In this article, we have collected some tips from the professionals at Jeffrey Small Arbor Financial to help you plan for your retirement.
1. Look ahead when planning your retirement.
Retirement is a lifetime goal. The sooner you start planning; the more options will be available to you when it’s finally time to retire from work and transition into a new phase of life. You can set your retirement date years in advance and even plan how your retirement plans will be funded.
2. Look back to see where you’re headed.
Take a look at your current financial situation and determine what changes need to be made to ensure that your resources last for the rest of your life (after retirement). For example, how much income do you currently need to maintain your current standard of living (and what will that be when you retire)? If the amount you save today is not enough to carry you through until retirement, it may be time to change income strategies.
3. Roll over individual retirement accounts and pensions into a tax-deferred account such as an Individual Retirement Account (IRA).
Tax-deferred investments provide a way to accumulate money faster, defer taxes until a later point in time, and leave the investment wealth growing for you tax-free. IRAs are similar to 401(k)s but with two key differences: you contribute after-tax dollars (yet still defer the tax), and most importantly, you can rollover your traditional 401(k) into an IRA (versus the requirement to convert your 401(k) upon retirement).
4. Consider investments outside of tax-deferred accounts.
Investing in products that are not tax-deferred may lead to higher returns on investment, but taxes must be paid each year on any earned gains or interest. However, the government has provided a form of tax-free investment that can help build wealth and save for retirement: the Roth IRA. For those who have yet to reach the age of fifty-nine and a half, this strategy may be your best option in the future, as long as you are willing to pay taxes each year on any gains.
5. Reduce your tax bill by minimizing expenses in retirement.
Now is the best time to determine how you can reduce your livings costs in retirement before you ever actually retire. Today, every dollar saved on taxes becomes $10 in monthly income when you’re retired (and living on a fixed income).
6. Invest your savings.
Once you have determined your retirement income strategies, it is time to determine how to invest your current savings to build wealth over time (so that the amount saved when you retire will be enough). Since money has future value, today’s dollars can produce more than dollars in the future if they are invested wisely. You should consider diversifying your investments across different asset types. When selecting investment vehicles, look for products that are easy to access, have low minimums where possible, and give you the greatest flexibility in terms of withdrawals.
7. Keep an eye on one key metric: inflation.
The past generation has seen average yearly inflation rates between 3% – 5%; according to the BLS, inflation has hovered around 3% annually over the past ten years. The same amount of money that purchased a gallon of gasoline in 1953 can now only purchase roughly half that amount today. It is important to note that inflation rates vary widely depending upon location, what you are purchasing, and your circumstances.