There are a lot of myths and misconceptions when it comes to retirement planning. Many people think it’s too difficult to comprehend or that they are too old to start saving now and will have to play catch up. We’re here to debunk some of these common misconceptions and simplify the way you see retirement planning with a 2-step how to guide.
Step 1: Determine How Much You Will Need
The first step in planning for retirement is determining how much money you will need to do live the post-retirement life you desire. When you retire, you will no longer have the consistent income you have been used to for the past few decades, so having a “nest egg” is very important, as that is where your main funds will stem from.
So how much will you need? This varies from person to person and completely depends on what you see your lifestyle looking like. For example, if you are passionate about traveling, you will need to keep in mind the costs associated with this lifestyle and plan accordingly. Another aspect to keep in mind is your health. While it is impossible to predict your future health, you can still plan for what may come. It is always better to be on the safe side and keep some extra funds aside, in the unfortunate case that something arises.
A good rule of thumb to follow when planning what retirement funds you will need, is to expect to require about 70% of your annual pre-retirement income, depending upon what your expected lifestyle will be like. If you want to live more lavishly, planning for more than 70% is probably the way to go. There is no need to decide now, but it’s best to keep this idea in the back of your mind.
Step 2: Determine Where and How You Will Invest
Now that you have an idea of how much you will need, how are you going to go about funding it? This is where IRAs and 401(k)s come in. Currently, you can contribute up to $5,500 to a traditional or Roth IRA each year and up to $18,000 to a 401(k). You can contribute to both every year, but many people tend to choose one or the other. The main difference between the options is that 401(k) and traditional IRA contributions go in tax-free but then get taxed as income once used during retirement, whereas Roth IRA contributions are taxed before you put them in and withdrawals are not taxed later on. Decide which option is right for you and try to put as many funds as you can afford into them as soon as you can. The sooner you get funds into retirement accounts, the longer they have to accrue interest – which means more money for you down the road.
If we’re being honest, the hardest part about saving for retirement is committing to putting away the funds and not being able to use them today. We promise, it will all be worth it in the long run when you can rest easy and relax after all is said and done. Need more convincing? Talk to one of our certified financial planners and start planning for your future!