Been thinking about retirement planning?
It's never too early or too late to start!
The nature of retirement planning is rapidly changing. With the stability of Social Security fading for millennials and so forth, knowing the different types of retirement options in order to accurately plan for retirement is crucial. opens in a new windowThe Department of Laboropens PDF file estimates that less than 50% of Americans know the amount they’d need to live comfortably during retirement.
Currently, Social Security benefits and employer funded pensions are the main source of retirement income for the baby boomer generation. But for those who still have 20+ years left, establishing a solid retirement plan will require some intentional effort on your behalf.
Identifying Your Income Needs
In order to plan accurately, you should have an understanding of the amount of money you will need during retirement. Do you want to travel, live in a retirement community or do you have medical costs to factor in? Ideally, you’ll want to be able to have at least 70%-80% of your income to maintain your current standard of living. Keep in mind that you’ll also have to adjust for inflation in your calculations as $80,000 now will be a lot different in 30-40 years.
Retirement planning isn’t something you want to start thinking about when you’re in the later half of your years. Just a year’s delay can cost you upwards of $235,000. The graphic below quantifies the advantages of starting your retirement planning early. If you saved $5,500 a year and your money earned 7% interest on an annual basis, you would end up with $760,303 after 35 years.
Choose the Plan that’s Best for You
There are a number of types of retirement plans you can choose from that are outside the standard pension and Social Security benefits. These plans are accounts that you can place your money in throughout your working years and potentially gain significant interest over time. Some types of retirement plans include:
- 401(k): A defined contribution account where your employers set aside a percentage of your monthly income and invest it on your behalf. You won’t be able to withdraw this money from your account without incurring a penalty until about 59 ½.
- Individual Retirement Arrangements (IRAs): These retirement focused accounts collect and invest your tax-deductible (depending on certain factors) contributions.
- Roth IRA: In comparison to the traditional IRA, contributions to a Roth IRA are not tax deductible but this also means you won’t pay taxes on your distributions when you withdraw at retirement age.
- Profit Sharing Plan: Through this option, a company will allow an employee to share in their profits based on its quarterly or annual earnings. However, the company is in control in terms of how much of the profit allocation you are allowed to partake in.