Retirement planning is an essential part of getting older. Without a proper retirement plan, you risk having to work beyond your initial retirement age to cover your expenses. Creating a retirement plan also helps you prepare for your family’s future, since you’ll know what assets you can leave in your will. There are many pieces of retirement planning advice to follow.
A 401k is a popular way to save for retirement. A 401k plan is offered through your employer. There are two variants, a traditional plan and Roth account. With a traditional plan, you decide how much of your income you want to transfer into the account each year. The amount you put into your account is not taxed under a traditional plan. Another option is a Roth IRA fund, which is funded by after-tax dollars. Each year, the income you place into the fund grows without you having to pay taxes on it. Each plan has different benefits for retirement, as noted below.
Benefits of a 401k
Starting a 401k is only possible if your employer provides it as an option. The exact requirements vary depending on the company, but in most cases, you can start a 401k if you worked for the company for at least one year and are 21 years of age or older. Most employees choose to put a certain amount of each paycheck into their account. The funds are then used to purchase mutual, index and sometimes exchange traded funds. While this is the easiest option, there are more strategic ways to invest, especially as you get closer to retirement.
If you want to focus on retirement financial planning, consider how close you are to a lower tax bracket. Because your income is not taxed, you may be able to increase how much goes into your account to drop into a lower bracket, reducing how much you pay in taxes while increasing the size of your retirement account. This is not an option for all employees, so do not force yourself to drastically lower your cost of living to get into a lower bracket.
A Roth 401k is almost identical to the traditional plan, but you are taxed on the income you deposit into the account. In exchange, you do not pay any income tax on the retirement funds when you make a withdrawal, as long as you are 59 and ½ years of age and have held the account for at least five years.
Some 401k companies also provide matching contributions as employee benefits. Under this option, your employer also invests in your account, up to a select percentage. Some common plans include matching dollar-for-dollar, up to the first 3 percent. Others invest $.50 for every dollar, up to a total of five percent.
There is a set 401k investment limit each year. The amount can vary depending on the year, but as of writing, you can contribute a maximum of $19,500 if you are under 50 years of age. If you are over, you can contribute up to $26,000 every year.
Benefits of a Roth IRA
A Roth IRA is an individual retirement account. Unlike a 401k, it is not provided through an employer, so any individual can open an IRA. Setting up a Roth IRA requires working with a brokerage or bank. You can either choose to manage your account yourself, or hire an investor to automatically handle your account. Working with a retirement financial advisor may initially cost more, but you are much more likely to see greater gains on your investment, resulting in more money when you are ready to retire. If your income is greater than $140,000, or $208,000 if you are married, you are unable to contribute to your account.
Roth IRA accounts have set limits on how much you can put into your account each year. As of writing, the 2021 contribution is $6,000 if you are under 50 years of age, or $7,000 if you are over this age. The funds you put into your account are taxed, but once you turn 59 and ½ years of age, you can withdraw from your account without paying taxes.
Retirement Financial Planning
Setting up a 401k or a Roth IRA ensures you have money for retirement, but it is only the first step in preparing to retire. The best way to prepare for retirement is to plan how much money you need. You can use a retirement calculator to add up your average cost of living, including mortgage payments, utilities and groceries. You also want to leave enough money so you can pursue your own interests, such as traveling or picking up a new hobby. Another consideration is how much money you want to leave behind to your family.
Do not be afraid to ask for retirement planning advice from a professional. A retirement financial advisor considers your spending and total income, as well as how much you can reasonably save before you retire. While it is never too early to think about retirement, most individuals wait until they are 10 years from retirement to speak with an advisor.
Another aspect of retirement planning is preparing for emergencies. Seniors have access to some of the best insurance plans, but these plans do not cover everything. If you have a preexisting condition, make sure you understand what is covered under insurance and what you will pay out of pocket. Outside of health emergencies, you also want to set aside some funds for making repairs on your home or vehicle.
Choosing When to Retire
Another part of retirement financial planning is deciding when you want to retire. While it may seem tempting to retire as soon as possible, this is not always the most financially sound option. More employees are choosing to work for a few extra years to build up financial security.
Even with the most accurate retirement calculator, there are bound to be surprise expenses you are not prepared for. Once you hit your ideal goal, consider working for an extra year, or even a few months, to create a larger retirement buffer. These extra funds can also account for a potential increase in cost of living after you retire. Even if you never use these funds, it gives you more money to leave behind to your family.
By Admin –
