Retirement Planning 101: Exploring Essential Steps and Best Options

Retirement planning is one of the most important aspects of personal finance planning. Despite being an essential part of personal finance planning, more than 50 million people in the US do not have access to a retirement plan at their workplace. However, the good thing is that it’s never too late to start with a retirement plan.

Whether you are in your early 20s or late 50s, you can always choose a retirement plan that would allow you to create a substantial retirement fund. Moreover, you can also take the help of a Long Island CPA to explore the options best suited to your needs. 

Exploring the essential steps in creating a retirement plan

Retirement planning is not an abrupt decision but a gradual process that requires careful consideration and strategic planning over time. The process consists of following important steps that must not be overlooked.

  • Understand when to start: The most crucial thing in retirement planning is to understand when to start. Your investment in a retirement account accrues interest. Therefore, the sooner you start, the bigger your retirement fund will get.  Nonetheless, it isn’t too late if you haven’t started yet.
  • Determining the right amount: The next important thing is to determine how much money you are going to need to retire, which is a function of present income and expenses. An ideal retirement plan should provide you with a post-retirement income equivalent to 70% to 90% of your pre-retirement income.
  • Don’t forget other financial goals: While it is essential to plan for your retirement, it is equally important to put aside money for your other financial goals like a house, car, etc. Apart from this, it is also essential to build an emergency fund.
  • Choose your retirement plan wisely: If your employer offers a retirement plan, like 401(k), consider starting there. However, if they don’t, you can open a retirement account from various available options.
  • Consider investment as an option: Apart from putting your money in a retirement plan, you can also invest in bonds, stocks, and mutual funds to create an additional fund that could come in very handy.

Retirement planning at different stages of life

While all retirement plans aim to provide a regular income, the planning for retirement may vary depending on your age. Following are some recommendations that could help you build a substantial retirement fund.

  • During young adulthood: During young adulthood (ages 21-35), you may not have a lot of money to invest, but you get a lot of time to let your investments mature. Therefore, with the compounding effect working in your favor, you can earn interest for a longer time and create substantial retirement savings.
  • During midlife: During midlife (between the ages of 36 and 50), you employ a balanced investment approach. While you may be dealing with credit card debts, mortgages, insurance premiums, and much more, with a stable income, you can still put a good amount of money into a retirement plan.
  • During later midlife: During later midlife (between the ages of 50 and 65), you might want to go ahead with a rather aggressive investment. By this time, you might have paid off all your loans, allowing you to invest more significant amounts of money to build an enormous retirement fund in a shorter period.

Various retirement plan options for individuals

401 (k)

A 401(k) is an employer-sponsored retirement plan in which your employer matches your contribution. Individuals can contribute up to $23,000 to a 401(k) account every year. However, if you are over 50, you can contribute an extra $7,500 per year.

Traditional IRA

A traditional IRA is similar to a 401(k), except that it is primarily meant for self-employed people who cannot access a 401(k). You can contribute up to $7,000 in a traditional IRA or $8,000 if you are over 50. However, the withdrawal will attract regular income tax for that year.

Roth IRA

Your contribution to a Roth IRA is funded with post-tax dollars, which may seem expensive upfront but offers significant benefits down the road. The contribution limit for a Roth IRA is the same as the traditional IRA, i.e., up to $7,000 in a traditional IRA or $8,000 if you are over 50

Simple IRA

Simple IRA is meant for the employees of a small business. It works the same way as 401 (k). The individual limit for a simple IRA is $16,000, which goes further up to $19,500 for individuals over 50 years.

It is imperative to understand that investing in a good retirement plan is essential for anyone desiring a financially stable life after retirement. Therefore, you should start retirement planning early in your career. If you encounter any problems or confusion, seeking professional help is advisable.