Source: Your Life, Your Money: "Saving for Retirement "
National K -12 Subject:
In this video segment from Your Life, Your Money, Maria Cortez is a partner in her family’s Mexican restaurant in New York City. Her goal is to retire at 55, and to arrange for her parents’ retirement. In the video, Maria discusses her future with a financial advisor. He discusses starting an individual retirement account (IRA), a private, tax-free, interest-bearing savings plan set up with a bank. The video also recommends that people who can get a 401(k), an employer-sponsored retirement plan, should participate immediately in the plan.
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Sometimes it’s hard to imagine being retired and not having to work to support yourself. Even though retirement may seem far away, it is critical to plan ahead for it. Saving for retirement is different than saving for the needs you have today, although both are necessary for good financial health. Saving for retirement requires setting money aside for the future when you will not be earning an income.
It is a good idea to calculate how much you might need to live on during retirement, so you can estimate how much you need to save each month. One often-used formula assumes you'll need 80% of your pre-retirement income to maintain your standard of living. Of course, the amount of money you put aside for retirement each month will increase over time as your income grows and as inflation drives up the cost of living. Retirement planning calculators are useful tools for determining expected income needs. A retirement calculator helps you determine how much money you will need for retirement, and whether or not your current savings contributions will be sufficient to cover those needs.
There are many different ways to save for retirement. If you have a salaried job, you may have access to an employer-sponsored retirement savings program like an employee pension. A pension is a type of retirement plan that provides a fixed monthly benefit to retirees who are no longer earning an income. They are often provided through trade unions, government offices or other organizations. Another employer-sponsored retirement plan is a 401(k), which allows you to contribute money from each pay check into a tax-deferred retirement account. (Tax-deferred means you won't pay taxes on that money until later, when you retire.)
If you are self-employed, or if your employer does not offer a retirement plan, you will need a more pro-active and disciplined approach to saving for retirement. There are a number of different tax-deferred savings accounts that allow individuals to set aside money in an independent account, like an Individual Retirement Account or IRA. There are also self-employed 401(k) plans offered through financial institutions. Another popular self-employed retirement plan is the Simplified Employee Pension, or SEP IRA, which allows you to contribute a percentage of your income to a retirement account. Keogh plans are similar to SEP IRAs but they allow you to contribute a higher percentage of your income each year and are more complicated to set up.
While there are multiple ways to save for retirement, the available plans and the conditions of the plans can change from year to year, so it is important to keep up with the most current programs. Most importantly, you should plan your strategy at a young age and stick to it.
Maria Cortez: Well my name is Maria Luisa Cortez. And I’m currently a co-owner of a Mexican restaurant called “El Maguey Y La Tuna.” It’s a family-run restaurant. We’ve existed since 1992.
Donald Faison: Maria worked in the corporate world but was drawn back to the family business where she put all her skills to work.
Maria Cortez: This is a tradition that we do every morning. Like our first customer, we go like this [demos, crosses self], today we had our first sale and they paid us with a hundred. That’s pretty good. The mission of the restaurant is to be number one Mexican restaurant on the Lower East Side. It’s very rare to have someone knowing now, like at my age knowing these traditional dishes the moles sauces, that's what we have to offer to the Lower East Side and to New York City. My mom does the moles the traditional way.
Dad speaks in Spanish, Maria translates
Maria Cortez: We do not use canned or preservatives. We grind them; we roast them; … we have certain machinery from back in the days… Dad speaks in Spanish
Maria Cortez: We want our restaurant to take us to our retirement; when you’re working with people that want to retire, you start thinking like, what they did right, and what they did wrong. My mom just showed me what she’s going to be getting for Social Security and honestly, it’s very little. I’m not going to depend on Social Security. I want to be in a better situation.
Donald Faison: When considering retirement it can pay to talk to an expert. Maria sat down with a financial advisor to discuss her options and learn more about saving for her future.
Maria Cortez: So I’m not only thinking about myself; I’ve got to think about my mom and my dad. I’m thinking about how they’re going to retire from this business.
Greg Plechner: Understood.
Greg Plechner: So there are two approaches. One approach is to open up a retirement plan through your business. Alternatively, you can establish an IRA account.
IRA (Individual Retirement Account): Open an account with as little as $100.00 Choose the type that's best for you Interest accumulates tax-free or tax-deferred
Donald Faison: An Individual Retirement Account, OR IRA, is a private SAVINGS plan set up with a bank, broker or other financial institution. Like all other retirement plans, IRA's allow individuals to set aside money each year that will earn interest tax-free.
Beth Kobliner: When money is able to grow without you having to pay tax on it, it grows even faster.
Michelle Singletary: My first day on my job, I went to my benefits office and I set it up so that automatically a certain percentage was taken out of my paycheck before I saw it every single paycheck.
Donald Faison: Another great way to save, if you work for a company that offers one, is a retirement plan that may be called a 401K. If your job offers one you should absolutely take advantage of it. For every dollar you contribute to it, your company may match it in full or in part. Think there’s no such thing as free money? Wrong! This is it!
Michelle Singletary: You should start saving for retirement the day you get your first job. If they have a retirement plan, join it that day you start.
Beth Kobliner: When you start in your 20’s and start to save long term, even starting at 23 can make a huge difference between starting at 33, you can end up with tens of thousands of dollars more just by starting early.
Donald Faison: All of these investment options feature a little bit of magic called compound interest. Here’s how it works: Let’s say when you’re 23 you start saving 50 bucks a month in a taxshielded account that earns seven percent interest. As interest gets added to the account each month, your money grows. So the next time around, you’re getting seven percent of a little more money: interest on your interest! By the time you’re 65, compound interest will turn your monthly investment of $50 into $154,000! But start saving early. If you waited until you were 33 to start, you’d only end up with about $72,000.
Donald Faison: Maria has a lot to consider as she helps her parents prepare for retirement and plans her own.
Maria Cortez: I would like to retire, probably at 55. I want to live in Mexico. I know that for sure. I want to come back to New York, back and forth. I see myself as more relaxed and in my summer home in Mexico.
RECAP: Start saving early
Create an emergency fund
Invest in a retirement savings account
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