“It takes a village to raise a child” – and to plan for retirement.
Although it may not seem obvious at first, retirement planning really is a team effort. From taking that abstract concept of life without work to creating and implementing a plan to get there, there are a lot of steps. With so much heavy lifting to do, it can be easy to put retirement planning on the backburner. But the best retirement plans are the ones that start early, giving you ample time to envision a life for “Future You” and round up a team to help you put the wheels in motion.
That said, it’s never too early (or too late!) to begin the process.
Whether you’re diving into retirement planning for the first time or you’re already a seasoned pro, there are some key tools and strategies you can use to make the most of your retirement plan. These three fundamental aspects include saving, growing, and protecting your money.
We’re bringing you a three-part series to give you in-depth information on each of those steps, beginning with today’s topic: saving.
Cash Flow Management
Cash flow management is just a fancy term to describe how much it costs to be you. It’s the process of tracking exactly how much money you need to survive and thrive on a regular basis.
But retirement planning takes cash flow management one step further: it asks you to consider how much it will cost to be you in the future. After you factor in all the changes that await you in retirement, chances are your spending habits will change.
While it’s not possible to pinpoint exactly how much cash you’ll need on hand in your later years, there are several strategies you can use to set yourself up for success down the road.
Start Saving Early
One of the best ways to save money is to give yourself plenty of time. Giving your investments time in the market allows you to take advantage of compound interest.
Compound interest is the idea that you can take money you’ve accrued from your investments and invest it all over again – creating more opportunities to build wealth. Since interest builds over time, the longer you have to accrue it, the more benefits you can usually expect.
Plus you want to be aware of the types of accounts you are saving into. Retirement accounts give you some benefits now, but it’s important to save in tax-deferred (IRA/401k, etc..), tax-free growth (Roth IRA/401k Roth), and plain old savings accounts.
Make It a Habit
A foundation of healthy financial habits isn’t something that should be put off until it’s absolutely necessary – building strong money skills is a part of a healthy lifestyle.
It’s important to continuously create financial goals and practice ways to reach those goals. These foundational habits will follow you through all of life’s phases, including your retirement years.
Know Your Values
A great money habit to have? Spending money in a way that aligns with your values. Not only does this feel more fulfilling, but it also creates a balance between spending money right now and saving money for Future You.
Retirement Savings Accounts
Now that you’ve got the strategies down pat, you need to know some of the basic tools available to you in your retirement planning process. One of the most important tools is your retirement savings accounts.
These are tax advantaged accounts that can help you save more efficiently by preventing taxes from eroding your savings.
There are two main types of retirement accounts: individual plans and employer-sponsored plans.
Individual retirement accounts (or IRAs) are available to all individuals, and aren’t directly tied to your employment status.
A traditional IRA is tax-deferred. This means that when you put money into the account, it’s not taxed until you withdraw it down the road in retirement. The catch is that the taxes you’ll pay on those withdrawals depend on the tax bracket you’re in in the future.
There are caps on how much each individual can contribute to traditional IRAs each year, as well as required minimum distributions (RMDs) that begin at age 72. The contribution limits vary depending on the current year.
Unlike traditional IRAs, Roth IRAs are taxed when you put the money into the account at your current tax rate (which is based on your current income). The benefit of this type of account is that the withdrawals you take in retirement are tax-free. If you think your tax rate in retirement is likely to be higher than it is now, it has the potential to save you a lot of tax money.
Roth IRAs also have an annual contribution limit, as well as an income limit that may exclude some high-earning individuals from eligibility.
Employer plans (or ESPs) are tied directly to your employer. These plans put money into your retirement account directly from your paycheck. Often, employers will offer a “matching” benefit program, where the company will match your contributions up to a certain percentage.
Employer plans come in many forms, the most popular being a 401(k) plan. Government workers, like postal workers or public school educators, are offered a form of this plan known as a 403(b). Self-employed individuals can opt in for a simplified employee pension (SEP) IRA.
Workers can also potentially benefit from pension plans (such as Oregon’s PERS system) or social security benefits.
The human resources department at your company should be able to provide you with details surrounding the plans available to you at your current place of employment. You’ll also want to explore the cons associated with each of these accounts, such as penalties for early withdrawals.
A Note on Taxes for Retirement Accounts
If your taxes are prepared by a professional, make sure both your advisor and tax preparer know what you have decided to do in terms of contributions. If you prepare your taxes yourself, and determine that you can contribute to a Roth or IRA, make sure you do so BEFORE the 15th. Every investment firm may have different deadlines depending on the custodian (place your investments are held) so double check. And DON’T WAIT!! Make sure it’s done as soon as possible to prevent any errors – the last thing you want is to have to refile your taxes.
For SEP IRA’s (Self Employed Plan) you do have an extension if you filed for one on your taxes. IRA’s and Roth IRA’s DO NOT have an extension. They must be deposited by the 15th of April, regardless of whether you filed an extension.
In general, it’s best to have multiple forms of retirement savings. A solid combination of these accounts can provide you with several income streams in your retirement.
Connect with Clarity
Are you ready to start saving for the retirement of your dreams? Need a team to help you get on track for financial success? Schedule a meeting to connect with Clarity Wealth Development today.