The Basics Of Retirement Planning

When it comes to retirement planning, there are a lot of factors to take into account. Your age, health, income, and assets are all important considerations. But another key factor…

Tax

June 27, 2022

Written by Kevin

When it comes to retirement planning, there are a lot of factors to take into account. Your age, health, income, and assets are all important considerations. But another key factor to think about is your future expenses. What will you need in retirement? 

Most of us work hard all of our lives with the expectation that we’ll be rewarded with the ease of retirement. About 63% of Americans plan to retire between the ages of 60 and 70. But living without a steady paycheck can be impossible if you don’t have an adequate retirement plan. In this post, we’ll discuss all you need to know about retirement.

What Is A Retirement Plan?

Your retirement goals should revolve around more than saving money. A comprehensive retirement plan considers all of the necessary actions to achieve and maintain your financial objectives after you stop working.

While the money you save throughout your life is essential for your retirement, managing it effectively is important. Retirement planning involves implementing strategies for saving, investing, and using your finances to safeguard your security throughout your life.

What Do You Need For Retirement? 

The following elements are factors in any retirement plan:

  • Current and future income
  • Assets
  • Current and future expenses
  • Expected liabilities
  • Life expectancy

But to create the ideal retirement plan, you’ll have to consider some non-financial retirement goals, such as:

  • Living arrangements
  • How to spend your time
  • Travel options
  • When to stop working
  • Commitments like paying for your child’s wedding
  • Education opportunities

The Importance of Retirement Planning

When you enter the workforce, it’s hard to imagine the days when you’ll get to wake without an alarm clock and set your schedule without worrying about punching the clock. But even though retirement seems far off, you should start thinking about it. It’s never too early to start planning for your retirement.

If you don’t have a strategy for supporting yourself without working, your lifestyle may change drastically after you retire. What’s worse is that you may not be able to stop working and enjoy a more leisurely pace.

Decide How You Want To Live

When you start planning for retirement early, you don’t have to invest much from each paycheck to see a decent return a few decades later. However, if you start investing later in life, you may have to set aside larger chunks of your income to create a sufficient nest egg. Investing early also gives your money plenty of time to compound.

But remember that an important part of retirement planning is deciding how you want to live, not just how you will pay for it. Keeping your lifelong dreams in mind gives you a specific objective that will motivate you to maintain progress toward the goal throughout your career.

Some of the other benefits of retirement planning include:

  • Creating a cushion for emergencies
  • Accounting for today’s longer lifespans
  • Providing for your family
  • Leaving a legacy
  • Maintaining or improving your standard of living
  • Combating inflation

How to Start With Retirement Planning

An entry-level job may not provide you with much of an income to invest. But time is on your side. With a compound interest rate of 6%, a 25-year-old would have to put aside only about $6,400 each year to save $1 million by the time they retire. You can take even less out of your paycheck and invest it wisely for the most efficient retirement plan.

You’ll benefit from saving your money in a retirement account instead of a traditional bank account. There are several types of accounts available to save for retirement. There are pros and cons to each. Diversifying your assets can help you take advantage of the benefits and minimize risk.

Employer-Sponsored Plans

Many employers feature 401(k) plans as an employee benefit. These are usually easy to establish and manage. Moreover, the company may match a percentage of your contributions. If you can’t contribute a lot to your retirement account yet, this is a great way to pad the account without impacting your paycheck.

Contribution

The total that you contribute to a 401(k) every year is deducted from your taxable income. Therefore, you’ll reduce your annual tax liability and allow your money to grow tax-free. You’ll only pay income tax on the money you withdraw from the account later in life.

In 2022, individuals under 50 can contribute up to $20,500 to their 401(k). People 50 or older are permitted to contribute up to $27,000.

Other Retirement Plans

Some employers provide other types of retirement plans, including:

SEP IRA – Allows higher contributions and immediate employee vesting opportunities.

Simple IRA – Has a lower contribution limit than a 401(k), but employers may contribute even if the employee doesn’t, and employees are always fully vested.

Individual Retirement Account

One of the 401(k) downsides is that the investment options are limited. An individual retirement account, or IRA, gives you more choices for plans and investments, including stocks and mutual funds. Anyone can open an IRA, which is an excellent option if you don’t have access to an employer’s 401(k).

The tax advantages of an IRA are similar to a 401(k). However, the contribution limits are lower. Individuals can contribute $6,000 a year up to age 49 and $7,000 a year at age 50 and up.

Roth IRA

A Roth IRA is similar to a traditional IRA. However, the tax benefits differ. With a Roth IRA, you pay taxes on your income before contributing it to the account. However, you don’t have to factor taxes into your withdrawals when you need the money during retirement. If you expect to be taxed at a higher rate when you retire than you are now, you might benefit from a Roth IRA.

Your tax services provider should be able to provide you with information about your tax bracket to make an informed decision. Working with a financial professional helps to clarify confusion and maximize your assets.

Life and Disability Insurance

Retirement accounts aren’t the only assets that you should have in your retirement portfolio. Protecting your finances and legacy with life and disability insurance is important. These are distinct types of policies that can safeguard you and your family.

About 25% of Americans become temporary or permanently disabled before reaching retirement age. If you have to work past retirement age, your chances of becoming sick or injured are even higher. Disability insurance can replace a portion of your income if you can’t work due to your disability.

Life Insurance

Life insurance is often considered to be an element of estate planning. However, it is relevant in retirement planning too. There are several types of life insurance policies. Some allow you to withdraw from the plan to help fund your retirement.

Retirement planning is a complex process, but it doesn’t have to be overwhelming. By taking some time to understand the most important factors involved, you can develop a plan that works for you. Keep these factors in mind as you create your retirement strategy. And, be sure to review your plan regularly to make sure it’s on track. 

Other Forms of Investment

To diversify your retirement plan and contribute beyond the limitations of many account types, consider other types of investment. Some alternative ways to save for retirement include:

  • Certificates of deposit
  • Real estate investments
  • Private equity
  • Venture capital
  • Hedge funds
  • Cryptocurrency
  • Luxury goods

How Much Should You Save For Retirement?

Experts have a hard time coming up with a specific recommendation for the ideal dollar amount you should retire. The number depends largely on how you plan to spend your money after you stop working. That’s why it’s so important to keep your non-financial goals in mind as part of your retirement plan.

In addition to considering your expected lifestyle expenses, you’ll need to understand your tax obligations. Accommodating the tax impact will help you develop an accurate retirement plan. It’s crucial to assess your specific situation to understand how much you need to save for retirement.

Considerations

Many experts recommend contributing as much as you can to your retirement accounts. You should include this in your budget to keep contributing even when you’re paying for other midlife expenses, such as a mortgage and car.

As you age and pay off your debts, you should invest the extra income for retirement. You might want to invest more conservatively in your mid-40s and beyond. There is a lot to consider when setting up a retirement account. Having someone evaluate your financial situation and go over your options can help you understand how to make the most of your retirement.

Get Start Your Retirement Planning

At Nesso Tax, we help our clients identify important factors in their retirement planning. We know that a retirement plan is not just about assets and income; it’s also about future expenses, liabilities, and life expectancy. We consider all of these factors when we help our clients make financial decisions.

At Nesso Group, we specialize in helping clients gain perspective on their financial health. We understand that retirement planning can be daunting, but we also know that it’s one of the most important things you can do for yourself and your family. Reach out now to learn more about how we can help.

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