
Plan for Retirement: Know What Steps to Take & When
Planning for retirement should be something you do consciously, not something you put off until later in life. How well you plan for your future will dictate what your life will be like after you reach retirement age.
- Maximize your retirement savings by using tax-advantaged retirement accounts (both individual and employer-sponsored plans).
- Other financial products like permanent life insurance and home equity loans can help you meet your retirement goals and can provide additional retirement income.
- Think about the different costs you may have in retirement and how much of your pre-retirement income you’ll need to replace to maintain the same lifestyle.
LESSON CONTENTS
What's Your Retirement Plan?
A retirement plan starts with identifying how much money you think you will need to live comfortably after retirement. Unless you expect to have a hefty pension, you'll need to bank money to provide you with savings and investment income to carry you through your golden years.
Social Security alone is unlikely to provide you with enough retirement income to support the quality of life you'll want. You need a solid financial plan for retirement, a financial advisor and a realistic view of what your living arrangements and health care needs may be.
Health care costs continue to rise year after year. Medicare may not be enough to cover the cost of various procedures, medications, in-home care or your stay at a local assisted living facility. That's why it's important to plan ahead and use tools like health savings accounts (HSA) before you reach the age of retirement, so you have extra money to spend on healthcare later in life.
Once you know how much money you'll need to have available, you can begin to save and invest towards that number as your goal. Typically, you'll want to make sure you'll have around 80% of your working salary to live on during retirement.
Step One: Invest at Work
The easiest way to get started with saving for retirement is through your employer-sponsored tax-advantaged 401(k) plan. You can take pre-taxed money and direct it to your 401(k), and your employer may also offer to match your contributions by a certain percentage or even dollar for dollar.
You can save $19,500-$26,000 (depending on your age) a year in a 401(k), in pre-tax dollars. When you reach retirement age, you'll have to pay income tax on the full amount withdrawn. Or you can opt for a Roth 401(k) and put away post-tax dollars, so your investments grow tax-free. If you switch employers, you can roll your 401(k) account over and keep saving.
You may opt to save money in individual retirement accounts, or IRAs. You can only save $6,000-$7,000 (depending on your age) a year with an IRA or Roth IRA. You can also set up a self-directed investment account to save money for tax benefits.
Step Two: Invest on Your Own
After you max out your savings for retirement in employer-sponsored or self-directed accounts, you can save additional money and use it to invest for retirement in the stock market. You can get guidance when making these kinds of financial decisions from a professional advisor.
Long-term investments in mutual funds can deliver a rate of return that accounts for the inflation rate, and you can invest in growth stocks, index funds, or exchange-traded funds (ETFs) for a chance at higher rates of return over time. There are many investment options that allow you to diversify your portfolio and protect yourself from market fluctuations.
Step Three: Consider Life Insurance
Setting up a life insurance policy can help you pass down money to your loved ones. You'll need to choose a policy with a sizeable death benefit if you are looking to hand off a nest egg to your children or dependents after you pass away.
Unlike traditional investments, this money will not be counted as taxable income in most cases, so the beneficiaries don't have to pay taxes. They can use this money to pay for funeral expenses, pay off their student loans or medical debt, or buy a home. If you were to die unexpectedly, you and your family can rest assured that they will be provided for after you're gone.
If you need extra money in retirement, you may be able to borrow against the cash value of the life insurance policy (if the policy is a Whole Life Insurance policy) once it has built up some equity.
Step Four: Use Real Estate Equity
Your home is likely one of the most valuable things you own. The value of your home should appreciate over time, assuming you keep up with repairs. If you buy a home, you can always sell the house later in life, downsize to a smaller home and pocket to difference to pad your budget.
Once you build up equity in your home by making regular mortgage payments, you can apply for a home equity loan or home equity line of credit (HELOC). This replaces your existing mortgage with a new loan for more than what was left on your mortgage. You can usually borrow up to 80% of your home equity in the form of a lump sum or line of credit. You can use this money to pay off debt or make repairs on your home to increase the overall value. However, borrowing against your home increases the risk of foreclosure. You'll need to repay the loan on time to avoid losing one of your most precious assets.
