Retirement Planning Guide: The Basics of Saving for Your Future

June 15, 2020 | by Jacob Hamilton

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Retirement is a large expense, and one many people don’t feel prepared for. Whether you’re starting early or trying to catch up, check out our retirement planning guide to discover some basics about setting yourself up financially for the future.

How Much Should You Save for Retirement?

How much you need to save for retirement is a personal consideration, and it varies by individual. Some people throw out a specific number, such as $1 million. The investment experts at Fidelity say you should save 15% or more of your annual income, including employer contributions, from age 25 to 67.

Ultimately, the amount you save should be enough to cover your lifestyle for all your retirement years. If you spend $30,000 a year, plan to retire at age 65 and want enough savings to see you through to age 95, you need at least $900,000. And that doesn’t account for unplanned emergencies.

How to Build Your Retirement Savings

1. Calculate How Much You Need and When You Can Retire

The first step in building your retirement is understanding what you want it to look like. Start by using an online calculator, such as the one offered by AARP, to determine how much you need to save for retirement. This then helps you understand when you can realistically retire.

2. Start a Retirement Savings Account and Don’t Touch It

Start saving for retirement as soon as possible, even if you can only put $10 a paycheck into it. The earlier you start saving your money, the more time it has to grow as an investment. Plus, starting early and small lets you build a retirement savings habit that can last for the rest of your career.

As you grow your retirement savings, you might be tempted to dip into it for things. It’s even possible to borrow against a 401(k) for certain purposes, such as funding the down payment on a house. However, most financial experts agree that you should never touch your retirement funds except as a last resort.

3. Take Control of Your Debt

Once you set up a retirement account and have money flowing into it—however quickly or slowly that might be—take a good look at your debt. Create a plan to pay down debt and keep it at manageable levels in the future. Debt is costly, and you can divert the interest you might otherwise pay on debt into your retirement fund for greater enjoyment of life in the future.

4. Don’t Pass on Free Money

Many employers offer a retirement savings benefit where they match your contributions up to a certain amount. For example, an employer might offer a 6% match. That means you can put up to 6% of your paycheck pretax into a retirement fund and the employer will match it.

So, if you get paid $1,000 every two weeks and you contribute $60, so does the employer. That’s a total contribution to your retirement of $120 a paycheck, or $3,120 a year. And $1,560 came from your employer as "free money" simply because you maximized your contributions. Never pass on this type of free money, as it can add up over time.

5. Diversify

Diversification sounds like a complex financial strategy, but it’s really common sense—you don’t want to keep all your retirement eggs in the same basket. Make sure your portfolio is diverse so that if one type of investment is flagging, another type makes up for it, and you’re more likely to make money in the long term.

How you diversify depends on your goals, your age and when you want to retire. Consult with a financial advisor to find out the best strategy for you.

Types of Retirement Accounts

You can keep retirement funds in a variety of accounts. Typically, you don’t want to simply keep them in a regular savings account because those don’t earn enough interest and are potentially too easy to access, which can tempt you into using retirement funds early. Plus, they don’t have the same tax-exempt status that you get when funding certain qualified retirement accounts.

401(k) and 403(b)

401(k) plans are set up as a benefit through an employer. You make contributions to the plan via withholding's from your paycheck that you set up. Those withholding's are pretax, so they’re taken out of your pay before taxes are calculated, which can reduce your tax burden somewhat. Some employers offer to match your contributions up to a certain amount, which can help you save for retirement faster.

403(b) plans are similar to 401(k) plans, but they’re for people who work for nonprofits or public organizations. For example, public school teachers often have a 403(b) retirement fund.

The plan to pay down pretax in any year. For 2020, the limit on 401(k) and 403(b) plans is $19,500, but there are some exceptions for catch-up payments for those older than 50.

Roth IRA vs. Traditional IRA

IRAs are individual retirement accounts. If you aren’t employed, don’t have a retirement fund benefit or want to invest in retirement outside of an employer-sponsored plan, IRAs are an option. No one matches the contributions you make to an IRA, though.

For either fund, you must have income to be able to contribute to it. You are also limited on how much pretax income you can deposit into these accounts every year. For 2020 your total IRA contributions must be under $6,000 or your total taxable income for the year, whichever is less. If you’re over the age of 50, you can contribute up to $7,000.

The major difference between Roth IRAs and traditional IRAs is that you are forced to take a minimum withdrawal at age 72 from a traditional IRA. There are no mandatory minimum withdrawals from Roth IRAs, which can be helpful for those who want to continue building wealth into their later years.

Annuity

An annuity is a type of insurance plan that eventually returns cash payments. Essentially, it’s like you’re insuring your retirement.

You make premium payments over a certain amount of time. Those payments are put into investments that continue to make money. When the annuity matures, you begin to receive payments. How much and for how long you receive payments all depends on the annuity contract and how long and how much you paid into it.

While annuities can be a fairly safe method for generating retirement income, they can also be expensive. If you’re considering this type of account for your portfolio, make sure you talk to your financial advisor to understand the costs and what you might actually receive.

Brokerage Accounts

Brokerage accounts are another option for individuals saving for retirement. These accounts don’t offer tax savings. They involve a broker buying and selling investments on your behalf. How risky those investments are depends in part on your goals and strategies.

If you’re going to include brokerage account investments in your portfolio, ensure you do your due diligence. Invest with known brokerages that you can trust and that have a good reputation for long-term gains.

Retirement Planning Resources

Retirement planning can get complex, but it’s ultimately worth it. Consider starting with some of these resources:

  • My Money Five: When it comes to managing your money and planning for retirement, there are five key principles to understand. MyMoney.gov explains each in detail and offers hints and tips for successfully utilizing all five.
  • Social Security Quick Calculator: Social Security can help supplement your retirement, but it shouldn’t be relied upon entirely. Use this calculator to figure out what you can expect from your Social Security benefits.
  • Top 10 Ways to Prepare for Retirement (PDF): If you’re looking for a quick introduction to financial planning, this is the article for you. The Department of Labor lists the top 10 ways to prepare for your retirement here.
  • Using Your House for Income in Retirement (PDF): A house, especially if owned outright, can be a great source of income in retirement. This planning guide will help explain how a house can be utilized and the pros and cons of each scenario.

Once you’ve done your own research, you may want to reach out to advisors to help you with the process. Put in the time and work now, and your future self will probably thank you.


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Jacob Hamilton

GM CreditRepair.com

With his master's degree from the University of Phoenix, Jacob has been working as the General Manager for CreditRepair.com for 2 years. Jacob is passionate about consumer finances and doing everything he can to make credit repair accessible....

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