As a household employee, planning for your retirement is one of the most important steps you can take for your future. While Social Security provides a foundation, building additional savings through retirement accounts can help ensure long-term financial security. Here’s some tips on retirement planning, the retirement savings options available, and information on how building an employer contribution into your total compensation plan can help.
When Can You Retire?
Retirement looks different for everyone and depends on your savings, priorities, and when you feel ready to leave the workforce.
- Social Security Basics: You can start claiming benefits as early as age 62, but your monthly payment will be smaller. Waiting until your full retirement age (67 if born in 1960 or later) or even up to age 70 can significantly increase your benefits.
- Flexibility Matters: Some people choose to retire early for personal reasons, while others may work longer to reach financial goals. Gradually reducing work hours is another popular option.
How Much Money Will You Need?
Experts say to aim for enough savings to replace 70% to 90% of your annual pre-retirement income. Here’s how to better estimate your needs:
- Current Expenses: Consider what you spend on housing, food, transportation, and other essentials.
- Future Plans: Will you want to travel, dine out, or pursue hobbies? Factor these into your retirement budget.
- Ongoing Costs: Don’t forget about medical expenses, home maintenance, or other long-term needs.
For example, if you earn $50,000 annually before retirement, plan to save enough to cover $35,000 to $45,000 of income per year in retirement.
Balancing Retirement with Other Financial Goals
Saving for retirement is important, but it’s not always your only priority. If you’re paying down debt or building an emergency fund, it’s okay to divide your focus. It is ok to start small. Even saving a little now makes a difference over time, thanks to the power of compound interest. Generally speaking, the sooner you start saving, the more time your money has to grow.
Tax Advantaged Retirement Savings Options
While you can always save for retirement in traditional savings accounts, brokerage accounts, by buying gold bars, or by stuffing cash under the mattress, some methods tends to work better than others. Taking advantage of tax breaks that encourage retirement savings is one of the best options available to you. Here are some of the most common savings vehicles used by household employees.
- Simplified Employee Pension (SEP) IRA
A SEP-IRA is a retirement account funded entirely by your employer. Contributions can be up to 25% of your salary, with a maximum of $69,000 for 2024 ($70,000 for 2025).
- Why It’s Great for You: You immediately own (or “vest in”) every dollar contributed. These contributions grow tax-free until you retire.
- Things to Know: If your employer has other employees, they must offer the same plan to everyone.
- SIMPLE IRA
With a SIMPLE IRA, you and your employer work together to build your retirement savings. You contribute through payroll deductions, and your employer typically matches up to 3% of your annual salary.
- Why It’s Great for You: Your contributions reduce your taxable income now, and your employer’s matching contributions are tax-free.
- Things to Know: You’re always fully vested in both your contributions and your employer’s matching contributions.
- Traditional and Roth IRAs
You can open an IRA on your own at any bank or brokerage. Alternatively, your employer might contribute directly to your IRA as part of your compensation.
- Traditional IRA: Contributions can be deducted from your taxable income now, but you’ll pay income taxes when you withdraw funds in retirement. Note that withdrawals prior to retirement (age 59 ½) may be subject to an additional 10% early withdrawal penalty.
- Roth IRA: Contributions are made with after-tax dollars, so all withdrawals in retirement (after age 59 ½) are tax-free. Similar to the traditional IRA, investment earnings withdrawn before age 59 ½ may be subject to a 10% early withdrawal penalty.
- Things to Know
- If your employer contributes, the amount will be counted as taxable income and subject to Social Security and Medicare taxes.
- There are exceptions for the 10% early withdrawal penalties noted above, such as using the funds for medical expenses and other hardship distributions. Learn more from the IRS at https://www.irs.gov/newsroom/what-if-i-withdraw-money-from-my-ira.
- What about a 401K?
Traditional 401K plans require that the family engage a plan provider or plan administrator to comply with all administrative, record-keeping, and participant statements, as required by the law. These carry costs to the employer, so most household employers opt for one of the lower-cost options described above.
Why You Shouldn’t Be Afraid to Invest in a Retirement Account
Investing in a retirement account can feel intimidating, especially if you’re concerned about needing access to the funds before retirement. However, even in the event of an early withdrawal, retirement accounts—particularly those with employer matching contributions—offer significant advantages over traditional savings accounts.
Employer Match: Free Money That Boosts Your Contributions
When your employer matches your contributions, it’s essentially free money added to your retirement savings. For example, if you contribute $1,500 and your employer matches it dollar-for-dollar, your account balance is instantly $3,000 before any investment growth. This is a 100% return on your initial contribution, which is hard to match with any other financial product.
What Happens if You Withdraw Early?
While early withdrawals from retirement accounts can result in penalties and taxes, the employer match still puts you ahead financially. Here’s a generalized example:
- Total Contributions: $1,500 (your contribution) + $1,500 (employer match) = $3,000
- Early Withdrawal Penalty: A 10% penalty on $3,000 equals $300.
- Income Taxes: Assuming a 22% tax rate, you’d owe $660.
- Net Amount Received: $3,000 - ($300 penalty + $660 tax) = $2,040
Even after penalties and taxes, you’re left with $2,040—$540 more than your original $1,500 contribution. The employer match ensures you come out ahead, even if you withdraw early.
Why Investing Beats Saving
While savings accounts offer liquidity and security, they typically provide very low returns. Retirement accounts, on the other hand, offer multiple benefits:
- Tax-Deferred Growth: Contributions grow without being taxed until withdrawal.
- Compounding Returns: Over time, investment growth can far outpace savings account interest.
- Employer Contributions: Matching funds make a significant impact on your balance.
Your Money Works Harder in a Retirement Account
Even in emergencies where you need to access funds early, the combination of employer contributions and tax advantages means retirement accounts provide better outcomes than saving in cash. Instead of letting fear of the future hold you back, take advantage of the opportunity to build your financial foundation.
The key is to treat your retirement account as an investment in your future. Emergencies may arise, but the benefits of contributing far outweigh the risks of withdrawing early. With every dollar you contribute, you’re setting yourself up for long-term success—even if life throws you a curveball along the way.
Take Charge of Your Future
Retirement planning is about creating the life you want after you stop working. Whether it’s traveling, pursuing hobbies, or simply enjoying peace of mind, saving now makes those dreams achievable.
Why Start Saving Now?
Retirement might seem far away, but the sooner you start, the more time your money has to grow. Small, consistent contributions can add up significantly over time.
HomeWork Solutions Can Help
Planning for your financial future is important, and HomeWork Solutions is here to support you. We make it easy for your employer to set up contributions to your retirement savings account — including both employee and employer contributions — at no additional fee. This means every available dollar can go towards building your savings for the future. Talk to your employer about taking advantage of this benefit and know that HomeWork Solutions is here to help make the process smooth and stress-free.