I love you. You know I do. Which is why I’m going to remind you to be the ant and not the grasshopper. The earlier you begin your retirement plan, the easier it’ll be to build. Putting in a little bit of money every year for many years is undeniably less difficult than scrambling to put a lot of money in your retirement accounts in just a few years, especially if those years are the last of your working career. So don’t wait. Future You will thank Now You.
“But I need that money now for fun things before the arthritis and the dementia set in!”
I’m not going to explain the fundamental life principle of making small sacrifices now for greater gain later. I’m not your mom. Instead, I’ll just terrify you with some statistics about elderly folks living in abject poverty. You know, just in case you ever wondered about the origins of that apocryphal story about old ladies subsisting on cat food. But I’m sure that fully loaded Ford F-150 and vacation in Cancun were worth it.
Also, can we dispense with this notion that retired people have no fun? There’s no reason why you won’t be able to enjoy your money in retirement if you take care of yourself now. Delay gratification instead of pretending like your active lifestyle has an expiration date.
“I don’t have two can tabs to rub together. What makes you think I can sock money away in a retirement account where I can’t touch it?”
Of all the lame excuses, this one holds the most water. Of course it’s hard to imagine saving for retirement when you’re so cash strapped you’re sifting through your neighbors’ trash for soda cans to redeem for nickels. I’m not going to condescend to you by suggesting you simply need to find some room in your budget to make austerity cuts. (“Save money by canceling your cable package!” is only useful advice to those who could afford to buy cable—not to mention a TV—in the first place.) I believe you’re really fucking broke.
But one way to jump this hurdle is to make your retirement plan a reality before you can get used to not having it. As soon as you get hired, opt into your company’s 401(k) or 403(b) plan, even if all you can contribute to the plan is less than 1% of your annual salary. If you don’t, you’re actively losing money. If your employer doesn’t offer a 401(k) or similar plan, start an IRA and automate your contributions as soon as you receive your first paycheck. Don’t have enough to meet the minimum for opening an IRA? Use a savings account and transfer the money once you’ve accumulated enough after several paychecks.
The point is to make it so you don’t know what it’s like to bring that retirement money home. You won’t miss what you never had.