Retirement Planning Basics

Running Marathon while retired

You may have a very idealistic vision of retirement — doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but that benefit may not provide enough income for your retirement years. Topped with the notion that few employers today offer traditional company pension plans that guarantee a specific income at retirement. Plus, people are now living longer and must find ways to fund those additional years of retirement. Those three facts alone point to one fact: sound retirement planning is critical.

“The earlier you start saving for retirement, the better,” says Senior Trust Officer, Val Mack. “When it comes to investing, time can literally mean money with the power of compounding.  Your contributions have the potential to earn interest and that interest reinvested can also earn interest.  Even investing small amounts each month can help you accumulate a great deal over the long term with the power of compounding.”

The good news? Thanks to the many tools and resources available, retirement planning is easier than it used to be.

Here are some basics to get you started:

1. Determine your retirement income needs

It’s common to discuss desired annual retirement income as a percentage of your current income. Depending on whom you’re talking to, that percentage could be anywhere from 60% to 90%, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn’t account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses.

How do you do this?

Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you’re nearing retirement, the gap between your current expenses and your retirement expenses may be much smaller. If retirement is still years away, the gap may be more significant, therefore projecting your future expenses may be more difficult.

Remember to take inflation into account. And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are currently paying a mortgage, that expense will drop if the mortgage is paid off by the time you retire. Other costs, such as health-related expenses, may increase later in retirement.

2. Calculate the gap

After estimating your retirement income needs, take stock of your estimated future assets and income: from Social Security, a work-related retirement plan, part-time job, or other sources. If estimates show that your future assets and income will fall short of your needs, the rest will have to come from additional personal retirement savings.

3. Figure out how much you’ll need to save

Come retirement time, you’ll need a “nest egg” that will provide you with enough income to fill the gap calculated above. But with retirement planning, exactly how much is enough?

To help you find the answer:

  • What age do you plan to retire?
    • The younger you retire, the longer your retirement will be, resulting in more money to carry you through.
  • What is your life expectancy?
    • The longer you live, the more years of retirement you’ll have to fund.
  • What rate of return can you expect from your savings now and during retirement?
    • Be conservative when projecting these rates.
  • Do you expect to dip into your principal?
    • If yes, you may exhaust your savings faster than if you’d live off investment earnings. Build in a cushion to guard against these risks.

4. Save for your retirement fund

After estimating how much money you’ll need for retirement, your next goal is to save that amount. First, you’ll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5% to 6%), and then determine approximately how much you’ll need to save every year between now and your retirement to reach that goal.

Then, put that savings plan into action. It’s never too early to get started. If available to you, a good idea is to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (401(k) plans, payroll deduction savings). Doing this reduces the risk of impulsive or unwise spending – out of sight, out of mind. If your lifestyle allows, save more than you think you’ll need.

5. Understand your investment options

Research which investment opportunities are available, and decide which ones are right for you. You may choose to hire a wealth management professional to assist you to explain the options available, and will assist you in selecting investments that are appropriate for your retirement plan. Note that many investments may involve the risk of loss of principal.

6. Use the right savings tools

While there are many retirement savings tools, the following are among the most common.

  • Employer-sponsored retirement plans such as 401(k), 403(b), SIMPLE, and 457(b) plans.
    • Your contributions come out of your salary as pre-tax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement.
      • 401(k), 403(b) and 457(b) plans can also allow after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, qualified distributions from your Roth account are free of federal, and possibly state, income tax.
  • IRAs and Roth IRAs like employer-sponsored retirement plans feature tax deferral of earnings.
    • If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income.
    • Roth IRAs don’t permit tax-deductible contributions but they allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.
  • Annuities are contracts issued by insurance companies.
    • Annuities are generally funded with after-tax dollars, but their earnings are tax deferred. Usually, there is no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at a time in the future, usually retirement. Annuities may be subject to certain charges and expenses, including mortality charges, surrender charges, administrative fees, and other charges.

Mack’s tip is “Don’t leave money on the table. If your company retirement plan offers a match, be sure to take advantage of it. A match is your employer paying you to save for retirement. It’s an opportunity to build your retirement savings without have to do anything other than save enough to get the full employer match.”

For more information regarding retirement planning, please contact our wealth management department.

Spread the word. Share this post!