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retirement planning

According to a recent Employee Benefit Research Institute (EBRI) Retirement Confidence Survey, many people think they’re doing a good job financially preparing for retirement. EBRI found that over seven in 10 workers remain confident in their ability to live comfortably. Howver, 34% of workers said COVID-19 has had a negative impact on their confidence. Regardless of your current confidence level, working with a financial advisor could help you create a retirement plan for your needs and goals. Let’s take a look at what you can do to prepare for your retirement.

Make the Decision to Start a Retirement Plan

The hardest thing about saving for retirement is probably just getting started. Most people don’t have a financial background, so it’s hard to think about things like IRAs or investment portfolios. It is also intimidating to think that you need to save hundreds of thousands of dollars for retirement – especially if you’re just getting started. But saving for retirement isn’t as daunting as it seems. If you start saving early, even small contributions can add up to big savings thanks to compound interest.

Think About How Much You’ll Need In Retirement

When you think about saving for retirement, start with how much you currently spend each month. If you spend 10% of your money on clothes, there’s a good chance you’ll want to spend about that much on clothes in the future. Also think about your monthly bills. Many people underestimate how much money they will need to spend in retirement. Some financial experts, like Nicole Lapin tell people that they should expect their retirement expenses to be at least 60% of what they are currently. And that’s assuming you live very frugally. Most people will probably want to spend 70% – 90% of what they currently spend. Look at your spending habits to get an idea what’s important to you.

Many people have specific things they want to spend money on in retirement. Maybe you want to travel, learn a language or volunteer more. Think about the lifestyle you might want to live. You should also think about where you might want to live. Many retirees move to warm, sunny locales.

Consider all these current and potential expenses. Once you have an idea how much you’ll spend each month in retirement, you can calculate how much you’ll need in savings.

Figure Out What You Already Have

retirement planning

Take stock of all the money and assets that you have saved. If you’re just starting and you don’t have much, that’s fine. But understand what you do have so that you can build off it and make it work for you.

Sometimes people overlook money that they have saved in a previous employer’s 401(k). If you have money in a 401(k) account that you no longer contribute to, consider an IRA rollover. You can usually transfer the money into your current employer’s 401(k) without having to pay any taxes or fees. You could also open an IRA and transfer the money into that account. Either way, don’t lose the progress you’ve already made toward your retirement plan.

Look over any investments you have and make sure they align with your retirement goals. If you plan to retire in 10 years, you probably don’t want all of your savings invested in high-risk stocks, although it depends on your plan. Maybe you do have some savings that you want to invest in higher-risk stocks. And if you aren’t sure how to allocate your investments, you should consider getting the help of a financial advisor.

How to Save Money: Retirement Accounts

When it comes to a retirement plan, there is no single way that everyone should allocate their savings. Depending on how much you have and what your goals are, you might want to consider different account types or investment vehicles. This is where a financial advisor can really help you. Financial advisors are experts who can help you choose the best investments for your specific situation.

There are a few ways to save that you should consider. If your employer offers a 401(k), take advantage of it. It will allow you to grow your savings without paying income tax upfront. How much you should contribute to a 401(k) will depend on your situation. Though if your employer offers a 401(k) match, it’s usually a good idea to contribute enough to take full advantage of the match.

If your employer doesn’t offer a 401(k), you can get many of the same benefits with a traditional IRA. Many experts also advise that people diversify their retirement savings with a Roth IRA. Unlike a traditional IRA, a Roth IRA is funded with after-tax dollars. The plus is that you don’t have pay income tax when you withdraw the money in retirement. Both types of IRAs can help you to reach your savings goals but you might benefit more from one or the other. For example, people who are just starting their careers might benefit more from contributing to a Roth IRA.

Common Retirement Contribution Limits
Account Type 2021 Contribution Limit* 2022 Contribution Limit*
401(k) $19,500 ($26,000 if 50 or older) $20,500 ($27,000 if 50 or older)
403(b) $19,500 ($26,000 if 50 or older) $20,500 ($27,000 if 50 or older)
SEP-IRA $19,500 ($26,000 if 50 or older) $20,500 ($27,000 if 50 or older)
SIMPLE IRA $13,500 ($16,500 if 50 or older) $14,000 ($17,000 if 50 or older)
457(b) $19,500 $20,500 ($27,000 if 50 or older)
Traditional IRA $6,000 ($7,000 if 50 or older) $6,000 ($7,000 if 50 or older)
Roth IRA $6,000 ($7,000 if 50 or older) $6,000 ($7,000 if 50 or older)

*Retirement accounts may also be subject to total contribution limits if you contribute to multiple accounts within a year. Check with the IRS or ask a tax professional if you have questions.

Consider Risk in Your Retirement Plan

Many people invest their IRA money through the stock market. There is always risk when you invest in the stock market. One way to potentially minimize that risk is choosing exchange-traded funds (ETFs) and index funds instead of just individual stocks. Funds are naturally more diverse and are less likely to lose money if the economy or stock market performs poorly.

Remember that there are options for people of all risk levels. If you have a low risk tolerance, you might want to consider something like a certificate of deposit (CD). It would earn you more than a savings account and the FDIC insures CDs.

Bottom Line

retirement planning

A retirement plan can help you ensure that you have enough retirement savings to live the life you want after you stop working. If you want to put yourself on the path to retirement success, start saving now. It doesn’t matter how old you are or how much you’ve already saved. There are multiple retirement accounts and the best one(s) for you will depend on your particular situation. You should consult with a financial expert if you need help deciding how to allocate your savings. But no matter what your retirement plan looks like, stick to it! Make saving a priority and don’t let small mistakes or unexpected challenges derail your plan.

Tips for Creating Your Retirement Plan

  • A financial advisor can help you take care of your finances when you’re retired. Finding a qualified 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.
  • Are you self-employed? You won’t have access to a 401(k) but don’t let that be an excuse to put off retirement savings. You can still save by opening a SEP-IRA. A SEP-IRA is relatively easy to set up and has flexible rules on annual contributions.
  • No matter what kind of retirement account you contribute to, make sure you’re aware of the annual contribution limits. Note that IRAs also have higher “catch-up” limits for people who are above a certain age. For example, the contribution limit for a traditional IRA in 2021 and 2022 is $6,000 if you are under age 50. The limit jumps to $7,000 is you’re 50 or older. That means even if you started saving late, you can make up a little bit thanks to the higher contribution limit.
  • It can be a challenge to save for retirement if you don’t earn a lot of money. However, there are a few incentives to help individuals and couples with a low or moderate income. One to take advantage of is the the Saver’s Tax Credit. It allows eligible filers to receive a tax credit of up to 50% of their retirement savings.

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Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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