Preparing for retirement is essential to achieving a comfortable and secure future. Having a clear vision for how you’d like to spend your retirement years – and understanding how to fund it – are important steps in the process. Financial planning and retirement are deeply connected, encompassing a wide range of tasks and considerations. Whether your retirement is just a few years away or several decades down the line, there are several key items to prioritize on your financial planning checklist. Working with a financial advisor can further help you optimize your strategy and keep you on track to meet your retirement goals.
Start With Your Target Retirement Number
When mapping out your financial planning retirement strategy, it can help to work backward. That means figuring out how much money you’ll need to save for retirement first, then building your financial plan around actions that can get you to that number.
SmartAsset’s retirement calculator can help you narrow down how much you may realistically need to have saved and invested. When estimating a target savings number, it’s important to ask questions like:
- What will your retirement lifestyle involve? (i.e. travel, new hobbies, starting a business, etc.)
- How much will you need to meet your annual retirement budget?
- Where will your retirement income primarily come from, in terms of Social Security, a 401(k), IRAs, etc.?
- At what age will you begin taking Social Security benefits?
- How many years do you anticipate spending in retirement?
- Is working part-time in retirement or starting a business something you’re interested in?
- How much debt do you anticipate having in retirement?
- Will you be providing financial support for adult children or grandchildren?
- Are you interested in creating a financial legacy of any kind?
These questions can help you set up accurate spending goals to ensure that you don’t run out of money in retirement.
Weigh Your Options for Saving and Investing
There’s more than one way to save and invest as you build wealth for the future. For example, you could save money for retirement using:
- 401(k) plan or similar workplace retirement account
- Traditional and Roth individual retirement accounts
- SEP or SIMPLE IRA plans if you’re self-employed or run a business
- Taxable brokerage accounts
- Savings, money market and CD accounts
- Health savings accounts (not a retirement account technically, but can be used to pay for healthcare expenses when you retire)
A 401(k) plan may be your first option for saving, owing to its tax advantages and the potential for employer matching. Contributions to a traditional 401(k) can reduce your taxable income, growth is tax-deferred and you pay taxes at your ordinary income tax rate on qualified withdrawals. The same rules apply to traditional IRAs as well as SIMPLE and SEP IRAs.
A Roth IRA, on the other hand, offers no tax deduction for contributions but you can make qualified withdrawals tax-free. With a taxable brokerage account, you’re subject to capital gains on earnings. Savings, money market and CD accounts are also taxable but they can be good to have for keeping some of your retirement savings liquid.
Health savings accounts (HSA) are not retirement accounts, but they can still be a part of your retirement plan. These accounts allow for tax-deductible contributions, tax-deferred growth and tax-free withdrawals when the money is used for qualified health care expenses, which can include long-term care.
Ideally, you should aim to save and invest through various channels, taking full advantage of the annual contribution limits for tax-advantaged retirement accounts. However, if your savings are limited, prioritize contributing to your employer’s retirement plan first.
Aim to contribute at least enough to receive the full company match if it’s available. Similarly, if you have an HSA with employer contributions, consider maximizing this benefit, as well. Once these are covered, evaluate how much you can allocate toward an IRA, taxable investment accounts and savings accounts.
Consider Supplementing Your Financial Resources
In addition to saving and investing money for retirement, there are other financial tools you can add to your plan.
First, you could purchase an annuity. Annuities are insurance contracts that pay you back a set amount of money in exchange for a lump sum or monthly premium. An annuity can offer guaranteed, predictable income for retirement in addition to the money you’re withdrawing from savings and investments or Social Security benefits.
Annuities do have pros and cons, however. For example, an annuity can be a costly purchase if you need to pay a large lump sum premium upfront. And the quality of an annuity is only as good as the insurance company that issues it. If the insurer isn’t financially healthy, that could pose a risk if it’s not able to make your annuity payouts when the time comes.
Next up is life insurance. Life insurance primarily offers a financial benefit to your family when you pass away. But some policies, such as whole life and universal life insurance, can also allow you to accumulate cash value. That’s money you could borrow against during your lifetime as an additional retirement income stream.
Doing so can deplete the death benefit of your life insurance policy if you don’t pay back what you borrow. And permanent life insurance can carry more expensive premiums than term life insurance, which has no cash value. But it’s worth considering how a cash value policy could help round out your retirement plans.
One more tool to consider is long-term care insurance. Requiring long-term care in an assisted living facility or nursing home could easily drain your retirement savings. Long-term care policies are designed to help cover these costs. Then, you won’t have to wipe out your investments or savings to pay for care.
As a general rule, long-term care insurance is less expensive the younger you are when you buy it. You may pay one upfront premium or monthly premiums, depending on your policy’s structure.
Do the Math on Social Security
Social Security benefits can add to your retirement income. However, it’s important to think ahead about when and how you plan to use them.
Technically, you can begin taking Social Security benefits at age 62. But doing so can reduce the amount of benefits you’re eligible to receive. Working while receiving Social Security benefits prior to reaching full retirement age, typically 66 or 67 depending on when you were born, can also shrink your benefit amount.
On the other hand, waiting until age 70 to take benefits could increase the amount you receive, up to 132% of your normal benefit amount. Whether it makes sense to take benefits earlier or later depends on the other sources of retirement income you already have and whether you plan to work at least part-time in retirement.
Work With a Financial Advisor
Many Americans mistakenly believe they’ll need less income in retirement, assuming their spending will decrease. However, factors like remaining mortgage payments, unexpected healthcare costs, moving to a retirement community and fulfilling bucket-list goals such as travel or continuing education can quickly drain retirement savings. Working with a financial advisor early on can help you develop a multi-stage retirement plan to strategically align your investments and savings with your retirement objectives.
A financial advisor can help you break up your retirement plan into actionable steps, like these:
- Grow your emergency fund to safeguard against unexpected setbacks
- Maximize your retirement plan contributions
- Implement a tax strategy for your investments and estate plan
- Diversify your investment portfolio to support a comfortable retirement
When putting together a retirement plan, a financial advisor will guide you in setting up goals through a time horizon. This is how long you will want to hold on to investments. An advisor will also help you develop an asset allocation strategy to target different types of investments for your needs. For example, part of your strategy might be to include highly liquid assets that can convert easily into cash without losing value.
Searching for a financial advisor can be a long process. If you’re interested in working with an advisor, SmartAsset’s free matching tool can pair you with up to three advisors who serve your area.
Bottom Line
Planning for a financially secure retirement is an ongoing process, and the sooner you start, the better. Your plan starts with knowing how much you’ll need to save for retirement, then deciding where to allocate your money to make the most of it. Checking in with your plan at least once a year can help you gauge whether you’re on track to reach your goal and what adjustments you may need to make, if any.
Tips for Retirement
- If you pass on your assets to a loved one, you must consider the tax implications of doing so. A financial advisor who specializes in estate planning can help you optimize a tax strategy to protect your assets and property for a loved one. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Rebalancing your portfolio periodically is an efficient strategy to keep your retirement goals aligned. Here are five important factors to consider when rearranging your investments.
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