Retirement Planning 101
August 2017
by Josephine Cusumano

For many of us, the age of retirement feels so far off in the future that we think we’ll have plenty of time to start saving later in life. However, that’s one common misconception that could seriously impact retirement plans.

Suburban Life/Philadelphia Life recently spoke with local experts and advisors who all urge that retirement planning should start as early as possible in order to promise growth and a healthy income for retirement, while also dishing out crucial advice—free of charge.

Retirement Financial Options
With so many options available to us, it can become quite overwhelming to decide which fits into our financial picture. For starters, Christian M. Wagner, president of Penn Investment Advisors, advises investors should plan to have three sources of income for retirement: social security, personal savings and IRAs and/or a qualified plan such as a 401K, 403B or private pensions, which are quickly becoming less common.

For social security, Wagner states, “They have to make sure they understand what their social security benefits are and when they can take them. Know the advantages and disadvantages of not taking them until you’re 70-years-old when you have to take it, but taking it early can also be problematic.”

When it comes to a Traditional IRA or Roth IRA, they each have their own rules and benefits, something investors should consider or consult with their financial advisor. For those interested in a Roth IRA, you’re able to contribute after-tax dollars, where it grows tax-free and generally, there is not a tax deduction and you’re able to make qualified tax- and penalty-free withdrawals after age 59 ½. For a Traditional IRA, you can contribute pre- or after-tax dollars, which will grow tax-deferred, you’re able to take advantage of the tax deduction (if qualified) and when it comes time to withdrawal after age 59 ½, all withdrawals are taxed.

In both cases, investors can contribute to either a Traditional or Roth IRA systematically, whether that’s monthly, quarterly or yearly and the decision, as experts say, is based on age, income factors and personal preference.

As for 401Ks, experts agree you should participate in your company’s qualified plan—whether it’s matched or not—as soon as possible. “That’s the best plan because it goes in there before the taxes are taken out,” explains William T. Manchester, vice president of investment at The Manchester Group of Janney Montgomery Scott. “They grow tax-deferred and the issue there is it starts out small so there’s no reward there, but the benefit is it comes out before you get your pay and you kind of don’t see it, so people don’t realize they’re missing it.”

Sean M. Schmid, chief operating officer of Penn Investment Advisors agrees, adding, “If you work for a company that offers a 401K, with a match, take full advantage of that … that’s free money in your pocket. ... A lot of people don’t take advantage of that and that’s a shame.”

As for the question of how much you should start contributing, Schmid recommends starting at 2-3 percent and with each passing year, try raising it by an additional percentage point. “If you get a 3 percent raise, give yourself a raise in your 401K as well,” he adds.

Even if a company doesn’t match, experts still advise on participating. “They may match it one day,” Schmid counters. “The problem is when people don’t contribute to these plans, they don’t contribute at all. The ideal thing is to also contribute to an IRA or another deductible basis, but that can be a stretch.”

It’s also crucial for investors to have personal accounts holding additional income as well. “Make sure you have an emergency fund,” advises Wagner. “Save on the side because a lot of people … what they’re not ready for, is the fact that when they start taking income out, they have to pay all these income taxes. Save in a taxable account as well as a 401K and that way, you have different sources of income when you do go into retirement.”

“A lot people believe [that] when they retire, because they’re not working, they’re going to spend less money, that’s actually the opposite,” Wagner adds. “Think about how much money you spend during a work week, versus how much you spend on a weekend. What happens is every day is a weekend.”

Necessary Advice
The key piece of advice each expert offers is to consider your financial picture— whether that’s salary, rent, mortgage, car and health payments— when making a decision and most importantly, start now. “A lot of people feel like, ‘Well you know what, I haven’t done anything, what am I going to do now?’ For those who haven’t begun to plan, they have to begin to do so now,” says Wagner.

While it’s advised for those in the 20-35 age bracket to start saving, Manchester advises they square away any student loans or credit cards before saving. “You want to be debt free,” he says, adding, “It’s better to knock that stuff down versus investing … you want to net the biggest return.”

As for those in their 40s and up, Manchester says it’s still a great time to start planning and saving. “I’ve noticed the clients are older and older and 40 is young. The 20-35-year-olds are going to be in great shape, but I know 40-year-olds who have saved and they’re doing just fine. They have to kind of double it up, but they know when to do it … and even 50s, you’re still in the game.”

Sally Lawson, senior investment advisor at Malvern Federal Savings Bank adds, “You start when you can ... as soon as you’re financially able to do that. … No matter what stage in life you’re in, you should find a way to contribute to your retirement.”

From the Experts
“I think most people don’t contribute to their 401K plans because they believe they can’t afford to. They can’t afford not to because they’re going to play less in income taxes by deferring a certain percentage and, in addition to that, they’re getting a match so it’s win combination and when you do it, do it with a great deal of discipline.”
—Sean M. Schmid,
Penn Investment Advisors Inc.

“The absolute moral sense is do not ever borrow from your 401K plan. You can’t borrow to fund your retirement, so why would you be able to borrow from your retirement plan? It doesn’t make sense and you have to pay taxes on money twice.”
—Christian M. Wagner,
Penn Investment Advisors Inc.

“Investors are under the impression that they can only contribute to the IRA and Roth IRA accounts on an annual basis, but you can contribute to them throughout the year on a systematic basis, which makes it easier for some people to save.”
—Sally Lawson,
Malvern Federal Savings Bank

“Every single person has a different plan, or different target, so what’s good for you could be bad for me. … There’s also good in everything too.”
—William T. Manchester, The Manchester
Group of Janney Montgomery Scott

Published (and copyrighted) in Suburban Life Magazine, August, 2017.