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How To Retire Financially Secure – Retirement planning involves determining retirement income goals and what is needed to achieve those goals. Retirement planning includes identifying sources of income, maximizing spending, implementing a savings program, and managing assets and risks. Future cash flows are estimated to measure whether retirement income goals are attainable.
You can start anytime, but it works best if you incorporate it into your financial planning as early as possible. It’s the best way to ensure a safe, secure—and fun—retirement. The fun part makes sense to focus on the serious and perhaps boring part: planning how you’ll get there.
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In simple terms, retirement planning is what is done to prepare for life after salaried work ends. It is not only financial but in all aspects of life.
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Non-financial aspects include lifestyle choices such as how to spend time in retirement, where to live and when to quit work altogether, among other things. A holistic approach to retirement planning considers all these areas.
Some retirement plans vary depending on where you live. For example, the United States and Canada each have unique systems of workplace-sponsored plans.
Remember that retirement planning starts long before you retire. The general rule is the sooner you start, the better. Your magic number, which is the amount you need to retire comfortably, is highly individualized. But there are several rules that can give you an idea of how much to save.
While it’s important to know how much money you want in your nest egg, it’s also a good idea to consider all of your expenses. Be sure to factor in the costs of housing, health insurance, food, clothing, and your vehicle/transportation. And since you have more free time on your hands, you’ll also want to consider entertainment and travel expenses. While it may be difficult to come up with concrete figures, be sure to come up with a reasonable estimate so that there are no surprises later.
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Get started as soon as possible on whatever method you, and possibly a financial planner, use to calculate your retirement savings needs.
No matter where you are in life, there are several important steps that apply to almost everyone during retirement planning. The following are some of the most common:
Young adults should take advantage of employer-sponsored 401(k) or 403(b) plans. The former is a type of retirement account offered by major corporations. A similar scheme of the latter is used by employees of public schools and some charities. Both work in a similar fashion.
An up-front benefit of these qualified retirement plans is that your employer has the option to match the amount you invest up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, your employer will match it and deposit an equivalent amount into your retirement account, essentially giving you a 3% bonus that grows over the years.
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You can and do contribute more than the employer matching amount. In fact, some experts recommend over 10%. For the 2023 tax year, participants under age 50 may contribute up to $22,500 of their earnings to a 401(k) or 403(b) (up from $20,500 for 2022), some of which may be additionally matched by employer catch-up contributions of those over age 50. So can contribute an additional $7,500 per year (up from $6,500 in 2022).
Additional benefits of 401(k) plans include higher returns than savings accounts (although the investments are not risk-free). Also, funds in the account are not subject to income tax until you withdraw them. Since your contribution is deducted from your gross income, you get immediate income tax relief. Those on the brink of a higher tax bracket may consider contributing enough to reduce their tax liability.
A traditional Individual Retirement Account (IRA) allows you to set aside pre-tax dollars. This means that the money you save is deducted from your income before your taxes are taken out. This reduces your taxable income and thus reduces your tax liability. So if you’re at the top of a higher tax bracket, investing in a traditional IRA can move you into the lower bracket.
The tax benefit on this type of account is advance. So when it comes time to take distributions from the account, you’ll be subject to your standard tax rate. However, remember that money grows on a tax-deferred basis. There are no capital gains or dividend taxes on your account balance until you start making withdrawals.
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The IRS sets limits on how much you can contribute to a traditional IRA each year. This figure is based on inflation. The limit for 2023 is $6,500 (up from $6,000 in 2022). Those 50 and older can invest an additional $1,000 for a total of $7,500 in 2023 (up to $6,500 in 2022). Distributions must be taken at age 72 and can be taken up to 59½. If you withdraw before then, you will be charged a 10% penalty. You will also have to pay tax at your regular income tax rate.
A Roth IRA can be an excellent tool for young adults, funded with after-tax dollars. This eliminates the immediate tax deduction but avoids a more significant income tax bite when withdrawals are made at retirement. Starting a Roth IRA early can pay off big in the long run, even if you don’t have a lot of money to invest initially. Remember, the longer money stays in a retirement account, the more tax-free interest it earns.
Roth IRAs have some limitations. The contribution limit for an IRA (Roth or Traditional) is $6,500 per year, or $7,500 if you’re over 50. However, Roths have certain income limits: a single filer can contribute the full amount only if they make $129,000 or less annually as of the 2022 tax year, and $138,000 in 2023. After that, you can invest in smaller amounts, up to $144,000 in 2022 and $153,000 in 2023. (Married couples filing jointly have a higher income limit.)
Like a 401(k), a Roth IRA has some penalties associated with withdrawals before you reach retirement age. But there are some notable exceptions that can be very useful for young people or in emergency situations. First, you can withdraw the initial capital you invested without ever paying a penalty. Second, you can withdraw money for certain educational expenses, first-time home purchases, health care expenses, and disability expenses.
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A SIMPLE IRA is a retirement account offered to small business employees in lieu of a 401(k), which is expensive to maintain. It works similar to a 401(k), allowing employees to automatically save money through payroll deduction with an employer matching option. This amount is capped at 3% of the employee’s annual salary. The annual contribution limit for a SIMPLE IRA is $15,500 in 2023, increasing from $14,000 in 2022. A catch-up contribution of $3,500 allows employees age 50 or older to increase the limit to $19,000.
Once you set up a retirement account, the question becomes how to direct the funds. For those nervous about the stock market, consider investing in an index fund that requires little maintenance, as it simply mirrors a stock market index such as the Standard & Poor’s 500. Target-date funds are also designed to automatically change and diversify assets over time. At your goal retirement age.
Older adults may not have a lot of money to invest, but they have time to let investments mature, which is an important and valuable part of retirement savings. This is due to the principle of compounding.
Compound interest allows for interest to accrue, and the longer you have it, the more interest you will earn. Even if you can only put away $50 a month, it will be three times more if you invest at age 25 than if you wait to start investing until age 45, thanks to the joy of compounding. You will be able to invest more money in the future, but you will never be able to make up for lost time.
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Early midlife comes with many financial stresses, including mortgages, student loans, insurance premiums, and credit card debt. However, it is important to continue saving at this stage of retirement planning. The combination of earning more money and still having to invest and earn interest makes these years some of the best for aggressive saving.
People at this stage of retirement planning should continue to take advantage of any 401(k) matching programs their employers offer. They should try to contribute as much as possible to a 401(k) or Roth IRA (you can have both at the same time). For ineligible a
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