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Retirement Planning

Retirement Planning

| November 13, 2018


In my blog post dated October 30, 2018, we addressed the fourth of six keys to creating a financial plan: Tax Planning. I highlighted some of the key concepts to consider in Tax Management. Here is a link to that post – Tax Management.

The fifth key area in any sound financial plan is Retirement Planning. Retirement planning is the process of deciding what your retirement goals are and the actions and decisions you need to undertake to realize these goals. It involves estimating expenses and saving and identifying other sources of potential retirement income.

It is said that we human beings stand out from other species by virtue of our ability to think and plan ahead. While that may be true, most of us have great trouble thinking about or preparing for the long term, as we are continuously caught up in everyday tasks and work. It is difficult enough to plan something six months ahead, like a summer vacation. How on earth are we supposed to think about something in the distant future -- like retirement?

Nevertheless, thinking in advance and acting on those thoughts is key to being ready when the future becomes the present. The younger you are, the more distant your retirement -- and the greater your ability to compound your returns over time. That window of time is your greatest advantage.

Retirement Planning ought to ask and answer some key questions:

  • How much will I need to save for retirement in order to live comfortably?
  • What are my goals?
  • When should I start?
  • What will I do after I retire?
  • How much can I count on from Social Security?
  • What costs might I run into once I have actually retired?

Now that you have promised to put your money away for the long term, where should it go? You have many options when it comes to retirement accounts.

* Employer plan with a match (401k) (403b) - These retirement plans allow you to take advantage of tax-deferred growth since neither contributions nor growth are taxed. Taxes are not taken until you withdraw money from the account. Many employers also provide matching contributions that are essentially free money added to your retirement account. There are restrictions on contribution amounts and penalties for early withdrawals.

* Traditional IRA - This type of Individual Retirement Account lets you invest pre-tax income that will also grow tax-deferred. Depending on your income, filing status and other factors, you may be able to deduct your contributions to a Traditional IRA on your tax return. Like a defined contribution plan, there are limits on what you are able to contribute. If you are 50 or older, you may be allowed to make catch-up contributions beyond the normal limits. You are able to make any type of investment you like, as long as it is allowed by the custodian (usually a financial institution or brokerage) of the account. Generally speaking, there are no requirements for making contributions to a Traditional IRA, but any distributions taken before age 59.5 are subject to taxes and a 10% penalty, unless the distribution meets certain conditions.

* Roth IRA - Unlike a Traditional IRA, under which your contributions are taxed upon withdrawal, in a Roth IRA your contributions are after-tax income. Withdrawals can thus be taken tax-free. Unlike a Traditional IRA, the gains made by your investments in a Roth IRA are not taxed if certain conditions are met. Many people who feel they may be in higher tax bracket when they retire than they are currently find that a Roth IRA is a good fit for their needs. In order to contribute to a Roth IRA, you or your spouse must have earned income. And again, direct contributions to a Roth IRA can be withdrawn tax-free at any time.

* Annuity - Annuities are issued by insurance companies and are designed to grow in value and then pay out a stream of guaranteed monthly payments in retirement (guarantees are based on the claims paying ability of the issuer). They are usually considered an option after 401(k) or IRA options have reached maximum contributions. Drawbacks can include the high fees and lack of flexibility often associated with annuities.

If you are your own boss, planning for retirement may take a little extra work, but there are some very beneficial options for you too. Below are a few of the most popular choices:

* Individual 401(k) - As the name implies, the Individual 401(k) is similar to the retirement plan offered by employers. However, this plan is only for sole proprietors who have no employees. Like IRAs, the Individual 401(k) comes with Traditional or Roth options.

* SEP IRA - A Simplified Employee Pension, or SEP IRA, is a way for business owners to receive the same advantages for their business that would ordinarily be provided through an Individual Retirement Account. If the business owner has employees, the employees receive the same benefits as the owner under the plan. The employer receives a tax deduction for plan contributions.

* SIMPLE IRA - A Savings Incentive Match Plan for Employees, called a SIMPLE IRA for short, requires businesses owners to contribute once it is opened, but participation is discretionary for employees. This plan requires certain contributions by the employer on behalf of the employees. The plan may allow nonelective contributions for employees even if they do not contribute. A SIMPLE IRA has much higher contributions limits than other IRAs, with catch-up provisions.

We hope the discussion above provides a window into the wide array of choices available in the tax code to help fund your retirement. As we have said before, the biggest mistake that most people make when it comes to their retirement is that they do not plan for it. A good financial plan is a road map that shows how the choices we make today will affect our future.

Until next time, cheers!


National Council for Aging Care
Financial Mentor
Motley Fool
Balance Financial

*Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.