Many people are afraid that Social Security pensions will run out of funds by 2033, as Social Security trustees have warned. Congress or the federal government may have to do something soon, to avoid having to cut benefits or leave millions of future retirees without their payments.
That’s why many, years ago or now, have chosen to maximize their savings and future payouts by supplementing with a 401(k) retirement fund. Personal finance expert and radio personality Dave Ramsay has a strong warning about how much of the information people get on these topics is not worth paying attention to and is sometimes blatantly misleading.
Ramsay’s point in his most recent column may be as simple as it is abstract at the same time: learn to differentiate between reality and fiction, and keep reality in mind when it comes to retirement.
Dave Ramsay Warns: Retirement Money Alone Is Not Enough to Live
The role that Social Security checks play in retirement income is a crucial topic that many people tend to underestimate. There is a common belief that once you reach retirement age, government payments will be enough to cover all necessary expenses. However, this perception can be misleading.
Financial, Ramsey warns that retirement planners often have inflated expectations about the purchasing power of Social Security benefits.
Additionally, as we said previously (and we expand now) it is anticipated that those retiring after 2033 could face an even greater challenge. If Congress does not take legislative action in time, Social Security trust fund reserves will be depleted, resulting in only 79% of anticipated benefits being able to be paid from available resources.
Another Lie About Retirement That Dave Ramsay Says We Should Ignore
What many people do wrong, according to Ramsay, is when deciding how much to invest in their 401(K) retirement plans and other long-term investments. To be more specific, the financial expert says that making the most of the investment percentage of your company’s contribution is a good starting point, but it’s just the first step of several.
Ramsay adds that 15% of a worker’s income should be invested in retirement, meaning you should start with the amount equal to your company’s 401(k), and then invest a little more, as much as possible.
401(k) or IRA Plans: Which Is Better for Your Purposes?
When you think about your financial future, it is key to choose the best investment options for your retirement. Once you’ve made the most of your 401(k), it’s a good idea to consider other options, such as a Roth IRA.
According to financial advisor Dave Ramsey, a Roth IRA is a great option to continue building your savings. In a Roth IRA, the contributions you make come from money that has already been taxed, meaning that when it comes time to withdraw those funds, you won’t have to pay taxes on the earnings earned.
This benefit can be especially valuable if you expect to be in a higher tax bracket when you retire.
Differences between a 401(k), a Traditional IRA and a Roth IRA:
401(k):
- It is a retirement savings plan offered by your employer.
- Contributions are made with pre-tax income, which reduces your taxable income in the year you contribute.
- The funds grow tax deferred, meaning you don’t pay taxes on the earnings until you withdraw the money in retirement.
- Withdrawals are taxed as ordinary income.
Traditional IRA:
- It is an individual retirement account that you can open on your own.
- Contributions may be tax deductible, which reduces your taxable income in the year you contribute.
- Just like a 401(k), funds grow tax deferred.
- Withdrawals are taxable when you make them, usually in retirement.
IRA Roth:
- It is also an individual retirement account, but contributions are made with money that has already been taxed.
- Earnings in the account grow tax-free, and qualified withdrawals are also tax-free.
- This is advantageous if you think you will be in a higher tax bracket in the future, since you will not have to pay taxes on the withdrawals.
Working After Retirement: A Pleasure or an Obligation?
Millions of Americans believe they will be forced to continue working after retirement, surveys have repeatedly revealed. While it is true that, according to Ramsay (and common sense), retirement benefits will always be smaller than your income as a worker, not everyone will be forced to continue going to the office after they have started collecting retirement benefits.
In any case, it is long-term planning to look for how to generate passive income, such as real estate investments to have additional rent to the Social Security payment or your private plan.
You can also choose to work part-time, rather than full-time. Many retirees find employment in retail stores, offices, or as administrative assistants. This will not only provide you with additional income, but will also keep you active.
If you have experience in a particular field, you can offer consulting or advisory services. This allows you to use your knowledge accumulated over years of career and work on your own schedule.
Exploring freelancing opportunities in areas such as writing, graphic design, programming, or accounting can be a great way to generate additional income from home.