Getting ready for retirement requires consistent saving, prudent investing and successfully avoiding penalties and fees. You can build a nest egg faster if you take advantage of workplace retirement benefits and make optimum use of government programs, including Social Security and Medicare. Here’s how to make a basic financial plan for retirement.
Save regularly when planning for retirement. The key to retirement planning is to save a portion of each paycheck beginning as early in your career as possible. Meghan Murphy, a director at Fidelity Investments, recommends aiming to save 15 percent of your pay each year for retirement. If you can’t save that much, save a smaller amount and then increase it each time you get a raise. “A 1 percent increase might mean $30 or $40 each pay period,” Murphy says. “If that’s in line with a raise or a pay increase, you don’t even miss the money because you didn’t have it to begin with.”
Maximize your 401(k) match. If your employer provides a 401(k) match, save at least enough to get the maximum possible 401(k) match. “If they match 50 cents on the dollar, up to 6 percent of your salary, elect 6 percent of your salary,” says Allison Vanaski, a certified financial planner for Arcadia Wealth Management in New York. “You just made a 50 percent return on your money by contributing a little bit each paycheck, and that’s in addition to what the investments will earn over time.”
Take advantage of retirement planning tax breaks. You can defer paying income tax on up to $18,500 in 2018 by contributing to a traditional 401(k) plan, and that amount jumps to $24,500 if you are age 50 or older. Income tax won’t be due on this money until you withdraw it from the account. Alternatively, you could contribute after-tax dollars to a Roth 401(k) and set yourself up for tax-free withdrawals in retirement. Low and moderate income workers who save for retirement may additionally be able to qualify for the saver’s tax credit. These tax benefits give you an extra incentive to save money for the future.
Open an IRA. If you don’t have a 401(k) plan at work, consider saving in an individual retirement account. An IRA offers similar tax breaks to a 401(k) plan, but isn’t tied to your job. The traditional and Roth IRA contribution limit is $5,500 in 2018, or $6,500 if you are age 50 or older. Workers who earn below certain income cutoffs can save in a 401(k) and IRA in the same year. You can also roll your retirement savings from a 401(k) to an IRA each time you change jobs to make your retirement finances easier to manage.
Carefully select a retirement investment allocation. Retirement savers need to choose a low-cost of mix of stocks and bonds that suits their risk tolerance. Young savers have many years to recover from stock market declines, so they can generally take on more risk. Many people gradually shift to more conservative investments as they approach retirement. “You should absolutely become more conservative over time, but you’ve got to make sure that as you are becoming more conservative you aren’t doing so at the risk of your purchasing power, your ability to outpace inflation over time,” says Benjamin Beck, a certified financial planner and chief investment officer at Beck Bode Wealth Management in Dedham, Massachusetts. “In order to make your income last for the rest of your life you have to participate in the markets.”
8 Retirement Planning Red Flags
Minimize fees in your retirement accounts. Fees reduce your investment returns and make it more difficult to build a nest egg for retirement. Remember to compare fees when selecting investments for retirement. Even a 1 percent fee can cost you tens of thousands of dollars over 30 years. “Fees for 401(k)s can range widely, and minimizing investing fees means savers have less drag on their long-term returns,” says Christina Empedocles, a certified financial planner for Insight Personal Finance in San Francisco. “If fees approach 1 percent, it could be more productive to instead invest retirement savings dollars in low cost, highly diversified index funds or ETFs in an individual retirement account.”
Qualify for a pension plan. Most employers no longer provide a traditional pension plan to new employees, but a few jobs still promise guaranteed payments in retirement. Many government jobs and union positions continue to offer traditional pension plans, and large companies are more likely to have pension plans than small firms or startups. However, you might need to stay at one position for a specific number of years in order to qualify, so frequent job hoppers might not qualify for a pension even if the employer provides one.
Boost your Social Security benefit. One of the most consequential retirement decisions you will make is when to sign up for Social Security. Payments are reduced if you sign up before your full retirement age, which is 66 for most baby boomers and 67 for millennials, and increase for each year you delay starting payments up until 70. Married couples can coordinate their claiming decisions to maximize their benefit as a couple. Continuing to work or suspending your payments can also have an impact on your retirement payout. Remember that your benefit will be adjusted to keep up with inflation each year.
Sign up for Medicare on time. If you receive health insurance coverage through your job, it’s important to enroll in another health plan before you retire, typically through Medicare or your state’s health insurance exchange. Medicare coverage can begin the month you turn age 65. It’s important to sign up for Medicare during the seven-month period around your 65th birthday because there are penalties if you enroll later. Those who continue to work after age 65 need to start Medicare coverage within eight months of leaving the job or health plan to avoid late enrollment penalties.
