How to plan for Retirement

Published June. 20, 2022

It depends on how you want to live, what kinds of investment accounts you have, and how much money you expect to get.

Planning for your retirement is up to you. It depends on what you want and what you can do. Even if retirement is a long way off, you should think about what you want and how you’ll get there. Your retirement account needs to be enough to cover your living costs, no matter what that means. Three of the most important ones are:

How much you want to spend every year

Where you would like to live

When you want to stop working,

If you know about these things, you’ll be able to figure out how much you need to save. Also, you’ll have to decide where to put your money. Many people will put their retirement savings in one or more of these five accounts:

The original 401 (k)
Roth 401 (k)
Standard IRA

You can only get a Roth IRA, Health Savings Account (HSA), or 401(k) through your employer. IRAs can be opened by anyone. With 401(k)s and IRAs, the benefits of a Traditional account usually come before taxes, while the benefits of a Roth account come after taxes. Whether you’ll be in a higher tax bracket now or when you retire will help you decide what to do.

If you’re self-employed, you might want to think about these other retirement accounts:

Solo 401(k)
SEP IRA
SIMPLE IRA

Each of these is good for a certain size of business. The contribution limits for a Solo 401(k) are high, which is a plus, but you can only get one if you’re the only employee. A SIMPLE IRA may be the best choice for businesses with less than 100 employees, since both employees and employers can put money into it.

You should also think about getting extra money. If you know you will get money from sources other than your retirement account, like Social Security or a pension, you may not need to save as much.

In this guidebook, we’ll talk about:

How much you should save for your golden years

Choosing accounts for retirement

Supplemental income to consider

Options for self-employed people to retire

 

Most people want to stop working at some point. But everyone plans for retirement in a little different way. You can get there in more than one way. Some people want to spend more money than others, while others want to spend less.

Your plan for retirement should be based on how you want to live and how much money you have. And it’s best to figure out the details as soon as possible. Even if retirement seems like a long way off, planning for it now will help you retire when and how you want.

First, figure out how much money you need to save.

 

How much money should you save for your golden years?

How much you need to save comes down to how you want to spend your retirement. Some people want to see the whole world when they get older. Or they could move closer to their families. You might have a hobby that you’d like to spend more time and money on. For you, retirement might look like your life now, but without work.

That’s a good place to start for a lot of people. Think about how much you spend now and decide if you want to spend more or less than that every year when you retire. What do you want your money to do for you? Answering these questions will help you set a goal for how much money you’ll need and think about how you’ll spend it when you retire.

Don’t forget to think about where you want to live. Cost of living is very different from place to place, and that has a big impact on how long your money will last. If you move to a place where the cost of living is lower, you’ll need less money to retire. Want to have a good time in New York City, Seattle, or San Francisco? Plan to save a lot more money.

Lastly, when do you want to stop working? This will give you a date by which you want to save the money. This is called a “time horizon” in the world of investing. It will also tell you how much you need to be able to retire. When you retire early, you have less time and more years ahead of you that you need to save for.

Still don’t know how much to put away? Tenjin AI can help you plan for retirement.

Choosing accounts for retirement

Once you know how much you need to save, it’s time to figure out what you’ll do with that money. Choosing the right investment accounts is a key part of planning for retirement because they can help you reach your goal faster by giving you interest and tax breaks. Even though there are a lot of different types of investment accounts, most people use five main ones to save for retirement.

1. The old-school 401 (k)

A Traditional 401(k) is a retirement plan set up by an employer. There are two great things about these:

Your employer may match some of the money you put in.
Your contributions are tax deductible.

A 401(k) is only something you can put money into if your employer has one. If they do and they match a portion of what you put in, this is almost always an account you should use. The money from the match is free. You shouldn’t just leave that out there. And because your contributions are tax-deductible, you’ll pay less income tax while you save for retirement.