You can also access your home equity through a reverse mortgage for another source of retirement income. Reverse mortgages are reserved for people who are at least 62 years old and can only be used on a primary residence (you have to live in the house). However, a reverse mortgage may not be appropriate if you want to pass down your home to your heirs, as the lending company will take ownership of the property if the loaned amount is not repaid once all borrowers have passed away.
You can also invest in additional properties and use them as rentals to increase your income during retirement. However, this comes with serious financial risk. You may have to hire a property manager to maintain your properties. You may even lose money after property taxes and repairs if you can't find anyone to rent your home or units in your building.
Continuing Your Retirement Plan
Make sure you stay on top of your retirement and investment accounts as the years go by. Review your investment gains annually, if not quarterly, and make sure your savings are on track to give you the cushion you need when you retire.
Even if you're planning to work well into your 60s or 70s, you'll need to be putting money back against the time when you do stop working. As the years go by, you may need to adjust and refine your investment activity to keep your savings goals on track.
The time to be adventurous and take risks is early in your working years when you can recoup losses. As you near retirement, take a more conservative approach to your investments, shifting your wealth into safer investments, and looking for opportunities that provide regular disbursement to boost retirement income.
One thing that can wreck your retirement plan is the lack of proper tax planning. Have a tax professional handle your taxes and make sure you report all of your earnings. This way you don't find yourself in hot water right when you're getting ready to relax and enjoy your retirement.
Withdraw Your Retirement Money Judiciously
Don't tap into your retirement savings before age 59½ unless it's a dire emergency. You'll pay a 10% penalty for accessing funds in most retirement accounts before then, as well as having to pay income tax on pre-tax savings like your 401(k).
Keep in mind, once you pass age 59½, you can significantly increase your tax bill by withdrawing too much from a traditional IRA or 401(k) (not applicable if you have a Roth 401(k)). Due to tax brackets increasing your income tax as your income goes up, try to take distributions from your pre-tax retirement accounts that come in just under the next higher tax bracket level.
However, you can also face challenges if you reach age 72 and don't start taking the required minimum distribution (RMD) from your traditional IRA of 401(k). Forgetting to take that money out of your retirement account in time can result in a 50% tax penalty. After all the work you did to save and invest that money, it would be a shame to lose half of it.
Your retirement plan can be somewhat fluid and may evolve over time. Overall, plan on putting away 10%-15% of your earnings out of every paycheck starting now and invest that money so you have a comfortable buffer for your retirement. Protect your earnings and withdraw them when the time is right to start the next phase of your life.
Your life after retirement is in no one's hands but your own. If you don't look out for your future, who will? The key to a happy, comfortable retirement lies in starting to plan as early as possible.
Saving and investing your money against your future plans is the best way to support your dreams for retirement, so add "retirement savings" to your monthly budget today. Once you start seeing your retirement investments grow, it will get easier and easier to add money to your accounts whenever you can.
PLEASE NOTE: The information provided is for educational purposes only and should not be considered recommendations or advice. Please consult the appropriate financial, tax or legal professional to determine whether the strategies presented in this article are appropriate for your situation.
Related Resources
View AllAre CDs Good For Retirement? What You Need to Know About Retirement CDs
When planning for retirement, it’s crucial to diversify your savings to balance risk and ensure steady growth. One popular savings option that has gained attention over the past year is the Certificate of Deposit (CD). So, are CDs good for retirement? Let’s learn more. This guide will explore whether retirement CDs are a good option for your retirement savings and how to incorporate them into your retirement planning.
Retirement Planning Guide: Why Retirement Planning is Important and How to Get Started
As we age, ensuring that we have enough resources to sustain our desired lifestyle becomes increasingly critical. Thus, understanding why retirement planning is essential is the first step toward securing your future. Without a solid plan, you might face financial challenges during retirement, such as inadequate savings, high medical expenses, and an inability to cover basic living costs. On the other hand, by planning ahead, you can enjoy your retirement years without worrying about financial uncertainties.
