What Is Retirement Planning?

November 29, 2022

By Soutas Financial

Retirement planning is the process of developing a plan for managing your finances after you have finished working.

When planning for retirement, you identify your income objectives and what you need to do to achieve them. Retirement planning involves identifying income sources, estimating future expenditures, establishing a savings programme, and managing assets and risk. Future cash flows are used to determine whether a retirement income goal is feasible.

Factor retirement planning into your financial plan as early as possible. That way, you’ll ensure a safe, secure, and enjoyable future. The reason why is that paying attention to the material and, perhaps, dull aspects of planning is enjoyable.

Ways to Increase Your Retirement Savings

Retirement planning is concerned with preparing for the post-employment phase of life. It includes financial planning, as well as other aspects of one’s life.

Retirement planning takes into account nonfinancial aspects such as lifestyle choices, where to live, and when to stop working as well as financial aspects.

The emphasis that one puts on retirement planning changes at different stages of life. For example:

How Much Do You Need to Retire?

There are numerous rules of thumb that can help you estimate how much you’ll need to retire comfortably. The sooner you start thinking about retirement, the better. Your magic number, which is the amount you’ll need to retire comfortably, is highly individualised.

It depends on who you ask how much you need.

The amount of money you need to save is important, but also think about your other expenses. Try to figure out how much it will cost you to live, cover your healthcare expenses, feed yourself, clothe yourself, and drive your car or truck. You’ll have more free time, so you might also factor in the cost of enjoying yourself and traveling. It’s best to create a rough estimate so there are no nasty surprises later on.

Start setting aside money as early as you can on whatever method you and your financial advisor use to figure out your retirement goals.

How to Prepare for Retirement

The steps that are common to almost everyone during their retirement planning are listed below.

Retirement Plans

There are different types of retirement accounts, each governed by different rules and standards.

Prepaid Plans offered by employers are a good alternative to traditional plans if you want to save money.

Employer-sponsored 401(k) or 403(b) plans are good for young adults. They can save for retirement using either one. Public schools and certain charities offer employees a similar 401(k) plan. It functions in a similar manner.

A great benefit of these qualified retirement plans is that your employer can match what you contribute up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, your employer may match that and deposit the equivalent amount into your retirement account, effectively giving you a 3% bonus that grows over time.

In addition to contributing the amount of the employer match, you should contribute more. Some experts recommend up to 10% more. For the 2023 tax year, employees under the age of 50 may contribute up to $22,500 to a 401(k) or 403(b) plan, of which some may be matched by an employer. People over the age of 50 may contribute an extra $7,500 to their 401(k)s in addition to their basic contributions.

Though 401(k) plans offer higher returns than savings accounts, the investments are not free of risk. Additionally, funds in the account are not taxed when withdrawn. Since your contributions are deducted from your income, you will receive an income tax reduction immediately. Those who are about to move into a higher tax bracket might consider contributing enough to lower their bill.

An IRA that follows traditional guidelines is what you are looking for.

An IRA lets you set aside pre-tax cash before tax is taken out. Because it reduces your taxable income, an IRA lowers your tax bill. With an IRA, you can reduce your taxable income and hence your tax bill. This may occur if you’re near a higher tax bracket and invest in a traditional IRA.

You must pay your regular tax rate when withdrawing money from this type of account. However, the money in this account grows tax-free. You don’t have to pay capital gains or dividend taxes on the balance of your account until you begin withdrawals.

The conventional IRA limit for each fiscal year is set at $6,500. The inflation-adjusted limit for 2023 is $7,500. A $1,000 addition for people aged 50 and older will contribute $7,500 in 2023. You must take distributions at age 72 and can do so as soon as 59½. You will be penalized for withdrawing before that date and also for paying tax on your regular earnings.

You may contribute up to $2,500 a year to a Roth IRA

Setting up a Roth IRA can be a great way to save for future generations, funded with post-tax money. Because this strategy avoids a more significant income tax bill when the funds are withdrawn, starting a Roth IRA early in life can be a smart idea. However, even if you don’t have a lot of money to invest at first, starting a Roth IRA early can help you save for the long term. Since contributions to a Roth IRA are free of federal income taxes, the longer the funds stay inside the account, the more tax-free interest is received.

IRA contributions are limited to $6,500 or $7,500 if you are over 50 years old, regardless of whether they are Roth or traditional IRAs. Still, there are income limits for a Roth IRA: A single taxpayer can contribute the full amount if their income is less than $129,000 in 2022, and $138,000 in 2023. After that, you may invest up to a lesser extent, up to a maximum annual income of $144,000 in 2022 and $153,000 in 2023 (marital status has a bigger impact on income limits).

