Retirement planning is crucial to ensure you have a secure and comfortable future. Even though you might not want to work forever, counting only on Social Security benefits might not give you enough money to support your retirement years.
Why is retirement planning so important? Well, think of it like making a roadmap for your future. Having a well-thought-out retirement plan provides peace of mind. You’ll have confidence in your ability to handle the financial challenges you may face during retirement.
Plus, smart retirement planning can help you avoid becoming a financial burden on your family or dependents later on. It’s an opportunity to remain self-sufficient and able to cover your expenses.
To create the best retirement plan, follow five main steps:
- First, you need to know how much money you’ll need.
- Second, you need to start saving and saving consistently.
- Third, pick the right retirement plan.
- Fourth, choose an investment strategy that aligns with your goals and timeline.
- And finally, think about your estate and legacy.
A well-structured retirement plan is essential to successfully navigate this crucial phase of life. In this article, we share five key steps to consider. Taking advantage of all of them will put you in charge of your finances and allow you to enjoy a better retirement. Consider, implement, review, and adjust . . . it’s not rocket science. Let’s take a look:
1. Financial Goals and Budgeting
First and foremost, define your retirement financial goals. How much income will you need during retirement to maintain your desired lifestyle?
Consider housing, healthcare, travel, hobbies, and other expenses. Create a detailed budget that outlines your expected costs in retirement, factoring in inflation. This budget will help you determine how much you need to save and invest to meet your goals.
How Much Do You Need to Save for Retirement?
Before you dive into the numbers for your retirement goals, you’ve got to figure out how much money you need to save in the first place. Naturally, this varies depending on how much you make each year and the age you plan to retire.
Experts say you might need as much as 70% to 90% of the money you used to earn to maintain your lifestyle when you stop working. That includes both your savings and Social Security benefits.
However, since retirees don’t spend time at work anymore, they have more time for traveling, exploring, shopping, and other exciting things. Setting accurate goals for how much you’ll spend in retirement helps with your planning. If you plan to spend more, you should save extra now.
Knowing what your expenses will exactly be during retirement is vital. It affects how much you take out each year and how you invest your savings. You must estimate your expenses correctly to avoid running out of money too soon or living a less comfortable retirement. So, thoroughly consider everything you may need to pay for during retirement.
Health expenses tend to increase as you age. Consider how you will cover medical costs during retirement, including healthcare and long-term care insurance. Medicare is available for individuals 65 and older but might not cover all expenses. Research your options and factor healthcare costs into your retirement budget.
On top of lifestyle expenses, consider the inflation rate of your retirement years. The inflation rate for retirement is all about how the cost of things goes up over time. Imagine if the price of food, clothes, and housing keeps increasing yearly. This increase means that the money you have today might not be able to buy as much in the future because things get more expensive.
On average, the cost of things goes up by about 2-3% every year. But this can change depending on the economy and other factors. So, when planning for your retirement savings, it’s wise to think about this steady price increase. You want to ensure that the money you save now can still cover your expenses when you’re not working anymore.
Figuring Out Investment Returns After Taxes
Once you know how long until you retire and how much money you’ll need, you need to consider how much your investments will make after paying taxes. This perspective helps you see if your investment plan can deliver the money you need for retirement.
Typically, hoping for a return (how much your investments grow) of over 10% (before taxes) isn’t very realistic, even if you plan to invest for a long time. As you age, you should expect lower returns because you might choose safer investments that don’t grow as quickly.
For example, imagine someone has $400,000 saved up for retirement and needs $50,000 every year; they’re expecting a steep 12.5% return (without considering taxes) to cover their expenses—that’s a bit too much to ask for. A big advantage of planning for retirement early is that you can build up your savings over time to get more realistic returns. If you have $1 million saved up for retirement, you will have a more reasonable 5% return.
The returns you make from investments often get taxed, depending on your retirement account type. So, it’s important to figure out how much retirement money you’ll have after taxes.
But also, when you start taking money out of your retirement account, that may be counted as taxable income. So be sure you know what your precise tax status will be during retirement to plan accordingly.
