The ABCs of Building a Strong Retirement Plan

By on April 17, 2018

Whether you are just starting out in the workforce, switching jobs or preparing to retire, it’s time to get a firm grasp of the basics of saving for retirement. At some point, every working adult will have or need to have a retirement plan so they can support themselves when they are no longer able to work. In addition to giving you financial security, retirement savings offers distinct advantages over other types of investments.

While you may have many other financial choices to make — which debts to pay off, whether to go back to school or how much home can you afford — setting aside some money for retirement can ensure your financial success well into your golden years. Before you speak with your trusted retirement planner or financial advisor, brush up on these retirement basics for choosing the right savings vehicle(s) and saving more for the future.

5 Basic Steps to Start Saving for Retirement

1. Choose the Right Retirement Account(s)

There are many different ways you can save for retirement; some savings vehicles are offered by your employer as an incentive for employees to stay with the company and others are available to all individuals. Here are some options you may have at your disposal, but you will want to speak with an experienced financial advisor to determine which vehicle will benefit you most in the long run.

Defined Benefit Pension Plans
Your employer may offer a defined benefit plan. With this plan, your employer promises you a certain amount of money, such as a monthly or annual pension, upon retirement. These plans are less common today than they once were, and you may have to work for the employer for a certain length of time before you become eligible, but they certainly offer the most security. Whatever your employer promises is paid and there is less risk of losing money in investments or the stock market.

Defined Contribution Plans
Today most employers offer a 401(k) or 403(b) benefits package which allows the employee to set aside contributions on a pre-tax or post-tax basis. These plans are not very costly for the employer, as a result, they may or may not offer matching contributions (for more information, see below). With these plans, the employee designates a certain amount of salary toward the retirement account to be withdrawn from each paycheck. This is a great way to save since you can’t spend the money and may not even notice it’s gone.

While these plans are sponsored by the employer, they are run by investment companies or fund managers. Participants are able to choose from various investment opportunities with varying levels of risks. There is a maximum amount you can contribute each year. In 2014, that amount is $17, 500 for people under 50 and $23,000 for those 50 or older.

Individual Retirement Accounts (IRA)
If your employer does not sponsor a pension plan of some sort, anyone can fund personal Individual Retirement Account (IRA). There are several different types of IRAs which allow you to contribute $5,500 ($6,500 if you are 50 or older).  Participation in a Roth IRA is limited by your income; the money contributed to the account is taxed upfront and grows tax free. On the other hand a traditional IRA is available to anyone; in most instances, the money contributed is tax-deductible but may be subject to taxes (and/or fees and penalties) upon withdrawal. Some experts recommend Roth IRAs for younger investors, because they have longer to see their money grow, but each account has its advantages and disadvantages for any saver.

2. Put your Retirement Savings on Automatic

To keep up with your retirement plan goals, most advisors highly recommend automating the saving process. Whether you have a 401(k), 403(b) or IRA, consider setting up automatic monthly or bi-weekly contributions directly from your paycheck or transferred from your bank account. With the help of a trusted financial advisor or retirement planner you can set a dollar amount or percentage which supports your goals and helps you reach IRS contribution limits to lower your tax liability.

3. Seek Tax Advantaged Savings

Who doesn’t want to lower their tax bill? Many retirement plans offer big tax advantages but each comes with it’s own rules and regulations so be sure to discuss your options with an experienced tax advisor.

Income that you contribute to a 401(k) or 403(b) is not subject to income taxes. When you contribute pre-tax money into these accounts your annual income is reduced; depending on the amount you save, your tax liability may be reduced to the next lowest tax bracket. Your retirement savings is not taxed until it is time to withdraw, and even then you can plan to take small amounts which incur less penalties.

Some low- and moderate-income taxpayers get an extra break for contributing to an IRA. In addition to the usual IRA deduction, you may qualify for a Retirement Savers tax credit for up to $2,000 ($4,000 for couples). Your credit will vary based on income level.

4. Save More with Employer Matching

Take the FREE money! You can boost your savings rate by taking advantage of offers from your employer to match your contributions, usually up to a certain dollar amount or percentage of your annual salary. Do not pass up these benefits unless you are truly destitute or are close to your contribution limits.

5. Invest to Earn More with the Power of Compound Interest

Investing your money allows it to earn more and grow your overall wealth. When you invest in a retirement account and leave the money there, it will accrue interest. Then, leave the interest in the account and it will compound to grow your account even faster. For example, if you start with $10,000 and earn 10% interest, one year later you have $11,000. Two years later, you’ll have $12,100. And 20 years later, you’ll have $67,275 — without contributing any more cash.

This is especially important for young savers with time on their side. The longer your money has to grown the more compound interest you can earn (again FREE money). Just imagine, saving $10,000 at age 25 could earn you about $450,000 by the time you are age 65. That is a lot better than starting at age 40 with the same investment of $10,000 and yielding approximately $100,000 by the time you are 65.

Build a Strong Retirement Future with a Financial Education Today

As your expenses go up and life gets more complex, it can be tempting to put saving for retirement aside, but the best way to reach your financial goals is to keep saving and investing. Think of it as paying yourself first and it will be easier to put the dollars toward your retirement goal.

Now that you know your basics, it’s time to delve into the details to better understand your options so you can pick the best retirement investment or account for your personal financial situation. After you have explored your options, it’s time to speak with a trusted financial advisor, retirement planner and/or tax expert for assistance with initiating the perfect retirement plan to reach your goals for a long and happy life after work.

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About Harold Goldman

I am the founder of FinancialSafetyNet.org, and a Retirement Planning and Long-Term Care specialist. I am also the President of Emes Insurance Services, Inc., a Murrieta based insurance agency designed to help people with Retirement Planning and funding for College. I believe in educating my clients to become financially competent in an effort to develop plans for guaranteed income, protection against loss and tax-advantaged growth. To contact me Call (844)-376-2265

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