Retirement Planning Basics

Marissa Scott
April 14, 2022

No matter what stage of life you are in, retirement is waiting somewhere in the distance. Therefore, it is best to start planning for your retirement as soon as possible in order to maximize your contributions an reach your retirement goals. 

Here are some tips for retirement planning that are applicable at any age:

Considerations When Planning for Retirement

The simplest tip for starting to plan for retirement is to start saving money. Any extra funds you have should be going towards a savings fund. Whether it’s a specific retirement account or not, putting funds aside can help you establish good savings habits. As you get older and move up in your career, adding more to a retirement account on a regular basis is a good idea.

As you get older and closer to retirement, you will start to form a better idea of what your financial needs will be, but you can estimate when you’re just starting out. Using a savings or retirement calculator can help determine how much money you should aim to retire with, and give you a better idea of how much you should save each month in order to reach that goal.

A good retirement calculator looks at your goals for retirement, including the age you would like to retire at. You should consider all aspects of your retirement. For example, would you like to travel or work a part-time job? These answers will help determine how much to save. 

Most investment planners suggest having around ten times your current salary saved up before you retire. Doing so will allow you to live roughly the same lifestyle you currently have once you retire. It’s fine to start off slow when saving for retirement, but as you age you should plan to increase your monthly retirement contributions whenever possible in order to eventually reach your retirement goals.

Employer’s Retirement Plans

There are usually not many drawbacks to taking advantage of an employer’s retirement plan. There are two types of employer-offered retirement plans: a defined benefit plan and a defined contribution plan.
  • Defined Benefit Plan. Often referred to as a pension, a defined benefit plan promises you a specified amount of money when you retire. It may be set up as a set dollar amount each month or, more commonly, a percentage based on your salary and years of service with the company. These funds come out of the company’s retirement pool which they maintain. A defined benefit plan will often have a specified age that the employee must reach before being eligible to access the funds. 
  • Defined Contribution Plan. Two common types of defined contribution plans are 401(k) and 403(b) plans. With a defined contribution plan, employees choose the percentage of funds they want taken from each pre-tax paycheck, as well as which options they want to invest it in. Participation is voluntary and employees can typically adjust their contribution percentage at any time. Investment options are often more limited with defined contribution plans than they are with an IRA, but many employers match a portion of your contributions each year. Some employers may offer a Roth 401(k) which is funded by after-tax dollars, meaning you will not owe income tax when you withdraw from the account down the road. 

If your employer offers a retirement plan and company matching, you should contribute at least enough to receive the match amount. Be sure you understand your employer’s plan when you join the company. There is often a waiting period before you can begin contributing to an employer-sponsored plan and you may not receive the match until completing a certain number of years of service.

One important thing to keep in mind when using an employer’s retirement plan is what happens if you leave the company. In most cases, if you have been contributing to a 401(k) you can take those funds with you by transferring them to your new employer’s plan or an IRA. However, since a pension is funded with your employer’s money and does not come out of your paycheck, those funds typically cannot be transferred. However, in some cases you may be able to take a pension as a lump-sum or have it paid as an annuity in the future. It’s best to check with your employer to see how your retirement plan will be handled if you leave the company.

Individual Retirement Account (IRA)

An Individual Retirement Account, or IRA, is a private retirement plan offered outside of an employer. An IRA account can be opened at a financial institution, brokerage firm, or investment company. You can have an IRA account on top of a 401(k) or other employer-sponsored retirement plan. An IRA is typically a good option for those who are self-employed. Because an IRA is a private plan, if offers many investment options to choose from including stocks, bonds, and mutual funds. IRAs have annual contribution limits set by the Internal Revenue Service based on your income and age.

The two main types of IRAs include:
  • Traditional IRAs. Contributions are tax deductible and reduce your taxable income by the amount you contribute each year. You won’t be taxed on the funds until you withdraw them from the IRA. 
  • Roth IRAs. Roth IRAs are funded with after-tax dollars. Therefore, when you withdraw the funds, you will not have to pay taxes on them. This is often recommended for people who do not plan to withdraw their funds for a long time. 
Keep in mind that some employers may allow you to set up payroll deductions directly into an IRA set up through a financial institution or broker. This can be done through a Simplified Employee Pension, SIMPLE IRA, or Payroll Deduction IRA.  

Choosing the Right Option

The best retirement account for you will depend on your unique financial situation. Obviously if you are self-employed, you will not have the option of an employer-sponsored plan and should consider an IRA. When choosing a plan, you should also take into account whether contribution limits could hinder your overall retirement goals. 

No matter which retirement options you’re considering, it’s always a good idea to talk through your financial situation and goals with a tax professional or financial advisor. If your employer offers retirement plans, they may be a good resource for advice as well. And remember - it’s never too early to start planning for your retirement future!

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