How To Plan For Retirement

Do you know when the best time to start planning for retirement is? Now! The earlier you can start contributing, the more time your money has to grow. Start prioritizing your retirement savings today; here’s how.

1. What Is Retirement?

Unless you want to work every day for the rest of your life, retirement planning is essential. Retirement is saving and investing money to preserve your finances after you leave the workforce. You want to start as early as possible, so you have enough saved around the time Social Security kicks in.

2. How Much Do You Need?

When do you want to retire? Are you on track? These questions go into how much you need to start saving. Typically, you should plan to be retired for 30 years. So, the goal should be to have 80% of your current income each year that you’re retired.

Keep in mind, you should factor in your age when choosing how to invest. If you’re younger, you have the flexibility to invest riskier and more aggressively. When you’re older, you will want to diversify your investments for a good mix and dial back the amounts you’re investing. Consider hiring a pro to manage your retirement savings to keep you on track and give you peace of mind.

3. Types Of Accounts

There are several ways you can start saving for your retirement. See which options will help meet your goals.

Employer-sponsored. These are plans that may be offered by your employer. You can choose to pay into these regularly and may be funded by your employer. Examples of these kinds of accounts are:

  • 401(k) – Save pre-tax income from your paycheck. Some employers offer to match your contribution up to a certain percentage. For more information about 401(k)s, check out our blog.
  • SIMPLE IRA – Another pre-tax option. However, the maximum contribution limit is lower than a 401(k).
  • Pension – This benefit is determined by your compensation, years of service, and age. When you retire from your employer, you will receive a set monthly payment in retirement.

Government, nonprofit, and military. These are examples of tax-exempt employers. If you’re employed or formerly employed by one of these entities, you may be eligible for one of these accounts:

  • 403(b) – This is similar to a 401(k) in the instance that you can save pre-tax income and employers can choose to match a certain percentage. The primary difference is that this type of account is only for employees of state, county, and local governments.
  • TSP – The Thrift Savings Plan is offered to federal government employees and the U.S. military.

Self-employed. Even if you’re the boss of your own company, you still need to think about locking up your business’s doors one last time and retiring. There are pre-tax income savings plans you can choose for yourself for long-term savings.

  • SEP-IRA – This is for business owners and workers who are self-employed, contractors, or freelancers. The owner contributes income to an account for themselves and their employees, if any.
  • Solo 401(k) – The 401(k) option from above? It’s available to business owners with no employees, other than their spouse.

Individual. These retirement savings accounts are independent and have nothing to do with an employer.

  • Traditional IRA – This is an individual savings account (IRA) where your contributions may be tax deductible but isn’t tied to your employer.
  • Roth IRA – This account type contributes after-tax income to your IRA. This also is not tied to your employer.

4. Investments

It’s important to not rely on Social Security as your only form of retirement savings. Social Security was only designed to complement other retirement savings plans, not replace them. It’s likely your Social Security benefit will cover less than a third of your expenses, and according to the Social Security Administration, benefits will drop below 20% after 2035.

That’s why it’s important to maximize your retirement savings by diversifying your investments. Utilize your employer-base retirement plan, while opening an IRA. Keep an eye on your investments to get the most longevity out of your retirement contributions. It’s best to check at least once a year to make sure you’re on track.

When you start planning for retirement early, you’re likely to achieve your retirement goal, invest money that could earn returns, and bring you financial confidence. To learn more about retirement planning, check out this lesson about securing finances for your future.