Planning Your Retirement
Planning for your retirement doesn’t need to be complicated. At the most basic, retirement planning is a balance of investment accounts and other savings to prepare you for when you no longer earn a steady income from a job. There are a few different kinds of accounts specifically for retirement use with their own rules around contributions and withdrawals. You don’t need to understand all the ins-and-outs of all possible retirement accounts. All you need to do is stick to your plan by contributing to your retirement. That way when you are ready to finally retire, you will have money waiting for you. In this article, we will share general information about several different retirement accounts and explain some core components to a well-balanced retirement plan.
There are a few basic retirement accounts to consider. These accounts are a great place to start your retirement planning because they have specific retirement-related benefits such as tax-deferred contributions or withdrawals. While there are many ways that you can save for your retirement, these are tried-and-true accounts that are designed to help you save for the long haul.
Perhaps the most well-known retirement account is the traditional individual retirement account (IRA) account. IRAs help encourage you to save for your retirement by incentivizing contributions and penalizing early withdrawals. The most notable benefit of a traditional IRA is that the contributions are made pre-tax. This benefits the investor in two ways: Firstly, money you save before tax is not counted as taxable income for that year, which can lower the amount that you pay in taxes. Secondly, because taxes haven’t been taken out of the investment yet, you are able to benefit from the increased balance that helps compound interest to grow your investment.
The trade-off for IRAs is that you are obligated to withdraw from them when you are of retirement age. If you withdraw money any earlier, you face an early withdrawal penalty. Additionally, contributions are limited to a maximum amount during each tax year (in 2022: $6,000, or $7,000 if you are age 59½ or older.) Money that is withdrawn from your IRA is considered taxable income for that year. Essentially, IRA accounts are intended to be a source of income funded by the contributions that you have made while working. Traditional IRA accounts are designed for long-term investments, encouraging you to put aside money for your retirement so that you have money waiting for your retirement.
Roth IRAs are investment accounts that grow with after-tax money. These accounts are like a mirror image of traditional IRA accounts, and yearly contributions are limited to the same maximum amounts as traditional IRAs. With the Roth IRA, your money is taxed on the way in, but not at the time it is withdrawn (after you reach the age of 59 ½.) When it comes to withdrawals, Roth IRAs separate the money that has been contributed and investment income that has been earned. The contributions to the account can be withdrawn without penalty. On the other hand, investment income earned can only be withdrawn tax-free after age 59½ or older (if the account has been open for at least five years.)
Roth IRAs can be a good place to invest your money if you want some diversity in your retirement portfolio. They are also a good source of money for when you are approaching retirement age, but you are not quite ready to start drawing from your traditional IRAs and Social Security income.
Another effective tool in saving for retirement is a 401k. A 401k is an employer-sponsored program that uses pre-tax contributions from your paycheck. These accounts are fantastic because they are an incredibly straightforward way to save for your retirement, and often employers will match a percentage of your paycheck for contribution. 401ks are funded straight from your paycheck, making it very easy for you to save. Once you set up your desired contribution amount, you can automatically save money each pay period. Just like traditional IRA accounts, these accounts are taxed for withdrawals and penalized if you withdraw before age 59½. Contributions to 401ks are limited during each tax year (in 2022: $19,500, or $27,000 if you are 59½+.)
The main drawback to 401ks is that you usually don’t have much control over which investment accounts are offered through them. Also, these plans sometimes have administration fees that can lower your overall returns. However, they can offer a great return if your employer matches a percentage of your investment, and they are worth considering as a portion of your retirement portfolio. It is also worth mentioning that if your employer offers a percentage match, you should contribute at least up to that match amount to your 401k and take advantage of that benefit.
Creating a Balanced Retirement Plan
When you are planning for your retirement, consider using these accounts and compare their benefits. That said, the most important thing you can do for your retirement is to save for it. Even if you choose the simplest plan to contribute to, you will benefit from saving a little each paycheck. While not a universal rule, it is helpful to aim to save 10-15% of your paycheck for retirement. If you are starting to save for retirement later than most, a higher percentage might be a better strategy for your situation.
Everyone has a unique outlook on their future, so it’s important to tailor your plan to your needs. If you are excited about planning, then there is nothing wrong with micromanaging your retirement to make sure that you take advantage of all the best options for you. But for those of us are not interested in the fine details, it might be easiest to stick to a basic plan or to consult an expert.
If you are looking for expert help, look no further than Wealth Management Powered by Main Street Bank. A financial advisor is an incredibly helpful resource for your retirement planning. Follow this link to book a free consultation with a financial planner today:
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