Retirement Planning

Most people want to spend their golden years taking it easy after their career has concluded, but in order to make this dream a reality, you have to plan ahead. By saving your money and preparing a reasonable budget you can stick to, you can make your retirement as exciting and enjoyable as you've always wanted.

What Is Retirement Planning?

When the time comes to end your career, you will have to make adjustments to life without a regular income from your job. Without enough saved up, you might find yourself having to make painful lifestyle changes to adjust to your reduced budget — the last thing you want to do while trying to enjoy life after your career. To avoid this, you need to prepare yourself by building your nest egg, setting a realistic budget and thinking seriously about how you want to spend your retirement.

One of the key elements to retirement planning is starting early, especially with regards to saving. Compound interest will mean that money that you invest grows more each year, so the earlier you can start socking away money, the more you’ll have when the time comes to retire. Even if retirement is decades away, it’s never too early to start saving and investing for your future.

Of course, retirement planning isn’t just about money. It’s also about anticipating the sort of life you want to live when you don’t have to work anymore. So, while it’s important to keep an eye on your finances, planning for retirement also requires thinking about your favorite hobbies or trips that you’ve always wanted to take, not to mention where you want to live. The most important part of retiring is being able to enjoy yourself, and any retirement planning you do should keep that front of mind.

Types of Retirement Planning

There are a number of different financial products designed specifically to aid you in building the nest egg that will fund a comfortable retirement. The federal government wants to support people’s efforts to save, so retirement accounts will frequently come with significant tax benefits that you should take advantage of wherever possible.

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IRA/401K & Roth IRA

IRA/401k

An individual retirement account (IRA) or 401k are tax-advantaged accounts that allow you to take pretax income and invest it in the stock or bond markets. Many employers will offer the opportunity to automatically deduct 401k contributions from each paycheck, which is one of the easiest ways to ensure that you’re saving enough. What’s more, 401k contributions are untaxed, so your taxable income is reduced by the size of your contribution, reducing your tax burden.

Plenty of employers will also match your 401k contributions, usually up to 5 percent of your income. This means that, not only do you save on your tax bill by making 401k contributions, but you double your money in the process. If your job offers matching 401k contributions, it’s almost always a good idea to take advantage of it.

Roth IRA

A Roth IRA is another form of retirement account, but one that offers distinctly different tax benefits to a 401k. Unlike a 401k, contributions to a Roth IRA are made after taxes, so they don’t save you on taxes in the short term. However, once you reach retirement, distributions from a Roth IRA are untaxed — unlike money you draw out of a 401k account, which is counted as income.

Roth IRAs are essentially a way to avoid paying capital gains taxes on the growth in your retirement savings, but your annual contributions are limited to $5,500 or less, so it’s important to start early and try to save enough each year to make the full contribution.

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Bond Funds

As you approach retirement, you’ll want to start shifting more of your assets from stocks to bonds. Stocks offer more growth and better returns in the long run, but they are prone to big swings in value in the short term that can interrupt retirement plans. Most bonds, however, provide a steady stream of interest income without a significant risk that you’ll lose any of your initial investment.

Any retirement portfolio should include a mix of stocks and bonds, but the closer you get to retirement, the more that mix should start to favor bonds more. For someone in their 30s or 40s, a major decline in the stock market like the one in 2008 isn’t going to derail retirement plans, because you can simply wait for the market to rebound. However, if you are only a year or two from retiring, having your porfolio drop in value by a third or more is a major problem. Since bonds aren’t as susceptible to these swings in the market, they make a better option for people for whom retirement is in the relatively near future.

Social Security

One form of retirement income that everyone can count on is Social Security, a subsidy paid by the government to all retirees. Social Security provides you with a steady monthly income for as long as you’re alive, so your retirement planning should include this income in your budget.

While anyone can start collecting Social Security at 62, your monthly payments are significantly higher if you delay retirement. Your monthly benefits are about 25 percent lower if you opt to start collecting them at 62 instead of waiting until your full retirement age of 65. And, if you can keep waiting, your benefits increase by about eight percent each year you delay collecting them until reaching their maximum at 70.

So, while it’s a personal decision when you want to retire, you should think about how that decision will affect the amount of your retirement benefits from Social Security.

Annuities

Annuities are a financial product wherein you pay a lump sum directly to an insurance company in exchange for regular payments over time. Retirees interested in securing a regular source of income in addition to their social security may want to turn a chunk of their retirement savings into an annuity.

It’s important to be careful when considering annuities, though. Firstly, the stability of the issuing company is essential as your annuity isn’t safe if they go out of business or file for bankruptcy. Secondly, annuities frequently offer lower returns than other investments, but remain popular because the issuing companies offer big commissions to incentivize financial and retirement advisors to recommend them to clients. Be sure to carefully research any annuity to determine if it really is right for you before purchasing as, frequently, stock or bond investments will be much more valuable in the long run.

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About the Author

Joel Anderson is a business writer with over a decade of experience writing about the wide world of finance. Based in Los Angeles, he specializes in writing about the financial markets, stocks, macroeconomic concepts and most broad financial topics with an eye toward instructional writing for the investing outsider.

Joel Anderson holds shares in Walmart, Verizon, AT&T, the Guggenheim Solar ETF, the United States Oil ETF and the Vanguard Total Stock Market Index Fund.