2. When to Start Saving and When to Retire
When should you begin thinking about retirement planning? Well, that’s up to you, but the sooner you start, the better. Starting early gives your money more time to grow until you retire.
But don’t worry if you haven’t started yet – it’s never too late to begin. Even if you haven’t thought about retiring, saving a small amount of money now can go a long way later. Making smart investment choices now can help you avoid playing catch-up in the future.
Begin Saving and Stick with It
If you’re already saving money for retirement or some other goal, keep it up! Saving money is a good habit that pays off. If you haven’t started yet, now’s the time to begin. You can start with a small amount and increase it gradually each month.
Starting to save early lets your money have more time to grow. Make saving for retirement a priority. Create a savings plan, stick to it, and set goals. Reward yourself when you reach your goals to make sticking to the plan enjoyable.
First, take advantage of compound interest by consistently contributing to retirement accounts such as a 401(k), IRA (Individual Retirement Account), or other retirement savings plans. Regular contributions over time can significantly boost your retirement nest egg.
Waiting to contribute to retirement accounts is one of life’s biggest potholes that people get stuck in. It permanently and irrevocably affects your retirement outcome. So don’t wait—start saving now!
Understanding Your Time Horizon
Your current age and when you think you’ll retire are the building blocks of a good retirement plan. The longer the time between now and retirement, the more risk your investments can handle.
If you’re young and still have more than 30 years until retirement, you can invest in things like stocks, which might be riskier but historically earn more money over a long time. The key here is time—think a minimum of 10 years. Also, you want your investments to make more money than inflation, so you can still buy what you want when you retire.
Retirement Age and Social Security
Deciding when to retire is a significant factor when planning for retirement. Some retire early due to preference or circumstances, while others work longer. Gradually transitioning into retirement through part-time work or consulting can provide financial stability and ease the transition.
You can start claiming Social Security benefits as early as age 62, which may result in reduced benefits. Full retirement age (FRA) varies, with 67 being the FRA for those born in 1960 or later. Delaying benefits beyond FRA can lead to increased payouts.
However, the earlier you retire, the less money from Social Security you’ll have overall. For instance, if you were born in 1960 or later, your full retirement age (when you get the full Social Security benefits) is 67. But if you wait even longer until you’re 70, your benefits will be even higher. We recommend you wait until you’re 70.5 before you apply for Social Security distributions, if you’re in good health.
Remember that while Social Security can provide a foundation, it may not cover all your expenses. On average, Social Security benefits replace about 40% of your income before retirement. You can estimate your benefits using the retirement estimator on the Social Security Administration’s website.
As a result, retirement planning involves diversifying your income sources, such as pensions, savings, and investments, to create a stable financial foundation.
3. Pick the Right Retirement Plan
When planning for retirement, it’s not just about deciding how much to save but also where to put your savings.
There’s no one-size-fits-all retirement plan, but there’s likely a perfect one—or a combination—for you. Though generally, the best plans offer tax advantages and maybe even extra contributions from your employer. If you’re lucky enough to have a 401(k) or a similar retirement plan from your employer that matches your contributions, that’s a great place to start.
Contribute to Your Employer’s Retirement Plan
If your employer offers a 401(k) Retirement Plan that includes an employer match, then participate! It’s the easiest money you’ll ever make.
The maximum amount that taxpayers are allowed to contribute to their 401(k) retirement accounts during 2023 is $22,500. That’s in addition to the employer match! Employees who are 50 years of age or older are allowed an additional ‘catch up’ contribution of up to $7,500.
Be sure to contribute enough to capture the full amount of the employer match regardless of your financial situation.
This tactic has benefits – it can lower your taxes, your company might add extra money to your account, and automatic deductions simplify it. Over time, this can add up because of compound interest and tax advantages.
Besides, waiting until your earnings are higher before contributing to a retirement account and/or maximizing your contributions may lead you to establish a lifestyle that doesn’t allow for retirement savings in the future.
Understand Your Employer’s Pension Plan
If your employer has a traditional pension plan, find out if you’re part of it and understand how it works. You can ask for a statement to see how much you might get. Knowing what happens to your pension if you change jobs is also good. You might also have benefits from a previous job or your spouse’s plan.
