I have only $20,000 saved for retirement and am 50 years old. I know I have to get going, but my head is swimming with things I have heard about a deferred compensation plan and a 403(b) variable annuity at work.
I'm a teacher, and can use either of the plans. ... I tried to get help from a person in benefits, but they sounded like they were talking in code. So I haven't been doing anything, although I did pay off my house. What should I do?
- K.D., Minneapolis
You are right: You have to get going.
Rather than being afraid of choosing the wrong retirement savings plan, you should be more worried about the dismal future you could face if you keep spinning your wheels.
Say you leave $20,000 invested in a strong mixture of stocks and bonds. If you had an 8 percent annual return in the next 15 years, you would end up with about $63,400. If the money is simply in a savings account, you will probably end up with less than $27,000.
Either way, your savings aren't going to carry you far in retirement.
There's a rule of thumb that if you want your savings to last through 30 years of retirement, you cannot remove more than 4 percent each year, then adjust it each year for inflation. Under that formula, if you accumulated $63,400 by the time your retire, you would have $2,536 for living expenses the first year away from work - about $211 a month.
To put it into perspective, consider that Medicare doesn't cover all medical expenses during retirement. So retirees typically buy extra medical insurance. That alone runs about $150 a month now per person, depending on where you live.
Typically, public school teachers receive rather nice pensions, which is becoming more unusual for other workers. If you happen to have a pension, and have been in your job for many years, it might provide a nice sum - perhaps about 60 percent of your annual income on the job.
Financial planners frequently recommend that people have at least enough money from savings, pensions and Social Security to give them about 70 percent of what they were used to during their last year of work.
Luckily, the two retirement savings plans that have been confusing you might be just what you need to help catch up. Under provisions for 403(b) plans, you might be able to save as much as $23,500 a year, and in the deferred compensation plan, or what's known as a 457 plan, you might be able to save as much as $31,000, said Melanie Walker, an attorney with Segal Co., a benefits firm.
Although the usual maximum limit on savings in each plan is $15,500 for the year, there are provisions for people to save $5,000 more a year if they are 50 or older.
On top of that, some additional amounts are possible if you meet certain criteria, such as 15 years of employment where the 403(b) is offered. Ask your human resources offices about the rules for your plan.
The benefit of using either a 403(b) plan or deferred compensation plan, or both, is that you insulate your savings from taxes.
Each year you put money away for retirement, you reduce your income taxes because you are not taking the income home with you.
Above all, do not procrastinate: Find a financial planner who does not charge commissions. Planners who charge commissions might steer you away from your retirement plans at work so they can sell you something.
Instead, you want impartial advice - someone who will have you use your workplace plan if it's good for you. Look for a fee-only financial planner who will charge you an hourly fee to compare your workplace retirement plan choices. Find one at GarrettPlanningNetwork.com or Napfa.org.
Gail MarksJarvis writes for Tribune Media Services.