April is Financial Literacy Month. You might be thinking, who cares? Well, how about using it to take a first financial step to learn something new.
Take Action: There are a few ways you can take action. Future financial planning is important for us all and the pandemic has driven that message home. Start an emergency savings account. Join a credit union and open up a $5 starter account. If you already have a savings account, add to it – the point is to develop a savings habit.
Next, consider your future retirement: Most of us are covered by the Social Security and Medicare systems – they provide access to both a health plan and income in old age, so that’s a good place to start. You pay a tax of 7.65% out of your paycheck into these systems so you might want to know how to answer these questions: What have you earned? What’s your full retirement age? Are these systems financially solid for the future?
Know your options: Your future income can come from four basic sources: Social Security, your workplace retirement plan, and your own personal savings and earnings if you keep working after age 66.
First Step: Social Security benefits: Register for your my Social Security account at ssa.gov/myaccount to see what your benefits (as of now) will be, and how that amount could grow. If you take these benefits early or the first year you become eligible, they are reduced by 25-30%, depending on your age. If you were married, you become eligible for a divorced spouse benefit (10 years of marriage required) and also as a surviving spouse. Pay attention to the rules. On average, Social Security replaces about 40% of someone’s working income.
Next: Learn the rules of your workplace benefits if you have a company-run retirement plan: The earlier you save in your company’s plan, the greater your eventual retirement income will become. But you have to start. And you have to avoid the “Big Mistake” – taking the retirement money and spending it when you leave a job. You will regret that sooner than you think as you will almost certainly have to pay income tax, fees and a 10% early-withdrawal penalty if you are younger than age 59 and a half.
Next: Personal savings: If you put money into an individual retirement account (IRA), you will someday receive yearly income from it. If eligible, make it a Roth IRA so you won’t have to pay taxes on your contributions or the interest you earn.
Learn investment basics: If your company offers a retirement savings plan, find out how to get the most out of investing in it, given your age. How about a target date fund, which is a mutual fund that focuses on a future retirement date, like 2050? Perhaps, the company also offers free financial wellness workshops.
Save as much as you can: Throughout the years ahead, even the tough times, know that you can better your finances. It’s never too late to start saving, and what you save is never too small to matter. It will add up and will help. Especially those of us who take reduced hours to care for a parent, or who get furloughed by our employer due to the coronavirus, or who can barely read a bank statement. Knowledge is power, so during these precarious times if all you can manage to do is sign up for a Social Security account, that will still make your retirement better, whenever it comes.