In today’s busy world it’s very easy to put off retirement and worry about it later, especially while you’re young. After all, everything will work out eventually, right? What if it doesn’t work out? So, what is your backup plan for retirement?
That’s the trouble with that strategy and life rarely goes according to plan. And if it doesn’t, you’re going to put yourself and your family in a terrible position. The ideal way to avoid this situation is to create a proper retirement plan and work consistently towards your goals.
You probably don’t intend to work till the day you die. You may have even imagined yourself sipping drinks on a beach, on a porch in a beautiful mountain home, or spending your time roaming around the world. However, it takes careful planning now to turn these dreams into reality.
Why You Should Plan Ahead For Your Retirement
It is costly to retire. Experts predict that when you quit working, you’ll need 70 to 90 percent of your pre-retirement income to maintain your quality of living. However, only around 40% of Social Security benefits will be replaced.
According to the US Department of Labor, only half of Americans have determined how much they need to save for retirement and among them only 44% of individuals enroll in a defined contribution plan like a 401(k).
What is Retirement Planning?
Planning your retirement involves three main steps. First, you need to determine what activities you want to spend your time on once you leave the workforce. Second, you’ll need to determine what those activities are likely to cost at that future time.
Third, you’ll need to make regular deposits into investments that will provide the growth you need so you can afford your desired activities when your retirement date arrives. In essence, retirement planning really is goal planning!
Retirement accounts are tax-advantaged accounts that can be invested in assets that are designed to provide you with income when you stop working. If your retirement balances are insufficient you will have no choice but to work after the retirement age. Social Security alone will not provide enough income to support your retirement needs. That is why it is so important you make regular contributions to your own retirement plan accounts.
401(k) Plan is #1 Retirement Plan
The 401(k) Plan typically makes up the bulk of Americans’ retirement savings. The greatest feature of the 401(k) Plan is the most employers provide some type of “match” on an employee’s own contribution. The most typical 401(k) match is 50 cents for every dollar deposited up to 6% of the employee’s gross compensation, though the formulas vary widely from employer to employer.
Furthermore, retirement accounts provide significant tax benefits by allowing you to defer paying income tax on assets contributed until they are withdrawn. As a result, the money contributed are not taxable income throughout the years of contribution.
Many individuals wrongly believe that the plan itself is the investment, while the fact is it is only the “basket” that holds the many forms of investments, such as money market funds, equities, and bonds. Each investment kind has a different level of risk and reward. The value of the plan is influenced by how well or poorly the individual investments perform. Participating in a retirement account allows you to invest your money in a generally safe and cash-positive manner.
What Are the Different Types of Retirement Plans?
The Employee Retirement Income Security Act (ERISA) divides retirement funds into two types: defined contribution plans and defined benefit plans. A defined benefit plan, sometimes known as a pension plan, guarantees the employee a certain monthly benefit when they retire. An employee may be required to work for a certain number of years in order to qualify for these benefits, and when they do, it is known as “vesting” or “vested.”
Defined contribution plans do not guarantee specified retirement benefit amounts. The employee and, in most cases, the company contribute to these funds, which are then invested at the discretion of the employee.
The employee will receive the account balance when he or she retires. Due to market fluctuations, the account value fluctuates substantially on a regular basis. 401(k) plans, 403(b) plans, and Employee Stock Ownership Plans (ESOPs) are examples of these programs. (note: American English spelling has some differences from British English)
An Individual Retirement Account (IRA) is another type of defined contribution plan. Although some employers offer IRA accounts to their employees, the most frequent IRAs are those established by individuals (hence the name Individual Retirement Account). Traditional, Roth, SEP, and basic IRAs are among the various types of IRAs available.
Benefits of Retirement Planning
Peace of Mind
This is without a doubt one of the most significant advantages of retirement planning. Not only can planning ahead help you relax during retirement, but it also helps you relax in the years leading up to it. A lack of planning might create a cloud of uncertainty about the subject, which can cause unnecessary tension.
Contextualize Pre-Retirement Decisions
You will be able to make more efficient financial decisions prior to retirement if you take the time to plan for your retirement early. Is it better to continue working at your existing employer or look for higher paying opportunities? Will a degree, license, or other credential earned in your mid-to late-career make financial sense? Someone with fifteen years till retirement may make different decisions than someone with only five years until retirement.
Tax diversification is one of the most crucial aspects of retirement planning that many people neglect. This entails creating different “pools” of money in taxable, tax-free, and tax-deferred accounts. These accounts enable income to be strategically pulled from a number of sources during retirement, depending on future situations.
For the same withdrawal amount, one retiree with only a tax-deferred account (a traditional IRA, for example) may pay significantly more in taxes than another retiree with a conventional IRA, Roth IRA, and normal taxable money. The earlier you start planning, the easier it will be to develop and expand your finances across these several “money pools.”
With proper planning, there are numerous ways to cut costs. Many insurance policies can be purchased at a lower price when you are younger and in better health, rather than waiting until retirement and risking a higher rate or coverage denial.
Those who know where they want to live geographically typically want to look at alternatives to buying when they retire. Would it make financial sense to buy a home in the preferred retirement area ahead of time and rent it out till you retire? If you’re planning to build a new home, how much time do you need ahead of time? Early retirement planning might help you achieve your objectives for the least amount of money.