Encourage Your Employer to Start a Plan
If your workplace doesn’t have a retirement plan, suggest that they create one. Different options are available, and a simpler plan can be good for you and your employer.
Starting Your Own Retirement Account
If your job doesn’t offer a retirement plan, you can still start your own retirement account with its own benefits. For instance, you can save up to $6,000 annually by investing in an Individual Retirement Account (IRA)—even more if you’re 50 or older. You can choose between a traditional IRA or a Roth IRA.
The taxes you pay and the value of your withdrawals later depend on your choice. IRAs are helpful because they provide tax advantages, and you can set up automatic deposits.
Different Types of Retirement Plans
Here are seven types of retirement plans that could work for you. If you’re curious about how each works, click the links to learn more.
We recommend you go ahead and set up both a Roth IRA and a Traditional IRA. Having both types of IRAs provides flexibility when you file your taxes each year. This way, you can make a contribution to the one that will help you reduce your tax obligation, either with the current filing or in later years. Talk to your CPA tax preparer to determine which account to contribute to each year.
In years where your earnings allow an IRA contribution, then do your best to maximize it. The contribution limit in 2023 is $6,500 to one or split between multiple accounts. If you’re 50 or older, you’re allowed an additional catch-up contribution up to $1,000.
If you’re self-employed, in addition to the Roth IRA and Traditional IRA, go ahead and set up either a SEP account or a SOLO 401(k) account. Both allow self-employed individuals to save a profit-sharing portion of business earnings—tax deferred! In 2023, you can contribute as much as 25% of your business’s net earnings, up to $66,000.
Protecting Your Retirement Savings
It’s important to avoid touching your retirement savings early. If you take money out now, you could lose out on interest and tax benefits or even face penalties. If you change jobs, it’s usually better to leave your savings where they are or transfer them to a new retirement plan.
4. Investment Strategy
How you save your money is just as important as how much you save. Things like inflation (when prices go up) and the types of investments you pick greatly influence how much money you’ll have saved when you retire.
When it comes to retirement accounts, you can use them to access different kinds of investments like stocks, bonds, and mutual funds. Figuring out the right mix of investments depends on how long you have until you need the money and how comfortable you are with taking risks.
Assessing Risk Tolerance and Investment Goals
Whether making the investment choices or letting a professional do it, one of the most critical steps in retirement planning is deciding how much risk you’re okay with taking. Should you put some of your money in safe things like Treasury bonds or take a chance for potentially higher returns?
John R. Frye, a senior advisor at Carnegie Investment Counsel, says that the markets (where investments are bought and sold) go up and down in long cycles. If you’re investing for a long time, like 40 years, seeing your investments go up and down is okay—it’s normal.
When the market drops, he suggests thinking of it like a sale—if clothes were 20% off, you’d want to buy them. So why not consider buying stocks when they’re “on sale,” too? That said, risk isn’t always a bad thing when it comes to investments.
It’s good to know how your savings or pension plan is invested. Learn about your investing choices, and don’t hesitate to ask questions. Putting your savings into different kinds of investments is a good idea. This method (diversifying) involves spreading your investments across different asset classes (such as stocks, bonds, and real estate) to reduce risk and increase potential returns.
As you get older, your investment mix might change based on your age, goals, and financial situation. Knowing about money and being secure with it go together.
Usually, the plan is to invest more aggressively when younger and gradually shift to safer investments as you get closer to retiring. Thankfully, you don’t need to watch your investments all the time. If you want to manage your retirement savings yourself, you can choose a few low-cost mutual funds. But if you want some expert help, you can hire a financial advisor.
Other Investment Options
There are more investment options than stocks and bonds that can be used to your advantage.
Some people join a venture capital group. Some people pour excess funds into a REIT (Real Estate Investment Trust), or a QOF (Qualified Opportunity Fund). Some people fund a side gig for themselves, their spouse, their child or a friend. Some people invest their excess funds into the stock market using a fund manager. Some people take a hobby and turn it into an income stream. All of these strategies help individuals diversify. That’s important! And it can be fun! Know yourself, and find a way to diversify that you will enjoy participating in or have the expertise to adequately monitor.