With a solid retirement plan, you can achieve your dreams and maintain your desired lifestyle. Start with this retirement planning guide to learn how to navigate the complexities of saving and investing for the future.
Refinancing Your Mortgage Loan as a Retirement Strategy: Is It Right for You?
As retirement approaches, financial stability becomes a paramount concern. Like many other Americans, your home is not only a place of comfort but might also be the largest asset or liability in your portfolio. Refinancing your mortgage is a common strategic move to enhance your financial situation as you transition into retirement. This guide will explore how to use refinancing effectively as part of a comprehensive mortgage and retirement planning strategy.
Should You Pay Off Your Mortgage Before Retirement? Pros and Cons
As retirement approaches, many homeowners begin to consider their financial landscape, particularly their mortgage—their most significant monthly expense. Often, the dilemma is: should I pay off my mortgage before I retire? Effective management of your mortgage loan situation as you near retirement is crucial. Making the correct choice will ensure financial stability and reduce stress in your later years. Deciding whether to pay off your mortgage before retirement or continue with regular payments should be on your retirement planning checklist.
What is an IRA and Should I Invest in One?
If you’re getting ready to save for retirement, you may be thinking of opening what’s known as an Individual Retirement Account (IRA). This is a common retirement savings tool to help you make the most of your hard-earned money. There are many different types of IRAs to choose from. Making the right choice all depends on your finances and future plans for your savings.
Retirement plan checklist
Retirement planning can be a complex task that requires careful consideration to ensure you have enough funds to maintain a comfortable lifestyle during your golden years.
Calculating Retirement: How Much Money Do I Need to Retire?
Saving for retirement is an almost universal problem. At some point, and at some age, most people aren’t physically able to keep working. And it’s why setting aside a nest egg is crucial. The idea of running out of money when you’re no longer able to work can be frightening to many people. Social Security is designed to fill in the gaps, not be the sole source of retirement income. Most people can’t afford to live just on their monthly Social Security benefits. That’s why you need to do your research before deciding how much to save for your retirement each month. You might also be able to use a retirement savings account to reduce your income tax at the end of the year. Use this in-depth guide to make sure you can cover your everyday expenses when going to work is no longer an option.
ETFs vs. Mutual Funds: What makes them different
If you’re looking to invest in the stock market, you might be thinking about investing in a mutual fund. But exchange-traded funds (ETFs) have become a popular alternative in recent years. They have many of the same benefits as mutual funds but are usually less expensive than mutual funds. Both options come with their fair share of pros and cons. If you’re not sure which is right for you, use this guide to get started.
What ESG Investors Should Know About Greenwashing
Investors want to know that the companies they support share their commitment to certain ideals. But judging a company based on these values can prove difficult. ESG investors can easily fall prey to what’s known as greenwashing, which is when a company deceives the investor into believing they are committed to certain causes and ideals. Learn more about the relationship between ESG investing and greenwashing, so you protect yourself from misleading claims.
NFTs: What is NFT (Non-Fungible Token)?
There’s a new type of digital commodity on the market. NFTs have been gaining a lot of notoriety among traders, investors, and collectors. So, what are NFTs, and why are they causing such a fuss? Learn more about these unique digital assets and why they’re being called the future of trading.
What You Should Know Before Taking a Loan from Your 401(k)
Your 401(k) is your retirement nest egg. You’ll need that money later in life once you have stopped working. If you need extra cash for an emergency or have trouble making ends meet, you may be tempted to tap into your 401(k) before retiring. After all, it’s your money. But withdrawing from your account before you retire may leave you with less money for your golden years. Keep these tips in mind when tapping into your 401(k).
How to Buy Stocks for the First Time: Know the Basics
You’ve heard about people buying stocks. You’ve even heard about people making a fortune by picking stocks. That sounds great! How do you get in on that? Not so fast. Buying stocks, even for the first time, is straightforward. Making a fortune on them can be harder, but it’s possible to get a nice rate of return without taking on unnecessary risk.