Life Events

Planning for Retirement: How to Get Started Now

Published

October 26, 2023

Planning for retirement is a continuous process that changes as your circumstances shift. A successful retirement plan is designed to create financial security and provide enough money for you to enjoy retirement. Although it may require some effort, putting in the work now can help set you up for the future.

Here are some things to consider when it comes to retirement planning:

Get an estimate of your Social Security benefits
Estimate the cost of the lifestyle you want to maintain
Don’t forget to factor taxes into your planning

Some experts suggest that the average individual should have $1 million stored away to live comfortably in retirement. Others think a potential retiree should aim to build up savings and investments that can provide 70-90% of their pre-retirement income. Ultimately, it’s different for everyone and retirement savings needs vary depending on age, income, and desired lifestyle.

Estimate your Social Security benefits

The Social Security Administration (SSA) has a calculator on their website that can estimate your future benefits. It displays your estimated monthly amount for early retirement (at age 62), full retirement (at age 67), and delayed retirement (at age 70). Typically, there is a sizable difference in your monthly benefits between early, full, or delayed retirement age.

For instance, a person born in 1960 earning $50,000 annually can expect the following monthly SSA benefit amounts:

Retiring at age 62 and 1 month: $1,015
Retiring at age 67: $1,544
Retiring at age 70: $1,985

Based on this example, if this person retires at 67 rather than 62, they’ll receive an additional $529 a month, or an extra $6,348 annually.

Therefore, postponing your retirement could mean an increase in SSA benefits, depending on your situation. Creating a SSA account online is a great way to get the most accurate information about your retirement benefits. When you do, your actual past earnings can be used for the calculations, so you can see your estimated Social Security benefits based on the retirement ages you choose.

Creating a retirement plan

After determining the amount of Social Security benefits you’ll receive, it’s a good idea to calculate your everyday expenses and estimate how much more money you may need for your standard of living. SSA benefits are helpful, but they may not cover your living costs in retirement. Once you realize how much income you may need, you can begin to build a savings and investment plan to best help you achieve those goals.

One of the fundamentals of retirement planning is to assemble a balanced portfolio that will provide you income in your “golden years.” Comprehensive retirement plans incorporate financial strategies such as savings accounts, mutual funds, index funds, and stock market investments. A diverse selection of investments may buffer market dips, so it’s not a bad idea to spread your retirement savings among different accounts.

Understanding how to do this could reduce your financial concerns about the future, so let’s look at a few options for building your diversified portfolio.

Traditional savings

Starting early is best, but it’s never too late to start saving money for retirement. Interest in a traditional retirement savings account accumulates over time, but the annual interest rate (APR) is usually low, and investment returns are minimum. An alternative might be to place your cash savings into certificates of deposit (CDs), which usually secure deposits and interest rates for a period of 1 month to 5 years. CDs typically have higher APRs, but if you withdraw your money early, you may lose some, or all, of your earned interest. Be sure to read the fine print and do your research so that you make the best choice to meet your needs.

Employer retirement savings plans

Employer-sponsored retirement plans, such as 401(k) plans, can be an easy way to save money for retirement. These plans often provide considerable tax advantages for future retirees. With traditional 401(k)s, employee contributions are made pre-tax, meaning they are subtracted from your gross income.

Keep in mind that withdrawals from 401(k) plans are subject to taxes, no matter when they’re made. It’s also worth noting that the tax rate will change over time with your income and retirement status, so the amount you pay in taxes today may not match what you pay in retirement.

Conversely, Roth 401(k) contributions come from after-tax funds, which may decrease your contribution for the same payroll deductions. However, qualified withdrawals aren’t subject to income tax, so that may benefit you down the road. With either type of account, some employers will match employee contributions.

If your employer offers matching, you put in a certain percentage of your income, and your employer will match that amount up to a certain point. It may be a one-for-one match (you put in 5% of your income, and your employer adds another 5%), or they may match 25% of your contribution up to a certain limit. Whatever they give you, it’s essentially free money. If you can do it, make the maximum contribution to gain as much as possible.

Individual retirement plan

An individual retirement account (IRA) is similar to a 401(k) account, but IRAs aren’t tied to an employer. Contributions are made to a Roth IRA with after-tax money or to a traditional IRA with pre-tax dollars. With each, you are subject to the same withdrawal stipulations, so make sure you understand any implications that may come from an early withdrawal or any restrictions on taking out a loan from your account.

IRAs are a good method for retirement investing, and since you make your own investment decisions, you have an added measure of control. You can invest your IRA contributions in stocks, mutual funds, bonds, and other fixed-income investments. Depending on your tolerance for risk, you may decide to allocate 90% of your account to a mutual fund and 10% to the bond market. Or, if you’re nearer retirement and are looking for a slower growth option that carries little risk, you can invest more (or all) of your funds in bonds. It’s completely up to you. Stock trading IRAs are available as well. They allow you to invest in one or more stocks while still receiving tax advantages on contributions or withdrawals.

Beyond the basics

While retirement savings accounts and plans are good choices, there are also other retirement investments that you could make, such as buying local, state, or federal bonds, investing in company stock, purchasing life insurance plans, buying annuities, or investing in real estate.

Each has its own risk level and specific opportunities for larger or more secure returns. If you choose to invest in more speculative methods (like real estate), consider your risk tolerance. Can you afford to lose that investment money and still retire comfortably? The answer to that question may be significant for your future plans.

Remember to consider the basics when you invest. Make sure you are accounting for mortgage payments, credit card debt, and things like possible future medical expenses. And make sure you take taxes into account.

Financial advisors can provide advice based on your financial situation. Discussing your plans now, with a financial consultant or a tax advisor, may help you make better financial decisions for your future. Whether you’re looking for swift growth in your funds or for rock-solid security, there are options that could help you invest money to your advantage. The sooner you start, the more you can earn.

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.