A 401(k) and Roth IRA both come with penalties for withdrawing funds before you reach retirement age, but there are a few noteworthy exceptions that might be particularly useful for younger people or in times of crisis. First, you may withdraw the invested capital without paying a penalty. Second, you may withdraw funds for educational expenses, buying your first home, paying for health care, and dealing with disabilities without incurring a penalty.

A SIMPLE IRA is an IRA that is simple to operate

An employee retirement account offered small businesses instead of a 401(k) is known as the SIMPLE IRA. Through payroll deductions, employees can save money through this account in addition to receiving an employer match. In addition to being set up like a 401(k), the SIMPLE IRA allows individuals to save money as long as they do not spend more than 3% of their annual salary. In 2022, the SIMPLE IRA’s annual contribution limit will increase from $14,000 to $15,500. Employees aged 50 or older can increase their contribution limit to $19,000 with a $3,500 additional contribution.

After you set up a retirement account, the question becomes how to direct the funds. People intimidated by the stock market may benefit from investing in an index fund that requires little maintenance, as it simply mirrors a stock market index like the Standard & Poor’s 500. Target-date funds also adapt to and diversify your assets over time in order to help you reach your retirement goal.

Retirement planning has four stages

Here are some pointers for Retirement Planning at various stages of your life.

Between the ages of 21 and 35, figuratively speaking, people become young adults.

It is important to remember that time can also be invested, which is a key and valuable part of retirement savings. This is because of the principle of compounding.

Even if you can only save $50 each month, it will be worth three times more if you invest it at age 25 than if you wait to invest until age 45, thanks to compounding. You may be able to invest more in the future, but you will never be able to make up for any lost time.

Ages 36 to 50 are considered the early midlife phase.

In late midlife, financial pressures can develop, including mortgages, student loans, insurance premiums, and credit card debts. However, saving aggressively at this phase in retirement planning is critical. These years are particularly good for aggressive savings because they combine increased earnings with the time you still have to invest and earn interest.

People in this phase of retirement planning should continue taking advantage of any 401(k) matching programmes that are offered by their employers and should also try to maximize their 401(k) or Roth IRA contributions (you may have both at the same time). If they are ineligible for a Roth IRA, consider a traditional IRA. As with your 401(k), this is funded with pretax funds and the assets within it grow tax-free.

An after-tax retirement contribution can be added to an employer-sponsored plan. There are no income limitations, but you must stick to the same annual limit.

Don’t forget to purchase life insurance and disability insurance. If you were to die, your family would struggle financially without drawing from your retirement savings.

Between the ages of 50 and 65, the later midlife phase is defined as the time after peak career or financial status and before retirement or death.

If you want to retire early, you must be more conservative with your investments as you age. There are still a few advantages to saving for retirement at this stage. Higher wages and possibly having some of the listed expenses (mortgages, student loans, credit card debt, etc.) paid off by this time can leave you with more disposable income to invest.13

You can still set up and contribute to a 401(k) or an IRA if you’re 50 or older. You may be able to contribute an additional $1,000 annually to your traditional or Roth IRA starting at age 50 in 2023.1

If you’ve used up all the tax-advantaged savings accounts you can use, consider adding to your retirement savings in other ways. CDs, blue-chip stocks, or vacation homes you rent out might be a good choice.

You can also begin to get a sense of what your Social Security benefits will be and when it makes sense to start claiming them. You may begin to receive retirement benefits at age 62, but the age for full benefits is 66.14

Long-term care insurance is a good idea if you’re planning for the future. It can help cover the costs of a nursing home or home care if you need it in your later years. If you don’t plan for health-related expenses properly, they can devastate your savings.

There are other aspects of retirement planning beyond saving money.

Retirement planning is more than just how much money you’ll save and how much you need. It includes your entire financial situation.

Your Home

Home ownership is the most important asset for most Americans. How does that fit into your retirement plan? Since the housing downturn, planners view homes as less of an asset than they once did. A home equity loan or home equity line of credit is now a popular option for many retiring homeowners, as they are often offered with no prepayment penalty.

Even after you retire, there’s also the question of whether or not you should sell your home. You might still have a significant amount of involvement with the home where you raised multiple children, and holding onto it might cost you a lot of money. A look at your home in retirement should be part of your retirement plan.

