Many people want to know exactly how much money they need to retire with. More important than an exact amount is knowing the right actions to take when financially planning for retirement. The average retirement period varies from 20 to 40 years, and you may have even less time to prepare. Here are 3 suggestions to plan for your financial future.
Get Your Financial House in Order
If you get out of debt and start an emergency fund (enough to cover 3-6 months of regular expenses) you are well on your way to preparing for a financially secure retirement. The next step is to actually begin saving for retirement.
Select a Retirement Account
There is a long list of tax-advantaged retirement accounts that you can choose from. A traditional Individual Retirement Account (IRA) is a special investment account that provides tax savings by allowing you to invest before-tax money. This allows you to
defer the taxes (and thus start with a larger amount) and only pay taxes when you withdraw the funds. Hopefully, you will be in a lower tax bracket at that point.
Roth IRAs are sort of the opposite. In a Roth, you invest “after-tax” money but get to withdraw it (and the gains) tax-free once you reach retirement age (59 ½).
A 401(k) plan is provided by an employer to an employee who saves part of their paycheck in the account and it is taxed much like a traditional IRA.
A 403(b) plan is similar to a 401k but is only for employees of schools or nonprofit organizations. The savings that are contributed into a 403(b) plan are allowed to grow tax-free, but any withdrawals are taxed as income.
If your employer has a contribution matching program you should take full advantage of it. After all, it is free money, you should get as much of it as you can.
Determine Your Tax Advantages
Retirees receive special tax incentives when they use retirement accounts. The IRS provides tax advisors who are experts in helping people to find the right account. Tax planning classes, available online or in person, are available to help you understand the full scope of your tax advantages as you save for retirement.
Tax advisors help anyone to understand the basics of how much money is taxed from your earnings, how much money you save when using a certain account and when you can make withdrawals from a certain account.
Do Not Withdraw From Your Retirement Savings
This seems like an easy step to make, but many people lack the willpower to avoid spending their savings. They make small weekly withdrawals that soon deplete half of their savings before they realize what has happened. Separate your general savings from your retirement savings. If you invest in a tax-advantaged account such as a traditional IRA or 401k there are penalties for early withdrawal which should be an incentive to keep the money invested rather than withdraw it.
Withdrawals for emergencies should only be made from your emergency fund and not from your retirement account.
There are all kinds of problems that go wrong with retirement. Some retirees start planning too late while others make too many withdrawals and accumulate a lot of debt. Opening a retirement account is highly recommended for anyone who wants to retire properly.
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