Retirement Planning Essentials

Why save for retirement?

It’s never too early to plan your retirement, even though you’ve got financial demands right now that make it hard to think about the future. And with news reports indicating many Americans keep working long past what used to be considered retirement age, you might wonder if it’s worth it to save for retirement at all. It’s important that you take control of your retirement savings as early as you can because programs that used to guarantee funded retirement like pensions and Social Security are becoming less available or certain with each passing year. Even if you plan to work for the rest of your life, retirement accounts are an important part of your future. You may run into age-related health issues, a recession that results in massive lay-offs or any number of future events that will lead you to rely on your own savings to live. If you can save, why wouldn’t you? 

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Setting retirement goals

While there is no perfect formula to guess what you’ll need for the future, it can help you stay on track to have a goal in mind. Start by figuring out how much you’ll realistically need annually to maintain a lifestyle you’ll enjoy. Remember that while some costs, like your mortgage or car, may go down as you pay things off, other things like medical expenses may rise.

Make an estimate about how many years you think you’ll live in retirement. For each of those years, add a 3 percent bump in your annual income need to account for inflation, and then multiply the income amount times the number of years. There are also a number of online calculators that can help, but meeting with a financial advisor is the best way to get an accurate picture of what you’ll need for retirement.

Along the way, be aware that you might encounter a retirement gap, which is when what you’re on track to save and what you need to save aren’t the same. Retirement savings isn’t a “set it and forget it” venture, so make sure to review your accounts every year or meet with your financial advisor annually.

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How can I save for retirement?

There are a number of ways to save for retirement, but the most important thing to remember is that it’s never too early or late to start. Even if you only have a few dollars a month to put aside, getting into the habit of saving gives you a better chance of succeeding at it than not saving at all. 

If your employer offers a 401(k) or 403(b), it’s easy to make contributions directly from your paycheck, before you even get it. Many employers will also match employee contributions, so by not participating you could be turning down free money. If you have a retirement plan with your employer, work with a financial advisor to make smart decisions with your investments considering your age, risk tolerance and income. Your HR department can help you do the work, but isn’t in a position to advise you on the best ways to invest your funds. 

Another great choice for retirement savings is an Individual Retirement Account (IRA). Both Traditional and Roth IRAs are funded with after-tax dollars. With a Traditional IRA, you’re only taxed on the earnings and deductible contributions when you make withdrawals. A Roth IRA allows you tax-free withdrawals if you meet certain IRS rules.

Simplified Employee Pension (SEP) IRA is a unique option that you may have available to you if you are self-employed or work for a small business. With a SEP, your employer makes tax-deductible contributions to the account; employees do not make direct contributions.

No matter whether you choose a specialized retirement account or choose another method of saving, like a Share Term Certificate ladder, it’s important to start saving whenever and however much you can. 

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Can I take an early withdrawal?

You can take an early withdrawal from a retirement account, but it’s typically not a good idea. If you take an early withdrawal from your retirement accounts, it could end up costing you, including income tax and/or a 10 percent early withdrawal penalty. There are some exceptions that allow you to avoid the penalty when taking an early withdrawal from your individual retirement account (IRA), such as using the funds for a qualified higher education expense or toward unreimbursed medical expenses, but those vary widely depending on the kind of account you have, the circumstances, your income bracket and your age.

If you have money in an employer-sponsored retirement plan, you usually cannot withdraw money from the plan unless certain events occur, often referred to as distribution “triggering events.” These triggering events vary between plans, depending upon the type of plan and the choices made by the employer. Sometimes termination of employment constitutes a triggering event, but even then there still may be a waiting period before you can take your money out. Some plans will allow you to move your money to another retirement plan or to an IRA upon termination of employment. Talk to the plan administrator (most likely your employer) for details regarding distributions or review the plan’s summary plan description.

 
 

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What if I change jobs?

When you leave a job, it’s a good idea to take your 401(k) with you. It’s your money, after all. Cashing it out can lead to income tax and a 10 percent penalty if you’re under 59 ½, which defeats the purpose of saving. 

You can roll your funds to an IRA, or you may even be able to move your funds to your new employer’s retirement plan. If your funds are moved following IRS rules, you will not face ordinary income taxes or a penalty in either case. Moving your retirement funds from your old plan to a new one or to an individual retirement account (IRA) may result in lower fees and more diverse investment options.

It’s important to note how the money moves between your old retirement plan and your new retirement plan or IRA. Request that funds go directly to your new plan or IRA and are not payable to you. Funds made payable to you will incur 20 percent withholdings and expose you to the risk of a 10 percent penalty if the funds are not deposited into a retirement account within 60 days. Rollovers are exempt from the IRS annual contribution limit for IRAs.

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