Dear Quentin,
I’m a 32-year-old man who just started my true career. Until now, I have been waiting tables, making just enough money to pay the bills. Recently, I started a new job at a factory making more money than I have ever seen (yay!).
Currently, I have extra funds. I’ve already started an emergency account and have begun putting money into a 401(k) offered by my employer which will eventually begin to match after a year of servitude.
My question is simply this: What are the next steps for me to still have the ability to retire around 55 and get the most out of my extra income? I think I’m on the right path, but I’m quickly becoming lost as I’m in an entirely new era of saving.
Sincerely,
A Late Bloomer
Read: Forget retirement — focus on financial independence
Dear Late Bloomer,
Congratulations on the new job. It’s so important to have a job that you appreciate and, hopefully, work with people who you enjoy. Given that millions of people spend eight hours a day (or more) at work, it makes life so much easier, as you will discover, and can help avoid burnout and stress throughout your working life. It will also help you stay happy and healthy, and in a better state of mind to save and make financial decisions that serve you well. I take my hat off to your positivity.
You are at a good age to start taking your career and your retirement seriously. Just don’t put too much pressure on yourself. Retiring at 55 is a big ask for most people, but not impossible if you live frugally, start saving now, and know that the best investments in the stock market are long-term investments. Another factor to be aware of: In most cases, you cannot access your 401(k), at least without incurring stiff penalties, until you are 59 ½.
There is the Rule of 55 where you can access your 401(k) without penalties at 55, but you would have to meet certain narrow criteria, such as separating from the job that offers the 401(k). Something else to consider — and this is a big one — you should be solvent enough to see you through many decades of retirement. You must pay tax on your 401(k) distributions because you have contributed to this fund with pretax dollars. That — as my dear grandmother used to say — may take the currant out of your bun.
Roth accounts are suitable for people such as yourself starting out in their careers, when their salaries — and tax brackets — are relatively low. You are investing after-tax dollars, but you withdraw it tax-free in retirement. At your age, you can contribute a maximum of $6,000 in a year. In the meantime, try to maintain the same modest lifestyle you had as a server. Case in point: An average coffee lover could save more than $150,000 over four decades if they were to brew their own coffee, instead of buying coffees on-the-go.
“You are at a good age to start taking your career and your retirement seriously. Just don’t put too much pressure on yourself.”
As MarketWatch retirement reporter Alessandra Malito, points out: “The person must have separated from their employer no sooner than the year they turn 55, in other words, they cannot quit at 54 and attempt to withdraw assets the following year. They also can only withdraw from the plan attached to their most recent employment, and not an old 401(k) plan. If those assets were to be rolled over into an individual retirement account, they could not be withdrawn from that IRA before age 59 ½ without a penalty.”
Most people will be relying on Social Security benefits for at least a part of their retirement. “You can start receiving your Social Security retirement benefits as early as age 62,” according to the IRS. “However, you are entitled to full benefits when you reach your full retirement age. If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.” Leaving the workforce for an early retirement will affect the potential benefits you receive when it comes time to your claim.
Keep working, keep saving, maximize your 401(k), start a Roth IRA, avoid fancy cars that depreciate as soon as you drive them out of the car lot, put money aside for a down payment on a home if possible and — most of all — stay in your lane and don’t become distracted by what other people in your age group have and don’t have. There are too many prescriptive reports from financial institutions that put enormous pressure on young people, which create panic or paralysis, or both. Keep your eye on the long game, and remember that 65 is still young.
Read: The millions you save for retirement aren’t worth much if you’re not healthy enough to enjoy it
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
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