A retirement plan is like a road map. It shows you how to get from where you are to where you need to go. The vehicle that gets you there could be a bike, a car, a train, a plane, a boat, or in some cases, a combination of all these vehicles. In retirement planning, your vehicles are your accounts: they transport you from point A to point B.
Just as a road map keeps you from getting lost on the road, a retirement plan keeps you from getting lost on your way to retirement.
A retirement account is simply a vehicle to save for retirement, while a retirement plan includes many factors ─ when you want to retire, how much you will need every month, your assets and investments, your debts, Social Security benefits, health care, emergency fund, and more.
Some factors to consider include:
Are you contributing enough?
If you’re like most Americans, the answer is probably no. In 2012, on average, Americans contributed about $2,700 to their 401(k) plans; even if matched at 100%, $2,700 a year is not enough for most people to make it through retirement. There is a lot of room to contribute far more than average before hitting the annual 401(k) contribution maximum of $17,500 (that’s the limit in 2014 per IRS rules; it typically increases a bit each year). But if you don’t have a plan ─ if you don’t know how much you’ll need to have saved when you retire ─ you won’t know how much you need to contribute every month. For most people, not knowing results in not contributing enough.
Are your investment allocations right for you? How you allocate your money ─ the types of investments you have ─ should depend on where you are on the path to retirement. Stocks involve more risk but typically yield a higher return, while bonds carry potentially less risk but typically yield a lower return.
Generally, the further away you are from retirement, the more money you should have in stocks and the less money you should have in bonds. As you get closer to retirement, you should reallocate your funds toward more bonds and less stocks. Why?
Because if you are too conservative when you’re young (not invested enough in stocks), your investments won’t grow like you need them to. But if you’re too aggressive as you near retirement (invested too much in stocks), market volatility could derail your retirement plans.
Have you strategically chosen your accounts? The government incentivizes us to save for out retirement by giving certain types of tax advantages to qualified retirement accounts. But those advantages vary.
For some, you may contribute pretax dollars (but that money is taxed when you take it out in retirement). For other, you can take out tax-free money in retirement, but contributions are made after taxes.
So you need to think strategically about how and where you are investing for retirement. In addition to the tax implications associated with different investment vehicles, you also need to look at fees associated with the account. And beware, if you’re planning to retire early, many types of retirement accounts will penalize you heavily for early withdrawals.
If your employer offers a 401(k) plan and matches contributions, it always makes sense to contribute at least as much as your employer will match. But for most Americans, that 401(k) plan alone is not sufficient.
To ensure that you are saving enough to retire when and how you want to, you need to have a road map to get from here to there. Please call if you’d like to discuss this in more detail.
Copyright © Integrated Concepts 2012. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.