Planning the estate is part of estate planning

A trust or other strategy should shield as much of your assets from estate taxes as possible before you die. A will should address your plans for your assets, but even before that, you should set up a trust or use another strategy to shield as much of your assets as possible from taxes.

In future, the first $12,921,000 of an estate will be exempt from estate taxes, but more and more people are leaving money to their children in a way that does not provide them with a lump sum. Changes may also be on the way in Congress concerning estate taxes, as the estate tax amount is scheduled to drop to $5,000,000 in 2026.

Taxes paid as efficiently as possible

When you reach retirement age and begin taking distributions, taxes become a big issue. Most of your retirement accounts are taxed as simple income tax, resulting in a potential 37% penalty. That’s why it is critical to consider setting up a Roth IRA or Roth 401(k) in order to pay taxes upfront rather than upon withdrawal.

Converting your Roth IRA contributions to a Roth IRA is a good idea if you expect to make more money in the future. An accountant or financial planner can help you work through tax issues.17

Insurance is the practice of covering the cost of loss or damage to property or life, through the transfer of funds or other means, usually in the form of a contract.

Protecting your assets is key to retirement planning. Age brings with it increased medical fees, and you will need to cope with the intricate Medicare system. Many people believe standard Medicare doesn’t provide adequate coverage, so they purchase Medicare Advantage or Medigap policies to supplement it. There’s also life insurance and long-term care insurance to think about.

An annuity is a unique kind of insurance policy offered by an insurer. An annuity is a sort of pension. You deposit money with an insurer and receive a predetermined monthly payment later on. There are numerous annuity alternatives and variables to consider when deciding if one is suitable for you.

What should I do to prepare for retirement?

Contribute every month—every little bit counts—to your retirement planning. You may start by contributing through an employer-sponsored plan if your company offers one. You may want to consider talking to a financial planner or investment specialist, as well. Your investments will grow over time as long as you begin contributing early. You’ll earn interest on that interest, too.

Why Is Retirement Planning So Important?

Having enough money for retirement is possible if you save enough. Because no one wants to work till the last minute, working part-time or occasionally is not sufficient to maintain your current lifestyle. It’s critical to have a retirement plan that allows you to receive the most money when you retire. It’s critical to receive the most money when you retire, and Social Security benefits will only go so far.

What Other Issues Should I Think About During Retirement?

Retirement planning is such an important part of your financial well-being. However, there are other issues you must also think about outside of retirement that might affect your finances. Make sure your finances provide you with the greatest tax benefits possible, in order to consider converting your Roth IRA to a Roth IRA. You may also wish to consider what will happen to your assets after you die, which is where estate planning comes into play. An insurance policy can help cover the costs left behind by you if you are injured or die unexpectedly.

The Bottom Line is a business blog that covers topics such as entrepreneurship, finance, and marketing.

The retirement planning process doesn’t care when you are in your life. It’s about how much money you need to be able to retire. Because it costs money to do so, everyone dreams of one day being able to quit working and spend more time with family and friends. In order to retire, you need to save money.

Your Fresno Financial Advisor Takeaways

Soutas Financial in Fresno wants to remind you of the following points. A great benefit of these qualified retirement plans is that your employer can match what you contribute up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, your employer may match that and deposit the equivalent amount into your retirement account, effectively giving you a 3% bonus that grows over time. Retirement planning is such an important part of your financial well-being. However, there are other issues you must also think about outside of retirement that might affect your finances. Make sure your finances provide you with the greatest tax benefits possible, in order to consider converting your Roth IRA to a Roth IRA.

We Can Assist You

Are you trying to find a financial advisor in California? Look no further than Soutas Financial & Insurance Solutions Inc. your Fresno financial planner is committed to helping take the complexity out of retirement planning. By using a variety of insurance and investment strategies that focus on Asset Protection, Long-Term Care Strategies, Legacy Planning, Tax-Efficient Strategies IRA, 401(k) & 403(b) Rollovers, Life Insurance, Annuities, Medicare, we can help you develop an overall retirement income strategy specific to you and your family.

We have a strong team of professionals helping ensure you receive all the assistance you need not only in developing your retirement income strategy, but in maintaining it throughout your retirement. Contact us today at 559-230-1648 or visit us today at Soutas Financial to get your retirement plans on track for success!

Other Fresno Financial Advisor Articles

Soutas Financial & Insurance Solutions Inc.
333 W. Shaw Avenue Suite 106
Fresno, CA 93704
(559) 230-1648