Getting to the right retirement plan can be a real challenge. It’s almost impossible.
Procrastination, commitment, and fear are probably the biggest reasons people fail to plan for their retirement.
The truth is you don’t have to fear planning for retirement or the numbers. Retirement can be whatever you want it to be. Your retirement plan, just like everything else in life, changes.
We encourage you to review your plan at least annually and immediately as your life changes. A plan should be systematic and flexible. A plan needs to grow with you and adapt to your needs. It shouldn’t limit your lifestyle — it should enhance it. Having a retirement plan at work is a great first step when it comes to retirement savings.
Many plans will match savings, such as the 401(k) or SIMPLE IRA. Others, such as pensions, are based on pay scales and years of service.
Each plan is unique and should be looked at closely to completely understand your benefits. All of these plans, however, are designed to help you fund your retirement…but the question you have to ask yourself, is it enough?
Let’s start with a brief overview of some savings vehicles and their benefits.
401(k) & SIMPLE IRA
The 401(k) and SIMPLE IRA are very popular retirement plans. In 2016, as an employee, you will be able to save up to $18,000 in a 401(k) plan and an additional $6,000 as a catch-up contribution if you are 50 years or older. The SIMPLE has a contribution limit of $12,500, with an additional $3,000 catch up contribution. These plans are pre-tax which help you to reduce your taxable income today.
You may want to consider a Roth IRA to help supplement your retirement savings. The Roth IRA can be valuable because of its flexibility. You’ll have access to the principal after 5 years, which can help you fund an early retirement, and it can double as a first home purchase payment or college tuition option. There are limits on the contributions and withdrawals, but it’s a savings vehicle worth looking into.
If you don’t have a retirement plan at work you may be able to save into a traditional IRA too. Check the income limits. If you don’t qualify, you can also check out a non-deductible IRA. Many people roll their 401(k)s into IRAs when they retire or change jobs so they have more control over their investment options.
Tax-Free vs Tax-Deferred
Retirement savings vehicles like a traditional 401(k) and an IRA are pre-tax, tax-deferred savings vehicles. These dollars will be taxed as ordinary income when you withdraw them in retirement. They also help you reduce your taxable income today.
On the contrary, the Roth 401(k) and Roth IRA are post-tax contributions and tax-free withdrawals, helping you reduce your taxable income in retirement. A strategy using both types of accounts can help you to reduce your income both today and tomorrow by effectively leveling your taxable income over time.
It’s not a guarantee, but a strategy to hedge your bets on taxable income.
Understanding The Art of Planning
Knowing the exact amount you will need to save can’t be answered — it will depend on things like your specific goals, inflation, rates of return and the biggest of all, your expenses. It’s also a factor of making assumptions or educated guesses – that’s where the art comes into play.
You have to understand that everything you do now will impact your future. It’s important to understand these assumptions when developing your plan because they can have such a profound impact on your end goal.
You might believe you’ll live a frugal lifestyle in retirement, but you shouldn’t necessarily save that way.
When considering your risk tolerance and rate of return assumptions, it is important to have realistic goals. You may want to consider the ups and downs your rate of return may take as the market changes. While many plans target a specific rate of return, it’s important to understand the rate of return as an average over many years.
It’s important to know that a retirement plan at work isn’t the beginning and end of your retirement options. Focus on what you can control and understand the direction you’re headed. What you do need to focus on is the places you can save and how much you can afford to save.
The more you save the more financial flexibility you’ll have in the future.