How to Plan and Save for Retirement

Posted May 27, 2021 by in Lifestyle

Planning for retirement can seem like an overwhelming task — especially when you find yourself having to google every retirement-related term, including what is an annuity? That’s where we come in. We have created this blog post to let you know everything you need to know about planning and saving for retirement. Here’s where to start:

Set Your Retirement Savings Goal

Deciding how much you need to save for retirement is a challenging task. But, it’s a necessary step to ensure you are on the right track to enjoy retirement. Research shows that most people should begin saving about 15 percent of their income starting at age 25 if they hope to retire at 62. The later you start saving, the higher percentage you will need to save, the more you will need to reduce your retirement expenses, and the longer you will have to work.

Open a Retirement Savings Account

Once you’ve figured out how much you have to save, open up a retirement account. Historically, investments in the stock market offer substantially better returns than savings accounts. For this reason, they are the preferred tool to grow retirement savings. Of course, not all investment accounts are created equally. This is why the federal government created two types of special retirement investment accounts.

Not all investment accounts are ideal for saving for retirement. But, in an attempt to encourage Americans to save for retirement, the federal government created special investment accounts, commonly known as retirement accounts, that provide tax advantages.

There are two basic steps when it comes to saving for retirement:

  • Get your free money: If you work for a company that offers an employer-sponsored retirement plan, such as a 401 (k), they will likely match any portion that you contribute. This is an extremely important job benefit that you must take advantage of.
  • Contribute to an IRA: If you work for yourself or for a company that does not offer retirement plans, this is the best place for you to start. You’ll need to decide between a Roth or traditional IRA. You will also need to keep in mind that there are contribution limits. For example, for 2021, the annual IRA contribution limit is $6,000 for people under the age of 50.

Roth IRA vs. Traditional IRA

There are more than just the Roth and traditional IRA accounts — but these two are the most commonly used.

Traditional IRA

In a traditional IRA, the money you contribute may be deductible from your taxes. You will have to pay income taxes on any money you withdraw from the account while you are retired.

Roth IRA

Contributions to a Roth IRA are not tax-deductible, which means there’s no upfront tax break but your payoff comes when you retire and your withdrawals will not be taxed.

Choose Your Investments

IRAs, mutual funds, index funds, and exchange-traded funds (ETFs) are typically considered strong investments for long-term retirement savings.

Index funds provide instant gratification in hundreds to thousands of stocks and bonds. A simple portfolio that contains a bond fund and a broad market index fund, like the S&P 500, is an excellent starting point for most investors. Ideally, you will not need to check in regularly on the performance of your retirement account. But, it is important to adjust the balance of your portfolio among cash, bonds, and stock as you age. If you ignore it completely, your portfolio 

may stray from your preferred asset allocation and goals.

For those looking for a truly hands-off, set it and forget it approach to saving for retirement, Robo-advisors may be the way to go. Robo-advisors provide you with a pre-mixed retirement portfolio and will automatically adjust your holdings as you get older and based on market fluctuations.

Increase Your Retirement Savings Rate Regularly

You may not be able to save 15% of your income for retirement right off the bat. If that’s the case, no worries. Start small and build up how much you save and contribute. Some experts recommend increasing the amount you contribute to your retirement accounts by one percent each year until you are able to reach that 15 percent benchmark — at least. Here are some other ways to increase your retirement savings:

  • Automatically save a percentage of all raises and bonuses. Make the deposit ASAP before your mind convinces you to buy a new car or handbag.
  • Save your windfalls. For example, tax refunds and any other unexpected windfalls should be used to contribute to your IRA.

Once you have paid off debt, direct the payment amounts to your retirement account. This goes for student loans, car debt, and credit card debt, etc.

What is an Annuity?

Annuities are investments that pay out a fixed stream of payments. These payments are most commonly used as an income stream for retirees. So, at what age should you start receiving an annuity? That depends on a few factors, including:

  • The current rate of return
  • What fees associated with the annuity you will have to pay
  • Your health and earning capacity

Explore your options and choose a retirement plan that fits your lifestyle. You might find that you can stop working sooner than you think!

*Photos by Joslyn Pickens