Retirement Planning 101

No matter your current age, you should plan for retirement now. Shutterstock

The best time to start retirement planning is today. No matter what you are doing as you read this, or what you have planned for the rest of the day, you should make time to begin retirement planning if you do not already have plans in place.

Whether you have a retirement account from work, or a savings account designated for retirement spending, there is so much more you can do to provide yourself income when you stop accepting a regular paycheck.

Let’s look at some of the decisions you need to make, and how to then fund those decisions with your current income.

Retirement Planning

Retirement planning is the financial arrangements you make while you are gainfully employed to ensure that you have income or savings to live on when you retire. Retirement planning is not as simple as just putting money into savings; you want to take advantage of investment products that offer you increased income on your retirement dollars and provide tax relief either when you invest the funds or when you take distributions in retirement.

Funds from individual retirement accounts (IRA), 401(k) accounts, annuities, and other products can supplement income you will receive from Social Security benefits.

Proper retirement planning requires that you give thought to the kind of life you want to lead when you are done working, and the income that life will require. It also need to consider your health and medical costs in retirement.

Social Security

Social Security is a federal program funded by your tax dollars to ensure that Americans have an income upon retirement. According to BankRate.com, the average monthly Social Security check amount is just over $1,500. The more money you make while gainfully employed, the more money you will have available to you when you begin to collect Social Security, which you can do as early as age 62 ½ or as late as age 71. You can find your current Social Security status by visiting www.ssa.gov.

You can call Social Security Administration or visit the website to get information on the policies and the benefits you can receive when you retire. Rido/Shutterstock

So, unless you believe you can live on $1,500 a month in retirement, you are going to want to find other retirement income.

Once you decide you want to begin receiving Social Security benefits, the steps to apply are outlined on this page at www.ssa.gov. You should complete the application four months before you want to begin receiving your benefits.

What My Retirement Will Look Like

If you are decades away from retiring, it may be difficult to answer the question “what do I want my retirement to look like?” But, if retirement is potentially close enough that you can visualize it, you need to ask yourself some questions.

Will I work part-time? Some people don’t want to completely leave the workplace when they “retire.” It is possible to be both retired and working. It is also possible to receive Social Security benefits and still work as long as you don’t pass the monthly threshold.

Will I downsize? Do you want to remain in your current home, or are you thinking about moving to smaller accommodations, or a retirement community? Are you planning to move?

Will I live alone in retirement? If you are married and will be living with your spouse in retirement, you should consider his or her income and financial status as well as your own.

How long will I live? An examination of recent family history related to health at retirement age, as well as a practical look at your own current health, will assist you in assessing how long you will need retirement income.

You might have some ideas about the kind of life you want to have in retirement. wavebreakmedia/Shutterstock

Calculating Annual Income Requirements

Are you going to depend on income or savings to fund your retirement? If “income’’ is the predominant response, you need to calculate how much income you will need in your retirement.

If you have no plans to continue working, even part-time, then your income in retirement will come from the forms suggested above, such as individual retirement accounts, annuities, Social Security, and other investment products.

It is less expensive to live a retired life than a working life. Expenditures for daily travel, wardrobe, and perhaps  social life are lower.

If you are not planning big changes in your lifestyle, it is estimated that a retired person requires approximately 75 percent of their annual pre-retirement income. If you made $60,000 a year while working, you will want $45,000 in annual income available to you in retirement income. Understanding that will help you determine how aggressively you need to invest in your retirement while you are working.

If, however, you plan to travel the world, your income will likely need to be higher.

You can use the incomes from Social Security, retirement accounts, and others, as well as your savings after you retire. Steven Frame/Shutterstock

You also need to consider any outstanding debts you have. Paying those off may be part of your necessary funding in retirement.

Getting Started

If you have not made any plans for retirement income, begin now by doing the following.

• Determine if your employer offers retirement planning investment options (401k with matching contributions) or services (retirement seminars) to kickstart your effort.
• If you do not have retirement investment at work, you can open an Individual Retirement Account. There are several types, and they differ based on when or whether you are taxed on the contributions you make and the distributions you take.
• Annuities are another path you can take. There are several types of annuities, and they can be complicated by different rules regarding funding and distribution. It is best to discuss annuities with a financial advisor.
• Develop a relationship with a financial advisor. They understand retirement income vehicles and can recommend options that will work best for your plans. You can get some assistance from your accountant, who should be able to recommend an advisor with retirement planning expertise.
• You can plan for retirement without professional advice, but it does require research and an understanding of how income is distributed from retirement income vehicles. You also need to discuss your retirement income plans with your accountant, who can guide you through the tax implications of any retirement investments you make.

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