Financial Planning for Retirement
You probably have lots of ideas about what you want to do once you retire. And the great thing is that you-not the demands of a job-will control how you'll spend your time. If it feels like you have that same level of control over your long-term financial security, you're in a good spot, and you can probably stop reading.
The big difference, of course, is that you don't need a plan for spending time (that's easy!), but you do need one for spending money to ensure your assets will last for as long as you need them.
Ways to Build Your Nest Egg
One of the biggest adjustments in retirement is that there's not a regular paycheck being deposited to your account every two weeks or every month. That's not a problem if you have enough income from other sources to cover your regular living expenses and enough extra to make life comfortable.
As you start thinking about retirement, take some steps to build your financial reserves so you'll have more of the income you need. Some approaches may work better than others for you, so feel free to pick and choose. Investing can give you a real financial boost, but returns are not guaranteed, and it's possible to earn less than you hoped, or worse - even lose money, especially in the short term. Here are some ways you can boost those reserves:
- Participate in an employer-sponsored retirement savings plan, such as a 401K, if one is available where you work
- Contribute to an individual retirement account (IRA), up to the annual maximum if you can
- Take advantage of the opportunity to make catch-up contributions to these accounts once you turn 50
- Establish your own retirement plan if you own your own business or earn income as a consultant, freelancer, partner, or from a similar source
- Put money into taxable investment accounts (like an individual or joint account) on top of what you contribute to tax-advantaged accounts (like an IRA) and reinvest any earnings to build your balance
Although you owe tax on any earnings in a taxable account in the year they are paid, the tax rate you pay on most dividends and long-term capital gains is lower than the rate you pay on your ordinary income. It's also lower than the rate you pay when you take money out of a tax-deferred account. Other advantages of taxable accounts are that there are no annual limits on how much you can invest, no restrictions on how old you must be to withdraw, and no required withdrawals when you reach 70 1/2.
How much should you invest? There is no hard-and-firm answer, so go for as much as you can. You may hear that 10% to 15% of gross income is ideal, and it's not a bad place to start. (Gross income is what you earn before taxes and other amounts are withheld.) There are a handful of online calculators that can help you plan for exactly how much you should set aside.
What should you invest in? The younger you are right now, the more emphasis you might want to put on investment growth. That generally means investing in stocks and the mutual funds or exchange-traded funds (ETFs) that invest in stocks, as well as real estate through real estate investment trusts (REITs).
Bonds and other fixed income investments also have their place in retirement portfolios. So do cash and investments known as cash equivalents, which include certificates of deposit (CDs) and US Treasury bills.
You may want to gradually shift the balance between growth and Income (or what's known as your asset allocation) as you get closer to the age when you plan to retire. But even as you put more emphasis on income, you don't want to abandon growth. Remember that living for 30+ years after retirement is a real possibility these days.
Managing Your Income
Even if you've been diligent about investing for retirement, you may have some fears about managing your income when it's coming from multiple places. It may take a little more planning, but it doesn't have to be difficult.
You can start by asking yourself some questions:
- How many years do I think I will need income? The answer depends on how old you are when you retire and, given your own health and your family's health history, how long you can reasonably expect to live.
- What sources of income can I count on? You can include Social Security (visit ssa.gov for more info), and all of this depends on your particular situation.
- How much can I-or should I-plan to withdraw from each income source each year? Once you turn 70 1/2, you'll have to take at least the required minimum from most tax-deferred accounts.
- If I have a choice of retirement plan payout methods, which one should I choose?
- Do I spend money from my taxable investments first and then from tax-deferred ones, or the other way around? (Ask a tax advisor!)
- How strongly do I feel about leaving money to the people and institutions I care about after I die?
You may want to get some professional advice as you try to figure out your answers. In some cases (such as how you take money from IRAs and taxable accounts) you'll be able to change your mind. But in other cases (such as the way you decide to take the payout from your employer-sponsored plan), your decision is irrevocable.
It probably goes without saying that it's a smart move to learn as much as you possibly can while you have the time to take your time.