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A Guide to Financial Planning for Retirement

Husband and wife plan for their retirement
Husband and wife plan for their retirement

When it comes to retirement, you can’t afford to be unprepared. Having a clear idea of how you want to spend your later years, and how you’ll pay for it, are key to ensuring that you can retire comfortably and securely. Financial planning and retirement go hand in hand, covering a variety of different tasks and topics. Whether your retirement is a few years away or you have several decades to get ready, there are certain things you’ll want to add to your financial planning to-do list.

Start With Your Target Retirement Number

When mapping out your financial planning retirement strategy, it can help to work backward. That means figuring out how much money you’ll need to save for retirement first, then building your financial plan around actions that can get you to that number.

A retirement calculator can help you narrow down how much you may realistically need to have saved and invested. When estimating a target savings number, it’s important to ask questions like:

  • What will your retirement lifestyle involve? (i.e. travel, new hobbies, starting a business, etc.)

  • How much will you need to meet your annual retirement budget?

  • Where will your retirement income primarily come from, in terms of Social Security, a 401(k), IRAs, etc.?

  • At what age will you begin taking Social Security benefits?

  • How many years do you anticipate spending in retirement?

  • Is working part-time in retirement or starting a business something you’re interested in?

  • How much debt do you anticipate having in retirement?

  • Will you be providing financial support for adult children or grandchildren?

  • Are you interested in creating a financial legacy of any kind?

These kinds of questions can help you fine tune how much you’ll need to ensure that you don’t run out of money in retirement.

Weigh Your Options for Saving and Investing

There’s more than one way to save and invest as you build wealth for the future. For example, you could save money for retirement using:

  • 401(k) plan or similar workplace retirement account

  • Traditional and Roth individual retirement accounts

  • SEP or SIMPLE IRA plans if you’re self-employed or run a business

  • Taxable brokerage accounts

  • Savings, money market and CD accounts

  • Health Savings Accounts (not a retirement account technically, but it can be used to pay for healthcare expenses when you retire)

A 401(k) plan may be your first option for saving, owing to its tax advantages and the potential for employer matching. Contributions to a traditional 401(k) can reduce your taxable income, growth is tax-deferred and you pay taxes at your ordinary income tax rate on qualified withdrawals. The same rules apply to traditional IRAs as well as SIMPLE and SEP IRAs.

A Roth IRA, on the other hand, offers no tax deduction for contributions but you can make qualified withdrawals tax-free. With a taxable brokerage account, you’re subject to capital gains on earnings. Savings, money market and CD accounts are also taxable but they can be good to have for keeping some of your retirement savings liquid.

Health Savings Accounts (HSA) are not retirement accounts but they can still fit into the financial planning retirement puzzle. These accounts allow for tax-deductible contributions, tax-deferred growth and tax-free withdrawals when the money is used for qualified health care expenses, which can include long-term care.

Ideally, you’re able to save and invest through multiple avenues, maximizing the annual contribution limits for tax-advantaged retirement accounts. But if you have a limited amount to save and invest, start with your employer’s plan first and contribute at least enough to get the full company match if one is offered. Consider doing the same with your HSA if you have one at work and your employer matches contributions. Then look at how much you can allocate to an IRA, taxable accounts and savings accounts next.

Consider Supplementing Your Financial Resources

Senior couple on vacation
Senior couple on vacation

In addition to saving and investing money for retirement, there are other financial tools you can add to your plan.

First, you could purchase an annuity. Annuities are insurance contracts that pay you back a set amount of money in exchange for a lump sum or monthly premium. An annuity can offer guaranteed, predictable income for retirement in addition to the money you’re withdrawing from savings and investments or Social Security benefits.

Annuities do have pros and cons, however. For example, an annuity can be a costly purchase if you’re required to pay a large lump sum premium upfront. And the quality of an annuity is only as good as the insurance company that issues it. If the insurer isn’t financially healthy, that could pose a risk if it’s not able to make your annuity payouts when the time comes.

Next up is life insurance. Life insurance is primarily designed to offer a financial benefit to your loved ones when you pass away. But some policies, such as whole life and universal life insurance, can also allow you to accumulate cash value. That’s money you could borrow against during your lifetime as an additional retirement income stream.

Doing so can deplete the death benefit of your life insurance policy if you don’t pay back what you borrow. And permanent life insurance can carry more expensive premiums than term life insurance, which has no cash value. But it’s worth considering how a cash value policy could help round out your retirement plans.

One more tool to consider is long-term care insurance. Requiring long-term care in an assisted living facility or nursing home could easily drain your retirement savings. Long-term care policies are designed to help cover those costs so you don’t have to wipe out your investments or savings to pay for care.

As a general rule, long-term care insurance is less expensive the younger you are when you buy it. You may pay one upfront premium or monthly premiums, depending on how your policy is structured.

Do the Math on Social Security

Social Security cards
Social Security cards

Social Security benefits can add to your retirement income but it’s important to think ahead about when and how you plan to use them.

Technically, you can begin taking Social Security benefits at age 62. But doing so can reduce the amount of benefits you’re eligible to receive. Working while receiving Social Security benefits prior to reaching full retirement age, typically 66 or 67 depending on when you were born, can also shrink your benefit amount.

On the other hand, waiting until age 70 to take benefits could increase the amount you receive, up to 132% of your normal benefit amount. Whether it makes sense to take benefits earlier or later depends on the other sources of retirement income you already have and whether you plan to work at least part-time in retirement.

The Bottom Line

Planning for a financially secure retirement is an ongoing process and the sooner you get started, the better. Your plan starts with knowing how much you’ll need to save for retirement, then deciding where to allocate your money to make the most of it. Checking in with your plan at least once a year can help you gauge whether you’re on track to reach your goal and what adjustments you may need to make, if any.

Tips for Retirement Planning

  • A financial advisor can and will work with you to put together a retirement-focused financial plan. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor tool can match you with up to three local financial advisors, and you can choose the one who is best for you. If you’re ready, get started now.

  • A good, online retirement planner, one that considers where you’d like to retire and your financial assets, among other things, can give you a quick assessment of what you’ll need to retire.

Photo credit: ©iStock.com/Chainarong Prasertthai, ©iStock.com/sanjeri, ©iStock.com/DNY59

The post A Guide to Financial Planning for Retirement appeared first on SmartAsset Blog.

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