Start Planning for Your Retirement
You can achieve your goals for retirement with proactive planning and wise asset management. Take action sooner rather than later to put yourself in the best position for the future you envision. It’s never too late to start. Begin exploring your retirement options and identify critical issues you should consider when planning.
How much do I need to save for retirement?
An essential first step is to project what your financial needs will be once you retire. Although it is difficult to predict your circumstance, you can use your current income to make an estimate. A general rule of thumb is that an individual may need 70-80% of their pre-retirement income to maintain a similar standard of living that they have before retiring. However, it all depends on numerous factors and how you plan to spend your time. What does your ideal retirement look like? At what age do you plan on retiring? Are you going to move to a retirement community? Do you plan on traveling abroad?
Make a comprehensive list of possible expenses, which can include:
- Housing: Rent or mortgage payments, home maintenance
- Utilities: Gas, electric, water, telephone, cable TV
- Other Necessities: food, clothing, and other personal items
- Health Care: medical insurance premiums, co-payments, Medicare premiums, prescriptions
- Taxes: Federal and state income tax, capital gains tax, property tax
- Debts: Personal loans, business loans, credit card payments
- Transportation: Car payments, insurance premiums, gas, maintenance, and repairs, public transportation
- Entertainment: dining out, travel, recreational hobbies, memberships
Where will my retirement income come from?
The next step is to identify all potential sources of retirement income. A common source of income is Social Security which most likely can only cover a portion of retirement expenses. Social Security retirement benefits can begin as early as age 62. Only individuals who reach full retirement age can receive full benefits.
Most retired individuals need income from multiple sources such as:
- Retirement accounts: 401(k), IRA. And other types of retirement accounts
- Pensions
- Investments
- Savings Accounts and CDs
- Stocks and Stock Mutual Funds
- Home Equity Loan
- Part-time work
- Annuities
- Income from rental properties
- Inheritance
What retirement savings plans should I choose?
There are many different types of retirement accounts that you can use to achieve your goals. As a business owner or self-employed individual, you have the opportunity to set up your retirement account. Two common types of retirement accounts are tax-deferred and tax-exempt. Contributions made to tax-deferred accounts, such as traditional IRAs and 401(K) plans, are tax-deductible, but all future withdrawals are taxed at your ordinary-income tax rate. Tax-exempt accounts, such as the Roth IRA or the Roth 401(k), do not defer the tax to a later date. Instead, contributions are made with “after-tax dollars,” and all future withdrawals are not taxed.
Here are some popular retirement account options for business owners and self-employed individuals:
Individual Retirement Account
Traditional Individual Retirement Account contributions are tax-deductible. Tax deduction limits are based on your Modified Adjusted Gross Income (MAGI) and filing status. The contribution deadline is the due date of the individual income tax return. IRA withdrawals are taxed at your ordinary-income tax rate. Any withdrawals made before the age 59.5 result in a 10% penalty. Individuals must take their first required minimum distributions by April 1 of the year following attainment of age 72 (70½ if you turned 70½ before January 1, 2020).
- 2021 IRA Deduction Limits – Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work
- 2021 IRA Deduction Limits – Effect of Modified AGI on Deduction if You Are NOT Covered by a Retirement Plan at Work
Roth IRA
The contributions made to a Roth Individual Retirement Account are not tax-deductible, and any future withdrawals are tax-free. An individual’s contribution limit depends on their filing status and modified adjusted gross income. Plan participants can make withdrawals at any time. However, if you have had the account for less than five years and are under 59.5 years old, you may need to pay tax or penalties on the earnings.
Simplified Employee Pension
A Simple Employee Pension plan allows the business owner to set up an Individual Retirement Account for themselves and their employees. The maximum contribution can be up to 25% of compensation but no more than $58,000 in 2021. The contribution must be the same percentage of salary for each eligible employee. The deadline for contributions is the federal income tax return filing due date. If a withdrawal is taken early before age 59.5 an additional tax of 10% is applied. Plan participants must take Required Minimum Distributions by April 1 of the year following attainment of age 72 (70½ if you turned 70½ before January 1, 2020).
Individual 401(k)
The Individual 401(k), also known as a Solo 401(k), is available to self-employed or small businesses with no employees (other than the owner and their spouse). The employee contribution is limited to the lesser of $19,500 or 100% of earned income. The employer and employee contributions combined can’t exceed $58,000 ($64,500 including catch-up contributions) for 2021. An additional 10% early withdrawal penalty is paid on distribution taken before age 59.5. Plan participants must take Required Minimum Distributions by April 1 of the year following attainment of age 72 (70½ if you turned 70½ before January 1, 2020).
How do I save for my retirement?
Here are some tips to help you get started:
- Start saving now, even if you need to start small. The compounding interests will grow your savings.
- Set up automatic contributions to retirement accounts or other investments. Doing so will ensure you are making regular contributions effortlessly.
- Cut back on your current expenses. Evaluate your spending habits and make necessary changes to help increase your savings and investments.
- Pay off debt such a credit cards and other high-interest rate debt.
- Create several streams of income. You can get a part-time or a side hustle to help you achieve your goals.
Learn more about your retirement plan options by connecting with an advisor.
