Things to Consider When Planning for Retirement: Expenses & Savings
This retirement series will discuss things to keep in mind to help you prepare for a successful retirement, including savings and expenses, what you need to know about Social Security, selecting pension benefit and retirement distribution options, healthcare and retirement, reviewing wills, trusts, powers of attorney, and beneficiaries, and how an experienced attorney can help you meet all your retirement planning needs.
Determining Retirement Expenses & Retirement Income Plan
Having a successful retirement takes planning. Determining your retirement expenses, developing a retirement income plan, and having the proper amount of savings are all vital to post-retirement success. The average retirement age in the United States is between 62 and 65 years of age, and life expectancy is almost 80 years old. Therefore, in considering retirement, you should plan to live on what you’ve saved for about 20 to 25 years.You may expect to spend more money on hobbies, entertainment, and activities once you have retired, but you also need to consider inflation, rising healthcare costs, and the financial responsibility you may have for elderly parents, children, and/or grandchildren. Additionally, when calculating how much you need to save, it is also important to plan for emergencies, and to protect yourself against any “financial shocks” in retirement, such as the stock market crashing, poor health, the death of a spouse, or the need for long-term care.
In contrast, you may have fewer expenses, such as no longer having a mortgage, reduced transportation and fuel costs, etc. It is essential to review each of your expenses to have a clear understanding of what your actual cost of retirement will be, which in turn, will help you determine how much you need to save.
Retirement Savings: 401(k), Traditional IRA & Roth IRA
As mentioned above, part of your retirement plan is determining how much money you will need saved when you decide to retire. That figure will most definitely vary from person to person; however, a good rule of thumb is that you will need about 80% of your, annual pre-retirement income for retirement. It’s a good idea to begin saving for retirement as soon as possible. As of 2016, workers can contribute up to $18,000 per year to their 401(k) retirement plan (the same rules apply to 403(b) and Thrift Savings Plans), which is deferred from income taxes. Workers age 50 and older can contribute an additional $6,000 to a 401(k) plan, for a total contribution of $24,000. Workers should also take advantage employer matched contributions to a 401(k), and aim to save enough to claim any matching funds your employer offers.Another option for retirement savings is an individual retirement account (IRA). There are two types of IRAs, traditional and Roth. In 2016, for both traditional and Roth IRAs, an individual cannot contribute more than $5,500 per year, or $6,500 for individuals age 50 and over. IRA accounts are beneficial because if you are maxing out your 401(k), the IRA allows you to save an additional $5,500 or $6,500 per year, depending on your age. Traditional and Roth IRAs both have advantages and disadvantages.
With a traditional IRA, you can defer income tax on what you contribute, but as with a 401(k) plan, taxes are taken out as the money is withdrawn. With a Roth IRA, taxes are paid on the contributions; however, the investment earnings in the account are not taxed and withdrawals of the principal after the age of 59 ½ are also tax free. Notably, Roth IRA eligibility phases out for taxpayers whose adjusted gross income is between $117,000 and $132,000 for individuals and $184,000 to $194,000 for married couples, but there are ways around the phase out limits, such as converting the contribution from an IRA to a Roth IRA.
Regardless of what type of IRA you decide to invest in, consulting a tax attorney regarding your proper management of retirement accounts and other assets is important, as the rules are complex and the exceptions have exceptions.
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Posted - 08/08/2016
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