Most massage therapists I come across know how to plan their massage sessions to suit each client’s specific needs. But when it comes to planning for their own retirement, they have no clue where to start.
When I ask them about retirement planning, the common response is “I am still young, I have time to think about it later. I just want to enjoy life right now.” What if I tell you that with a little planning, you can still enjoy life right now while at the same time, you can make sure your financial future is secure and you can retire comfortably without worrying about money? Interested? Great! Read on.
In investing for the future, time is really your ally. The earlier you start, the more chance your savings can grow exponentially. Consider this, if you put $100 into an investment account every month from age 25 until you retire at 65, you will have put in a total of $48,000 (principal).
Assuming an annual return of 5%, do you know how much you will have in the account? Your $48,000 investment will grow to $145,664*! That is more than 200% gain. If you start saving 10 years later when you are 35 instead of 25, you will only have $80,159* when you reach 65 years old. You just cheated yourself out of $53,505 for investing 10 years later. That’s why the earlier you start, the more time your money can grow exponentially.
Don’t be discouraged if you are already in your 40s and you haven’t started savings yet. You can’t change the past but you can control your present and change your future if you start saving now. Where should you start? Here is a sequential list of places where you should start your investment.
Remember, the money you put into any retirement account should not be taken out before your retirement. So choose the amount of contribution wisely. When in doubt, always speak with a financial or retirement specialist before making any investment decision.
401K. Does your employer offer 401K? If you are eligible to participate in your company’s 401K plan and your company matches your contribution, this is the first place you should put your savings in. If your company matches 50% of 4%, tell your human resource representative that you want to contribute 4% of your income towards your 401K.
What this means is that if your paycheck is $1000, your company will take $40 out of your check and put it in your 401K account. On top of that, your company will match 50% of 4% which is $20. You are effectively getting an extra $20 free just for contributing to your 401K. Your $40 is taken out pre-tax, meaning you will only be taxed on the $960.
So the more money you put into your 401K, the less income you will report come tax day and the less taxes you will pay. One caveat, you will get taxed on the contribution and growth/gains when you take the money out at retirement. You should consult with a financial specialist to see what is the right amount to contribute beyond the 4%.
Roth IRA. If your company does not offer a match to your 401K contribution, then a Roth IRA is where you should put your money first. For most of us, the maximum amount you can contribute to a Roth IRA is $5,500 for 2015. What is a Roth IRA you say? IRA stands for Individual Retirement Account. Roth IRA is one type of IRA wherein you contribute post tax (meaning your money get taxed before you put it in Roth IRA) but you can withdraw your contribution and your gains TAX FREE!
Remember the $100 per month example we discussed earlier in this article? If you put your money in a normal investment account instead of Roth IRA, you will need to pay taxes on the $145,664 when you take it out at age 65. But if you put that $100 monthly into a Roth IRA account, all $145,664 can be withdrawn TAX FREE!
Wait! If you can contribute $450 per month in your Roth IRA ($5400 per year, still below maximum for 2015) from age 25 to age 65 and assuming the same 5% rate of return (mind you, the long term average annual return of the stock market is 8%), do you know how much money you will have when you retire at 65? A mind boggling $652,325*!!! And it’s all TAX FREE! If you are jumping up and down right now shouting where can you open a Roth IRA, I don’t blame you.
You can open a Roth IRA at any bank, but with the current interest rate at 0.05% or less for a CD (Certificate of Deposit), you are better off opening a Roth IRA account with a brokerage firm like Fidelity, Merrill Lynch, Charles Schwab, etc and invest your money in the stock market. Mastering how to invest in the stock market takes lots of research and discipline.
But all masteries start from the basic fundamentals. I can write an article on the basics of investing in the stock market if there are enough interest in it. Roth IRA is not for everyone. It’s a great option if you are young and have time on your side to weather through the ups and downs of the stock market. Always speak with an investment adviser and make sure you understand the risk of investing in the stock market.
Brokerage account. If you have contributed to your 401K and maxed out your annual Roth IRA limit and still have some money to invest, congratulations! Your next step could be opening a brokerage account.
Again, if you are young and you have time on your side, opening a brokerage account and putting your investment into the stock market gives you the best chance to grow your investment at the highest yield possible. If you make it this far, then speak with a financial adviser about investing in the stock market.
I have given you a lot of information here, and this is just the tip of the iceberg. If you have questions, feel free to put your questions in the comments below. Remember, time is your ally and the earlier you start, the better is your chance to retire comfortably.
*The amount is based on a simplified calculation without taking into effect inflation and fees involved in opening and maintaining your retirement account.
*Note that this article is not meant to be customized financial advise. Readers should engage a professional financial planner, attorney and/or CPA for financial advice customized to their unique situations and needs.
This article is a contribution from our highly esteemed friend John Teng, who occasionally contributes useful articles geared towards financial planning for massage therapists. John is is an MS, a BS, a LMT, a NCTMB, an ACMT and Director at the European Massage Therapy School. You can read about John’s career here.