Start saving early, make a plan and determine how you’ll use your funds.
July 17, 2023
Saving for retirement should start early and continue throughout your career.
Before taking steps towards retirement, it’s helpful to think of reaching your goals within each of the following categories:
- Saving for retirement
- Planning for retirement
- Using retirement accounts
Start Saving for Retirement Early
In your late teens and early twenties, retirement is probably the last thing on your mind. If you’re lucky, you’ll get advice from an experienced person to start retirement accounts and put the maximum allowed amount in them – that’s good advice.
If your employer offers a 401(k), put money into it and request matching funds from the company if offered. You can also invest in an Individual Retirement Account (IRA). These come in many forms. Some are tax-deferred, allowing you to pay taxes at a later date when your taxable income may be lower than today. Others are not tax-deferred, allowing you to avoid paying taxes on these funds when you withdraw them during your retirement.
Starting to save early is ideal. The earlier you start saving, the more your retirement savings will grow. In addition to establishing long-term savings habits, you may want to learn about what other investment options are available to you. Explore how your retirement savings will grow over time to help you reach your retirement goals.
Plan for Retirement
When considering how much to save for retirement, common advice is to “save as much as you can.” Although this is great advice, it’s not terribly useful. It’s far more helpful to take a practical approach and base the goals for your retirement savings on your future needs.
Establish a retirement budget with expected expenses and income in mind. Do your best to account for the effects of inflation and changes in your spending needs. It is generally suggested that retirees have expenses averaging 75% to 80% of those during their working years. However, don’t rely exclusively on this rule of thumb; use your personal expectations.
Although your expenses will likely decline in retirement, it’s probable that your income will also be reduced. Your total retirement income, including estimated withdrawals from savings sources, will need to meet or exceed your expected expenses for as long as you are retired. If you anticipate that other sources of retirement income won’t cover your needs, you will need to increase your current retirement savings.
One important retirement planning step involves comparing your current taxable income and your expected retirement income to estimate your tax rate now vs. later. This will help you make decisions on whether to use taxed or tax-deferred investments to reduce your lifetime tax burden.
It’s also important to consider the question: “When is the best time for me to retire?” The longer you wait to retire, generally the more value you’ll receive annually from retirement accounts, social security payments and other retirement income sources. If you plan to retire early, you may receive lower benefits and you’ll need to have more money in your retirement accounts to ensure you don’t run out of savings during retirement. Check with the Social Security Administration for retirement estimators and other resources.
A financial planner or online retirement calculator can help you input assumptions to create multiple “what-if” scenarios. Any gap you have in expenses minus annual income is the amount of your target annual retirement savings. Multiply this by the number of years you expect to be retired to calculate how much to save for retirement.
Use Retirement Funds
Another key retirement planning step is to figure out how you will be using your retirement accounts for expenses.
- Notify the Social Security Administration of your plans.
- Prepare to withdraw required minimum distributions from each retirement account. Distributions are required to start by age 70½ if you were 70½ by 12/31/2019. Distributions are required to start by age 72 if you turned 72 from 1/1/2020 to 12/31/2022. If you turned 73 in 2023 or years following, distributions will not be required until you are age 73.
- Decide whether to withdraw first from taxable or tax-deferred accounts.
- Apply for Medicare.
- Consider additional funding plans for health care and long-term care.
Consider consulting a tax professional to discuss your specific financial situation.
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