5. Estate Planning and Legacy
Estate planning is another important part of ensuring your retirement plan is complete. Different experts like lawyers and accountants can help with different parts of this. One big part of estate planning is planning what happens to your things after you pass away. Life insurance is also important here.
Having a solid estate plan and life insurance means that your belongings will be divided up the way you want, and your loved ones won’t face money troubles when you’re not around. Having a clear plan also helps avoid a long and expensive legal process called probate.
Develop an estate plan that includes a will, health care proxy, power of attorney, and any other necessary legal documents. Think about how you want your assets to be distributed and how you can minimize taxes and other costs for your beneficiaries. Estate planning can also include considerations for charitable giving or leaving a legacy.
Thinking About Taxes in Estate Planning
Taxes are another big deal in estate planning. If you want to give your things to your family or a charity, you need to know how that affects taxes. It would be best if you compared what’s better—giving something as a gift now or passing it on after you’re gone.
Key Takeaways for Retirement Planning in Tennessee
Putting together a solid retirement plan can be tough because you need to find a balance between what you hope to get back from your investments and how you want to live. One good way to do this is by having a portfolio that can change as the market changes and your retirement goals shift. This makes sure your plan stays on track even if things don’t go as planned.
Everyone’s retirement needs and circumstances are unique, so it’s important to tailor your retirement plan to your situation. Regularly review and adjust your retirement plan as your life circumstances change and as you move closer to retirement. Seeking advice from financial professionals or retirement planners can also provide valuable guidance in creating a solid retirement strategy.
All in all, the key to retirement saving is to start early, be consistent in saving, and stay informed about changes in your financial situation and the broader economic landscape. By creating a well-rounded retirement plan, you can approach your golden years with confidence and peace of mind.
Though, there’s so much more to talk about when it comes to planning for retirement! The financial experts at TriStar CPAs are primed and ready to walk you through options, scenarios, and strategic plans. Let’s get you on track to build a retirement you will want to live with! We enjoy this stuff. Let’s talk. Let’s plan. Let’s partner.
Don’t Hesitate to Ask Questions
While these tips are here to help guide you, you’ll need more information to make the best choices. Look into the resources listed below. Talk to your employer, bank, union, or financial advisor.
It’s important to ask questions and make sure you understand the answers. So, seek practical advice now and start taking action.
Talk to a trusted CPA at TriStar in Tennessee to begin your retirement planning journey today!
Additional Retirement Planning Programs And Resources Available In Tennessee
- Tennessee Consolidated Retirement System (TCRS): TCRS is the retirement plan for state employees, including teachers and employees of state agencies and universities in Tennessee. It offers defined benefits and hybrid retirement plans, along with educational resources to help participants understand their retirement options.
- Tennessee Deferred Compensation Program (TDCP): This program provides a way for state employees, including teachers and local government employees, to save for retirement through a 457(b) deferred compensation plan. This plan allows participants to contribute a portion of their salary on a pre-tax basis, potentially reducing their taxable income.
- Social Security Administration (SSA): While not specific to Tennessee, Social Security benefits are an important component of many people’s retirement income. The SSA provides information about retirement benefits, disability benefits, and survivor benefits. You can visit the SSA website or local Social Security offices for more information.
- Retirement Planning Workshops: Various financial institutions, community centers, and non-profit organizations in Tennessee may offer retirement planning workshops and seminars. These workshops often cover topics like budgeting, saving, investing, and understanding retirement accounts.
- Financial Advisors and Planners: Many financial advisors and planners in Tennessee, like TriStar CPAs, offer retirement planning services. They can help you create a customized retirement plan based on your goals, risk tolerance, and financial situation.
- AARP Tennessee: AARP offers resources, workshops, and events related to retirement planning, social security, and other relevant topics for older adults.
- Online Resources: There are various online resources available to help you with retirement planning, including retirement calculators, guides, and articles. These resources can provide general information and insights to assist you in making informed decisions.