Your Complete Guide to Retirement Planning
Saving for retirement should be a pillar of your financial plan – regardless of your age. If you hope to retire at some point, you need to take action today. Some studies show that as many as one in three Americans have saved $5,000 or less for their retirement. Fortunately, you can start taking steps right now to get on track. Read on to discover the benefits of saving for retirement, tips for getting the most from your money, and simple steps to help you get started.
Benefits of Saving for Your Retirement
There are many good reasons to start saving. Depending on your life stage, retirement planning may not be top of mind today, but there are several important reasons to start saving for retirement, including:
- Increasing your financial security rather than depending on social security alone
- Decreasing your annual tax obligations with tax-deferred savings
- Compounding interest over time so you can put your money to work for you
- Taking advantage of employer matching contributions and other incentives
Understanding Retirement Savings Accounts
Once you decide to begin saving for your future, there are many options for your retirement planning. Below we discuss several account types that you can use to make your money work harder for you. Each has their own unique advantages, so it’s important to find a trusted financial professional who can help you determine the best way to reach your goals.
Individual retirement accounts, or IRAs for short, are popular options because of their tax advantages. Contributions made to a traditional IRA account are tax-deductible, making withdrawals made at the time of retirement taxable. These are ideal if you expect to be in a lower tax bracket at retirement and your income is too high to be eligible for a Roth IRA.
Many people choose Roth IRAs because earnings are guaranteed at a fixed rate with tax-free growth. Contributions are not tax-deductible at the time they are made, but your withdrawals are tax- and penalty-free if the account has been open for at least five years and you are older than 59 and a half. A Roth is ideal if you think you will be in a higher tax bracket at retirement and want to avoid required minimum distributions beginning at age 70 and a half.
The SEP IRA is ideal for anyone who works for themselves or as a full-time freelancer. They operate the same way as a traditional IRA in that you don’t pay taxes until you make a withdrawal. The primary advantage is that SEP IRAs have higher contribution limits.
Savings IRA vs Certificate of Deposit IRA
Many banks and credit unions offer savings IRAs and certificate of deposit IRAs. Both options offer the opportunity to earn dividends and both have tax benefits. The difference is that the Savings IRA allows you to save at a guaranteed, fixed rate without an end date, whereas a certificate of deposit IRA runs for a set period and does eventually reach a maturity date.
Employer-Offered 401(k) or 403(b)
401(k) accounts are probably the most well-known retirement savings vehicles. These accounts allow employees to make pre-tax contributions, and many employers offer some level of matching or other incentive to encourage employee participation.
The individual 401(k) account, also referred to as a Solo or Self-Employed 401(k), is meant for self-employed individuals who have no full-time employees other than themselves and/or their spouses. Anyone who has an employer identification number is eligible to open an individual 401(k) account.
A 457 account is similar to 401(k) but was created specifically for government employees at the state and local level. Some non-profit employees are also eligible. Like 401(k) accounts, they are non-qualified and tax-deferred.
Health Savings Accounts
While not exclusively intended for retirement savings, health savings accounts can still serve as an integral part of your plan for future retirement expenses. These accounts offer tax-deferred savings that can also grow and be withdrawn tax-free as long as they are used for a qualified health care expenses.
Pro-Tip: It’s a great idea to have enough in your health savings account to cover your annual insurance deductible. This will help you tackle any up-front medical expenses you may incur without having to tap into your emergency fund or other savings.
Many people consider their life insurance plan a part of their retirement strategy. The costs of these plans can vary drastically based on many factors, and it can be fairly expensive for some. We recommend speaking with a financial professional who can assess your unique situation and prioritize your retirement plan options.
Taxable Investing Accounts
Taxable investing accounts allow you to invest in things like stocks, bonds, and real estate with more flexibility when it comes to taxation. These accounts may also have more investor-friendly contribution limits than other account types. It can be a great option to consider if you’ve already maxed out your contribution to other account types.
How to Start Saving for Retirement
The advantages of saving for retirement speak for themselves, but many people never get started because they don’t know where to begin. The truth is, saving can be fairly straightforward. Here are a few tips to help you get started:
Step 1: Calculate Your Retirement Costs
Once you reach retirement age, your expenses will likely look different than they do today. For example, you may have been able to pay off your home or other debts by the time you retire, but you may also have new expenses like increased healthcare costs. It’s impossible to predict the future, but as you build your plan, you'll need to make these estimations. It also helps to determine at exactly what age you’d like to retire and how much time you have left to prepare.
Many experts recommend you keep your retirement income at about 85% of your current working pay rate. Fortunately, depending on your lifestyle and how effectively you pay off debts, you may not actually need this much.
Pro-Tip: As you work toward your retirement, prioritize paying off your debts. Mortgage refinancing may be a great option for homeowners because it offers several benefits.
Step 2: Invest in Your Retirement Plan
As your plan comes together, you should put it into action as quickly as possible. After discussing your options with your trusted financial professional, start contributing to the account or account types that you’ve deemed important for your future. In many cases, employers offer retirement plans that can put additional money into your account at no cost to you. If that’s the case, this is a great way to start saving!
Pro-Tip: You can make this easy on yourself by designating automatic contributions from your paycheck. By eliminating the manual process of transferring funds to your retirement accounts, you eliminate both the risk of forgetting and the temptation of spending the money now instead of setting it aside for the future.
Step 3: Diversify Your Investments
Because different accounts have different regulations, you may reach the maximum contribution allowed or even run out of employer incentives. The plan you build with your trusted financial professional should include a “what next” strategy so you will know where to shift your focus when you reach these limits.
Step 4: Review the Plan and Adjust Accordingly
Your goals and needs will likely change over time. That’s why it’s important to be flexible with your retirement plan. You should periodically revisit your retirement plan and consider things like changes to your lifestyle or current income along with any additional expenses you may face in your golden years.
Pro-Tip: This is a good time to revisit your investment accounts to determine if they still align with your tolerance for risk. As you get closer to retirement, your portfolio should typically become less risky.
FAQs about Saving for Retirement
We know that many people are concerned with retirement planning, and the First Service Wealth Management team is here to help.88
Below we answer three of the most common questions we receive:
Q: When Is it too Late to Start Saving for Retirement?
While it is never too late to make changes to your financial plans and increase your retirement savings, it is true that the earlier you start, the better off you will be. Most financial planners agree that you should start saving in your 20s to avoid running out of money in retirement.
Q: How Much Should I Save for Retirement?
There is no universally correct answer to this. However, it is certainly advisable to save for your retirement by contributing up to your employer’s matching amount, if available. If you feel you can't afford to contribute their maximum matching amount, begin with what you can afford and plan to increase your contributions every six months or each time you get a raise to reach that maximum. Research shows that you should ideally contribute 10 to 15 percent of your income, if allowable. From there, if you are able to invest more, speak with a financial professional to determine the best strategy for continuously growing your investments.
Q: What Will My Lifestyle Be Like when I Retire?
Your lifestyle will be largely determined by how much money you have available and which expenses you can afford. There are several factors that can influence these retirement costs, so start by asking questions like whether your home will be paid off, whether you plan to relocate, and what kind of lifestyle you want as a retiree. For example, if you plan to relocate to an area with a higher cost of living, it may cut into your ability to buy luxury goods, travel, or participate in other activities.
Speak with a Financial Professional Today
Planning for retirement can be a daunting task, but you don’t have to do it alone. Let the professionals at First Service Wealth Management help you prepare for a more secure financial future. Our team will work to develop a deep understanding of your goals and needs, and will deliver tailored strategies specific to helping you reach your retirement goals.30
Complete the form below to schedule a free consultation!