Planning for retirement may seem like a laborious task for days far ahead of you. However, as the days quickly become months, the months years, and the years decades, retirement can appear out of nowhere. Don’t let it catch you by surprise when planning for its arrival isn’t as hard as you may think.
Follow these four steps and turn your retirement dreams into an attainable goal.
Step 1: Calculate your retirement costs
Your expenses in retirement will differ from your current costs. The first step in making your retirement plan is determining how much money you will need for your golden years. Experts say you will need as much as 85 percent of your current income; however, you can also use a retirement calculator to identify your exact costs. You may need more or less than 85 percent, depending on your lifestyle.
What type of lifestyle do you want as a retiree?
There are several factors that weigh into your retirement costs. Consider these questions to determine how much you’ll need to retire comfortably. Will your house be paid off? Are you planning to relocate to an area that has a higher or lower cost of living? What type of lifestyle do you want to live as a retiree? Do you envision yourself traveling more?
Step 2: Invest in your work’s retirement plan
The best way to start saving for retirement is through your employer’s retirement plan. Whether they have a 401(k), a 403(b), or a defined contribution plan, most employers offer to match a percentage of your contributions, which means free retirement money for you. By not participating, you’re leaving free money on the table.
How much should you contribute?
At minimum, contribute up to your company’s matching amount. 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, ideally, you should contribute 10 to 15 percent of your income, if allowable. The IRS sets annual limits on how much you can invest in a 401(k) or other defined contribution plans.
Step 3: Invest outside of your work plan with an IRA
Once you’ve maximized your employer-provided retirement plan, invest in an individual retirement account, better known as an IRA. IRAs are savings accounts designed with special tax advantages for retirement savings. Anyone with earned income can contribute up to the maximum contribution limit.
Choose from a traditional IRA or Roth IRA. With both accounts, earnings grow tax-deferred, meaning you won’t have to pay taxes on the interest as it’s earned. However, they differ in other ways.
Traditional IRAs vs. Roth IRAs
Traditional IRA contributions are tax deductible, making withdrawals at the time of retirement taxable. They’re 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.
Roth IRA contributions are not tax deductible; however, your withdrawals are tax- and penalty-free, if the account has been open for at least five years and you’re older than 59 1/2. 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 1/2.
SEP IRAs are ideal if you work for yourself or freelance. They operate just like traditional IRAs, but with higher contribution limits. They are for the self-employed.
There are savings IRAs, offered through banks and credit unions, and investment IRAs, offered through financial advisors. A financial advisor can help you decide which IRA and account option is best for your needs.
Step 4: Review and adjust your plan
Goals and needs change; therefore, it’s important to review your retirement plan periodically. Revisit your lifestyle plans for retirement and your current income. If there’s been a change, adjust your contributions accordingly. Also, revisit your investment accounts to determine if they still meet your risk-tolerance guidelines. As you get closer to retirement, your portfolios should typically become less risky.
Consult with a financial advisor for more retirement advice and guidance.30