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Plan for Retirement: Know What Steps to Take & When

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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.

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Yellow notepad with pen svg icon Lesson Notes:
  • 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.

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.

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