How to Start a Retirement Plan

August 10, 2020

According to the Employee Benefit Research Institute’s 2020 Retirement Confidence Survey, 7 in 10 workers are confident they’ll have enough money to live comfortably in retirement. Only 4 in 10, however, have planned for retirement.

Planning for retirement can be overwhelming. Most of us don’t have a financial background so it’s hard to think about investment portfolios or IRA’s. Not to mention, the sheer task of saving thousands of dollars seems impossible, especially on a budget.

Fortunately, saving for retirement is possible no matter where you are along your financial journey.

Here are some tips to help get you started. ‍

4 Steps to Create a Retirement Plan

1. Figure out how much money you’ll need in retirement.

‍ Look at your current monthly budget and use it as a guide to determine how much money you’ll need in retirement. Some financial experts advise that you should expect your retirement expense to be at least 60% of what they are right now. But that’s a conservative estimate and assumes you will live very frugally. If you want to travel or move someplace sunny, plan to spend 70-80% of what you currently spend. Consider all your current and potential expenses.‍

2. Take stock of how much you already have.

Review your assets and savings accounts. Don’t worry if you’re just starting to build your savings or plan for retirement. Knowing what you have helps establish the baseline from which your savings will grow.

Once you know how much you have and how much you’ll need, use a free retirement calculator like this one from NerdWallet. It gives you a retirement savings score so you can get an idea of where you’re at when it comes to achieving your retirement goals. ‍

3. Understand the different types of retirement savings accounts.

There is no one-size-fits-all when it comes to retirement planning and savings. Use the information you gathered in the first two steps to identify the best solutions for your retirement goals. Here’s a high-level breakdown of the most common types of retirement accounts, including the annual contribution limits set by the Internal Revenue Service (IRS).

Account Type

401(k) Plans

‍ A 401(k)-retirement plan is an employer-sponsored retirement account. It allows you to dedicate a percentage of your pre-tax income towards a retirement account. The funds are often invested in a range of vehicles like stock, bonds, and mutual funds which can help your account grow faster. Some employers match a percentage of your contribution. Many experts recommended maxing out your employer 401(k) contribution because it’s like free money. Talk to your employer’s Human Resources Team to learn more about the plans they may offer. ‍

403(b) Plans

‍ A 403(b)-retirement plan is an employer-sponsored retirement account just like a 401(k). The only difference is the classification of the company. For-profit employers can offer 401(k) plans. Certain tax-exempt or not-for-profit organizations can offer 403(b) plans. As with a 401(k), experts recommend contributing to your employer’s plan and maxing out any contributions they might provide. Talk to your employer’s Human Resources Team to learn more about the plans they may offer. ‍

Traditional IRA

‍ A Traditional Individual Retirement Account (IRA) is not an employer-sponsored plan. It’s an individual account that allows you to put aside pre-tax money on your own. Like 401(k) and 403(b) plans, Traditional IRA contributions are considered tax deductions which can lower your taxable income throughout the year. Money put into an IRA and any investment earnings are only taxed when money is withdrawn. ‍

Roth IRA

‍ A Roth Individual Retirement Account (IRA) is not an employer-sponsored plan. It’s an individual account just like a Traditional IRA. However, there’s a big difference. With a Roth IRA, you put money into the account after you’ve paid taxes. As a result, your withdrawals in retirement are generally tax free. ‍

4. Meet with a financial advisor.

Saving for retirement takes time and everyone’s financial situation is unique. That’s where a financial advisor comes in. They’ll use the information you’ve gathered from the first three steps to help you create a retirement plan designed to meet your goals. Most credit unions and banks offer these services for free.

Saving for retirement can feel overwhelming, especially if you’re just getting started. A retirement plan is the best place to start. Just like a monthly budget, it outlines your goals and how you will achieve them. There are many retirement savings accounts out there. Talk with a financial advisor to discuss your situation and create a plan to help meet your retirement goals.

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