2. Roth 401 (k)

A Roth 401(k) works the same way as a Traditional 401(k), but the tax benefits come later. You make contributions, and (sometimes) your employer matches some of them. You also pay taxes as usual. But you don’t have to pay taxes when you take money out of your retirement account. This means that you don’t have to pay taxes on any interest you made on your account.

In 2022, the most you can put into a Roth or Traditional 401(k) is $20,500, or $27,000 if you are at least 50 years old.

3. Individual Retirement Account (IRA)

Like a 401(k), an IRA can help you save money on taxes. Depending on how much you make, your contributions may lower your income before taxes, which means you pay less income tax as you get closer to retirement. The most important difference? Your employer doesn’t match your contributions. The limits on how much you can put in each year are also much lower. In 2022, you can only put in $6,000, or $7,000 if you are 50 or older.

4. Individual Retirement Account (IRA) in Roth (IRA)

A Roth IRA works the same way as a Roth 401(k), but the tax benefits come when you retire, just like with a Roth 401(k). Right now, your contributions are still part of your taxable income, but when you take money out in retirement, none of the interest is taxed.

So, should you use a Traditional account or a Roth account? One way to spread out your taxes in retirement is to use both Traditional and Roth accounts. Another thing you can do is compare your current tax bracket to the one you think you’ll be in when you retire and try to work around that. Also, remember that your income may change over the course of your career. So you might choose Roth right now, but if you get a big raise, you might switch to Traditional.

5. Account for health savings (HSA)

Another good choice is an HSA. You can save money on taxes by putting money into an HSA, and if you use the money to pay for medical costs, you don’t have to pay taxes on the money you take out. After age 65, you can use the money just like you would with a traditional 401(k) or IRA, even for things that aren’t medical.

Only people with high-deductible health plans can put money into a Health Savings Account (HDHP). If your HDHP only covers you, you can put up to $3,650 into an HSA in 2022. If your HDHP covers your whole family, you can put up to $7,200 into an HSA.

How else can you make money?

If you put enough money into a retirement account, the money you get out of it should be enough to cover your costs when you retire. But if you have other ways to make money, you might not have to save as much. Social Security is a common way for people to get money when they retire. You should be able to get social security benefits as long as you or your spouse have paid enough into the system over the course of your career. You’ll still get some benefits if you retire a little early (but it may be less).

This can add up to a lot of money every month. Using the Social Security Administration’s Retirement Estimator, you can figure out how much you’ll get in benefits.

Accounts for retirement for those who are self-employed

People who work for themselves have a few more things to think about.

One Participant 401(k) Plan or Solo 401(k) (k)

A Solo 401(k) is similar to a regular 401 (k). But if you have a Solo 401(k), you are both the boss and the worker. The employee contribution limit and the employer contribution limit can be added together. This is a pretty good choice if you don’t have any employees and run your own business. But a Solo 401(k) usually needs more planning ahead of time and more paperwork on a regular basis than other account types.

If your situation changes, you might be able to roll over your Solo 401(k) plan or combine your IRAs into a better way to save for retirement.

Employee Pension Made Easier (SEP IRA)

With a SEP IRA, each employee gets their own IRA set up by the company. Only the employer can put money into the plan, and the rate of contribution must be the same for each employee who is eligible.

Plan to match employees’ savings as an incentive (SIMPLE IRA)

A SIMPLE IRA is perfect for small business owners with less than 100 workers. Both the employer and the worker can make a difference.

You can also put money into a Traditional IRA or a Roth IRA, but the amount you can put in depends on how much you’ve already saved in other retirement accounts.

 

Start making plans for when you retire.

There is no one way to plan for retirement that works for everyone. It’s about what you want and what you can do. Your plan needs to work for you. Because of this, Tenjin AI makes recommendations for you based on what you tell us. We’ll help you find the right accounts, choose the right assets, and start planning for retirement based on your current savings, when you want to retire, and how you want to retire. Click here to get started.

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