Your Financial Future: Retirement Goal-setting
Submitted by Alexander Consulting Group, LLC on July 26th, 2021Planning for retirement early in your career can get you on the right path to financial wellness. A number of factors play into building retirement capital – beginning with deciding what retirement means to you. You can go a long way toward solidifying your financial future if you start retirement goal-setting now. Here are some things to do to get started.
Retirement Goal-setting and Bucket-list Items
In my experience, the biggest issue with retirement is, “what am I going to do to keep myself occupied?” Knowing what you want retirement to look like is key to knowing how much to save and the best way to invest.
So, answer these key questions to figure out your retirement math:
- How much money will I need to reach the retirement lifestyle that I want? Do I need to modify my vision?
- How much money will I need to support myself through 20-30 years of retirement?
- With the money I anticipate needing in retirement, at what age can I retire?
Bucket-list items go into retirement goal-setting, too. See bears in Alaska! Buy a Harley and drive across the country! All good.
Here are the three things I hear most from clients, but set your own priorities:
- Travel
- Leave money to my kids and grandkids
- Start a charity
Social Security Analysis
The Social Security taxes you pay during your working years determine the monthly benefits you’ll get when you retire. Those will be an important part of your retirement income. No matter how old you are, you can set up a Social Security account at https://www.ssa.gov/myaccount/ to learn about your benefits. Tools and calculators on site can help you analyze future benefits based on projected earnings. This will help you decide your retirement age and plan your retirement budget.
Cash Flow Analysis
Cash flow analysis in this context is budgeting for retirement. It relates back to putting the pieces together for your vision of retirement:
- Where will you live? (Factor in mortgage/rental, state and local taxes, other costs)
- How much longer do you need to work? (Factor in projected earnings, savings and retirement fund contributions, and investment growth)
- How much more will you need to save for retirement? (How much time and what investment strategies do you need to reach your target amount?)
Online financial-planning software tools can give you a simple report. If you need more help, a financial advisor can do the math, answer your questions, and clarify next steps for meeting your goals.
IRA Contributions and Roth IRA Conversions
Paying taxes in retirement is one thing you have to budget for. With an Individual Retirement Account (IRA), your contributions are tax-deferred: they accumulate tax-free until you take money out and pay income taxes. If you make IRA withdrawals before age 59½, you may have to pay a 10% penalty in addition to income tax.
With a Roth IRA, you pay taxes on your earnings before you contribute, so no income tax is owed on the distributions. You also can convert* an IRA to a Roth IRA. Both of these types of accounts have a maximum contribution per year.
I usually advise my clients to put a healthy percentage of their earnings into a Roth IRA, so that they have options in retirement for withdrawing money based on their tax bracket.
*Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Employer-sponsored Plans
Many workplaces offer a company retirement plan, such as a 401(k). My advice is to take advantage of that by contributing as much of your earnings as you can afford (within the contributions allowed per year).
Once your contribution is set up as a paycheck deduction, the money automatically goes into some sort of default money market fund – and will sit there unless you direct that it be invested. So, make sure you take an active role in investing your money for growth. Tap into your company’s retirement plan advisor to take advantage of their expertise.
Annuities and Pensions
A pension plan is something that companies set up for workers to receive money in retirement (the federal government used to do this, too). An organization basically invests money for their workers, who then get a revenue stream after retirement. You still can find existing pension plans in some municipal or state governments, but these are legacy. Instead, most workplaces have converted to employer-matched contributions such as 401(k)or 403(b) retirement plans.
An annuity is a way for you to create your own pension. Annuities are basically insurance contracts. Individuals purchase annuities to get a guarantee of future return on their money, plus protection of their principal amount. There are many types of annuity products and annuities are highly regulated by states. But they can have some drawbacks. As always, do your due diligence in investigating where you put your money.
*Annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
RMDs & Withdrawal Strategies
Tapping into different streams of revenue during retirement will take strategy and an understanding of tax implications. A couple of things to know:
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Generally, you have to start taking required minimum withdrawals (RMDs) from your IRA when you reach age 72 (or from SEP IRA, SIMPLE IRA, 401(k), and other tax-deferred retirement accounts). You will pay income tax on the amounts you withdraw each year, so that’s something you’ll need to budget for.
- Having a withdrawal strategy among your various accounts will give you enough money to live off of while managing the taxes you’ll pay each year. For tax purposes, during your earning years put as much money as possible into tax deferred accounts; during retirement, take as little out of tax-deferred accounts as possible.
It’s good to be aware of the end game as you make choices about how to save and invest for retirement.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
If you’d like to consult with an individual financial planner, please contact me. Alexander Consulting’s philosophy is to encourage people to plan for lifelong security: financial, health, and social. We take a highly individualized and zealously researched approach to financial planning so that our clients are fully prepared for all of life’s challenges.
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