Financial Planning
Key takeaways
- Start by getting an estimate of your Social Security benefits.
- Determine what lifestyle you want to maintain and estimate the cost.
- Be sure to take taxes into account in your planning.
Planning for retirement should be an ongoing process that changes over time as your circumstances change. A good retirement plan aims to develop secure, comfortable financial resources, andit provides enough money to let you enjoy retirement. It takes a little bit of work but putting in the effort now can help set you up for the future.
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Some say that the average person should have $1 million saved to live well in retirement. Others say that a potential retiree should aim to have savings and investments that will provide 70-90% of pre-retirement income. But the truth is that it’s different for everyone, and retirement savings needs depend on age, income, and desired lifestyle. This article will introduce you to the steps you need to take for your retirement planning. You’ll learn to set investment goals and to optimize your investment strategy for maximum tax advantages.
Estimate future Social Security benefits
On the Social Security Administration (SSA) website, there’s a calculator that can forecast your future benefits.The results show your estimated monthly amount for early retirement (at age 62), full retirement (at age 67), and delayed retirement (at age 70). There’s typically a significant difference in your monthly benefits between early, full, or delayed retirement age. For instance, for a person born in 1960 earning $50,000 annually, here are some typical monthly SSA benefit amounts:
- Retiring at age 62 and 1 month: $1,015
- Retiring at age 67: $1,544
- Retiring at age 70: $1,985
If this person retires at 67 instead of at 62, they gain $529 a month, or an extra $6,348 annually. So, postponing the receipt of SSA benefits could mean more money later on, depending upon your circumstances.
The best way to get the most accurate information about your retirement benefits is to sign up for an online SSA account. When you do, your actual past earnings can be used for your calculations. And once you’re logged in to your account, you’ll see your estimated Social Security benefits based on the retirement ages that you select.
Make a retirement plan
After you learn your estimated Social Security payments, you should assess your day-to-day expenses anddetermine how much more money you’ll need to maintain your lifestyle. SSA benefits are helpful, but they may not be enough to cover your living expenses in retirement.
One of the basic rules of retirement planning is that you should develop a balanced portfolio that will provide you income in your “golden” years. Comprehensive retirement plans mix financial strategies like savings accounts, mutual funds, index funds, and stock market investments. Having a mix of investment returns could help buffer market dips, so it’s not a bad idea to split your retirement savings among different accounts. Knowing how to do this could decrease your financial stress about the future, so let’s look at a few options you may have regarding building your own diverse portfolio.
Traditional savings
Starting early is best, but it’s never too late to begin to put some retirement money aside. Interest in a traditional retirement savings account compounds over the years, but the annual interest rate (APR) is often low and investment returns are minimal. Another choice might be to put your cash savings into certificates of deposit (CDs), which typically lock in deposits and interest rates for anywhere from 1 month to 5 years. CDs usually have higher APRs, but if you withdraw your money early, you might lose some, or all, of your earned interest. Make sure to read the fine print and do your research so that you make the best decision for both your short- and long-term plans.
Employer retirement savings plans
Employer sponsored retirement plans, such as 401(k) plans, can be an easy way to save money for retirement. They also often offer significant tax advantages for future retirees. In traditional 401(k)s, employee contributions are made pre-tax, meaning they come out of your gross income.Remember that withdrawals from 401(k) plans are subject to taxes, no matter when they occur – the tax rate will change over time with your income and retirement status.
Roth 401(k) contributions come from after-tax funds, so they may reduce your contribution for the same level of payroll deductions. However, qualified withdrawals aren’t subject to income tax, so that may benefit you.
With either type of account, some employers will match employee contributions. If your employer offers matching, you put in a percentage of your income, and your employer would match that amount – to a point. It might be a one-for-one match (you put in 5% of your income and your employer adds another 5%) or they might match 25% of your contribution up to a certain limit. Whatever they give you, it’s extra money at no additional cost. If you can do it, make the maximum contribution, so that you can gain as much as possible.
Individual Retirement Plan
An individual retirement plan (IRA) is similar to a 401(k) account, except that IRAs aren’t connected to an employer. Contributions are made to a Roth IRA with after-tax money or to a traditional IRA with pre-tax dollars. With each, you’re subject to the same withdrawal stipulations, so make sure you understand any implications that may occur from an early withdrawal or any limitations there may be on taking out a loan from your account.
IRAs are a good method for retirement investing. And here’s a bonus — you’re the one making your own investment decisions. You might allocate 50% of your account to a bond fund and 50% to a mutual fund. Stock trading IRAs are available as well. They allow you to invest in one or more stocks while still receiving tax advantages on contributions or withdrawals.
Beyond the basics
While retirement savings accounts and plans are a good choice, there are also other retirement investments that you could make, such as buying local, state, or federal bonds, investing in company stock, purchasing life insurance plans, or investing in real estate. Each has its own risk level and specific opportunities for larger or more secure returns. If you choose to invest in more speculative methods (like real estate) carefully consider your risk tolerance. Can you afford to lose that investment money and still retire comfortably? The answer to that question may be important for your future plans
Don’t forget to consider the basics when you go to invest. Make sure you are accounting for mortgage payments, credit card debt, and things like possible future medical expenses. And be sure to take taxes into account.
Financial advisors can provide advice based on your financial situation.Discussing your plans now, in advance, with a financial consultant or a tax advisor may help you make better financial decisions for your future.
Planning for retirement?
There are many different ways to plan for your retirement goals. Whether you’re looking for fast growth in your funds or for rock-solid security, there are options that could help you invest money to your advantage. The sooner you start, the more you might earn. And, once you’re in your retirement years, having more money than you need is a grand bonus.
Whether you’ve just started your first job, or you’re nearing retirement, Best Egg can help you work to reach your financial goals. Read more — and learn more — to take steps toward a strong and healthy retirement.