A Quick Guide to Retirement Planning

Retirement planning is simply making sure you have enough money to retire. For the purpose of this post, we’ll be talking about traditional retirement accounts and not Roth-IRA’s or other investment vehicles. We’ll also be concentrating on particular types of employer-sponsored plans such as 401(k) accounts and pension plans.

Why do I need a plan? In short, because you don’t want to run out of money in retirement… Obviously. But there are a lot of things that can go wrong if you don’t take the time to plan ahead for your future needs in terms of income and expenses over the next 30+ years (your retirement). The biggest mistake people make when it comes to their finances is they don’t plan ahead at all! It’s especially important if you’re not married, have no children, or have no significant other who will inherit your assets after you die. You also need a financial plan if your current savings amounts are pathetic! In order to get started with financial planning, we need some terminology: Net Worth – Your net worth represents everything that belongs to you right now minus all debts. All assets minus all liabilities equals net worth. I need to learn about retirement planning? I do! I’m new to this whole financial planning thing. That’s OK. You don’t have to know everything in order to get started.

 Retirement Income – Retirement income is the amount of money you expect to receive from your investments, employer-sponsored retirement accounts, pension plans, social security benefits, etc… in retirement. Your estimated future expenses minus your estimated sources of retirement income will tell you if you have enough money or need more funds for your golden years.

 Retirement Expenses – Retirement expenses are all the costs associated with living during retirement including things like housing costs (mortgage payments), food costs (groceries), transportation needs (cars/buses/trolleys/trains), clothing needs (new clothes for special occasions or work) and entertainment budgets (going out to eat or seeing a movie). After figuring out how much money you’ll need in retirement, it’s time to start saving! How can I save for my golden years? There are several different options when it comes to saving for your future needs: Traditional 401(k) Plan A traditional 401(k) is an employer-sponsored plan where employees contribute part of their wages each pay period into the plan on a pre-tax basis at their own discretion based upon how much they can afford each month. Employer contributions are made on the employee’s behalf (pre-tax), and employers often match their employees’ contributions (for example, 50 cents per dollar up to 6% of the employee’s salary). The main benefit of a traditional 401(k) is tax savings. For 2014, you can contribute up to $17,500 pre-tax in a 401(k) plan. If you’re over age 50 you can contribute an additional $5,500 per year which is known as “catch-up” contributions. Traditional 403(b) Plans Similar to traditional 401(k) plans, traditional 403(b) plans are employer-sponsored retirement accounts available to public school teachers and nonprofit organizations such as hospitals or charities. If your employer offers this plan type for its employees than it will be an option when it comes time for you to start contributing money into your own retirement account! Roth IRA A Roth IRA is another type of employer-sponsored plan that lets employees make tax deductible contributions into their own individual retirement accounts after calculating how much they can afford each month based upon their income before taxes.

 The Roth IRA doesn’t offer any pre-tax contributions like the traditional 401(k) or 403(b) plans, but it does offer tax deductible withdrawals after certain conditions are met. The main benefit of a Roth IRA is tax savings in retirement. For 2014, you can contribute up to $5,500 per year into a Roth IRA account on an after-tax basis. If you’re over age 50 you can contribute an additional $1,000 per year on top of that which is known as “catch up” contributions. No Employer Match Unlike the traditional 401(k) or 403(b) plans where employers offer matches for their employees’ contributions each paycheck period, there are no matching contributions with a Roth IRA unless your employer offers some type of match for its employees’ accounts similar to what they’re currently doing with their traditional 401(k) or 403(b) plan! This is not always the case though! Depending on which company your working for will determine whether or not there are matching funds associated with your Roth IRA account.

 I had more fun writing this piece than I thought I would… That’s good! I’m definitely going to keep writing about retirement planning because it’s one of my favorite subjects to write about!