Retirement Planning Overview
Looking to save for retirement?
Read on to find out the best ways.
Planning for your retirement can be confusing: there are so many options out there, confusing financial rhetoric, and tons of numbers you don’t fully understand.
Want clear explanations?
Read the Trusty Guide to Retirement Planning and you’ll find yourself far more knowledgeable and much less nervous about your future. First, read our executive summary below. Then feel free to jump to particular sections of the guide by using the Table of Contents on your right. If you’d like, please let us know what we can do to make this guide even better; We’d love to know.
|Retirement Income Needs
- You should first determine how much money you will need in retirement: factor in estimates for your expenses per year and how many years your retirement will last (think of your personal health and family history; keep in mind that average life expectancy in US is in upper-70’s)
- Determine your annual expenses for each of these major expenses:
- Housing (mortgage, insurance, taxes, maintenance)
- Utilities (heating, water, phone, Internet access, cable)
- Transportation (loan, insurance, gas, maintenance)
- Credit cards/debt
- Savings (emergency, vacation, large expenses)
- Personal spending (clothes, entertainment, eating out)
- Lifestyle choices (travel, gifts, hobbies)
- Although these may all be the same categories you use today, the percentages may be very different during your retirement years. For example, you might have paid off your mortgage by then (Well done! Drop the housing costs); at the same time, your healthcare costs may have risen sharply (they usually do).
- One thing you can’t control is the rate of inflation. Typically, inflation raises the price of goods about 4% every year.
|Retirement Income Planning
There are typically 4 sources of income in retirement:
- Social Security: You’ve been paying into this since you started working. To get an idea of what benefits to expect, visit the SSA website chris-put link. Be conservative and assume that you’ll get 25% less than what they estimate.
- Company Retirement Plans: Great because your contributions are not taxed: pre-tax earnings are directly invested into a 401K which you can withdraw when you are 59½ (before that age, you must pay a penalty plus tax). Your withdrawals are taxed without penalty after 59½.
- Continued Employment - Many people continue to work in retirement in order to supplement their savings.
- Personal Savings/Investments: Traditional IRA’s are a common investment for many people. Much like company sponsored retirement plans, the Traditional IRA’s contributions are not taxed but the withdrawals are taxed. Roth IRA’s tax your contributions not your withdrawals—this is a good plan for those who expect to be in a much higher tax bracket when they are older.
|How to Save for Retirement:
||See this section for comparisons of each major type of investment, including:
Tax advantage investments:
Fully taxed investments:
- 401(k)'s, 403(b), Keogh, SEP IRA, or SIMPLE IRA
- Traditional IRAs and Roth IRAs
- Mutual Funds
|Retirement Planning Strategy
||Generally good retirement planning follows this strategy:
- In your 20's - Start contributing to your 401(k) and/or a Roth IRA agressively; choose mostly stock with a limited percentage of bonds
- In Your 30s–40s - Put some of your savings into bonds, but keep the majority in stocks. A general guideline is to put 10% of your income toward retirement savings—15% if you can afford it.
- In Your 50s - You’ll want a more conservative portfolio, since you’ll have less time to bounce back from a bad market. Make a commitment to put at least 15% of your income to savings, hopefully more.
- After Retirement - Speak with a financial advisor about how to make your savings last the rest of your lifetime. If you take out too much too quickly, you could be in trouble later.
Read on to learn more about how you should plan for your retirement.