In this series for Money Smart Week, Everwise Credit Union is sharing tips on personal finance.
Retirement should be planned as much in advance as possible, because the more time allowed for savings to grow, the bigger the nest egg will be when it’s time to cash in.
Here’s how to get started on retirement planning.
1. Define your retirement number.
Before putting aside money for the future, determine how much you’ll need to have saved to live comfortably and independently throughout retirement. Experts say 80% of an individual’s current annual income is needed for each year of retirement, and to plan for 30 years of retirement. Estimate retirement needs by taking current annual income multiplied by 0.80, then multiply that by 30 to reach the amount needed.
2. Choose your retirement accounts.
There are many options available that may help with retirement savings goals. Here’s a quick review of the two most common retirement accounts:
- 401(k): Current or former employees may already have a 401(k) that’s collecting money for retirement and investing it so it can have an opportunity to grow. Leverage this retirement tool by maximizing contributions and taking advantage of any employer-matched contributions. Many employers will match a portion or all of an employee’s contributions, which is free money that will help investments grow tax deferred.
- Individual Retirement Account (IRA): Open and begin regular contributions to an IRA. An Individual Retirement Plan (IRA) is a retirement fund that allows money to grow tax-deferred. There are federal limits on how much can be added to an IRA annually and income restrictions (see details below). Choose between a conventional IRA or Roth IRA. A conventional IRA lets money grow tax-deferred, but withdrawals are taxable. A Roth IRA does not feature tax-deferred growth, but qualified withdrawals in retirement are typically not taxed.
3. Use catch‑up contributions if you’re 50 or older
People ages 50+ can make additional contributions. This is particularly helpful if they haven’t yet put aside the amount needed for a comfortable retirement.
4. Select your investment approach
After identifying the retirement fund strategy that works best, choose somewhere to invest the money, such as a target date fund, which refers to a planned retirement date.
A target date fund is a smart choice because it spreads the money in a 401(k) across many asset classes, such as large company stocks, small-company stocks, bonds and emerging-markets stocks. Then, the target date nears, the fund becomes more conservative, owning less stocks and more bonds, automatically reducing risks closer to retirement.
Celeste Jones is an Everwise area manager in Central Indiana.
The information provided is for educational purposes only. The views and opinions expressed are solely those of the author. This information should not be considered to constitute financial, tax, legal, or accounting advice or recommendations. Please consult with an attorney, financial or tax professional for guidance.
