What is Retirement Planning: Definitive Guide

Retirement funds can make or break your standard of living as a senior. Here’s a step-by-step way to give yourself the best life possible when you hit retirement age.

Retirement planning involves determining how much income you would like to have at retirement, then thinking up the best way to achieve that financial goal. 

Retirement planning often involves how much money you’ll need to save and invest to accrue wealth, as well as how much money to save in the present to ensure you’re on the best path toward retirement savings. 

Have you ever struggled to understand all the various retirement plans available?  There are so many that it’s hard to find which one is right for you.

You might find it difficult to envision a retirement savings plan since retirement is decades away. That’s why this article is the definitive guide to the best retirement planning. 

What Is Retirement Planning?

When we talk about retirement planning, we mean devising a series of retirement goals decades before you retire so that you’re the best off after you retire. 

There are three ways to plan for retirement, according to USA.gov:

• Set up a retirement plan with your employer.
• Save and invest on your own.
• Use social security.

Social security involves receiving a monthly check from the federal government to pay for food, housing, and other essentials. As of 2020, eligible individuals collect a little under $800 a month, equating to around $9,400 a year.

While the monthly social security amount lets you feed and house yourself, you don’t have much money to enjoy your free time after retirement.

That’s the benefit of a retirement plan and any retirement contribution you make — you can accrue wealth over the years till you’re ready to use it in retirement.

Creating Your Financial Goals

Financial goals involve preparing for emergencies that could occur in the next year while preparing for the distant future, according to NerdWallet. 

The three most important financial goals you need in life include:

• Setting aside an emergency fund. Ideally, you should have $500 set aside for a major emergency. Whether it’s an automobile accident, sudden health crisis, or damage to the home, you want to be prepared. 
• Contribute to your retirement fund. NerdWallet describes it as your 401(k), but we think you should be contributing to your retirement plan no matter the plan and your age. The early you start planning for retirement, the better. 
• Finish paying high-interest debts. We think you should prioritize paying off high-interest debt as soon as possible. You’ll relieve yourself of the psychological burden of being under debt, but you then free up the funds to grow other financial goals.

This article focuses on setting up a retirement fund, but we just want to remind you that you can take on multiple financial goals simultaneously. Retirement should be your end goal but not your only goal.

How to Start Saving for Retirement

Depending on what age you start saving, you could accumulate over $1 million in retirement savings in your retirement account. 

NerdWallet did the math and found that if you start saving at 20 years old with no prior savings and earn 6% annually on investments, you will need to put away a little over $300 a month to earn $1 million by 67.

That monthly amount nearly doubles if you start saving at 30.  The time you invest is the key takeaway message, but here are other things you should keep in mind:

1. Focus on starting early. You can’t change the missed opportunities to save, but you can get a grip on a present to improve your future. Start saving today. Start this week if you can. 

If you haven’t already started some way to retire, we recommend doing it as soon as possible.

2. Be consistent. Once you start saving, keep saving. You must grow the discipline to save $300 or more for retirement rather than spending on a new gadget, clothes, or expensive vacation.

3. Understand your financial needs in retirement. You need between 70% and 90% of your pre-retirement income to have the same quality of life in retirement, according to the U.S. Employee Benefits Security Administration.

If you save more than a million dollars in retirement, you might even afford a higher standard of living pre-retirement — depending on how frugal you lived. 

Determining the type of life you want in retirement helps you adjust how you save in the years leading up to it.

4. See what retirement benefits your employer offers. See if your employer offers a retirement plan and whether you qualify for it, what the plan is, and whether your spouse can be covered by the plan too. 

Considering retirement options is especially important if you’re thinking about switching jobs. It might be worth it to hang on a little longer at your current job down the line if it offers better retirement benefits.

5. Consider opening an Individual Retirement Account (IRA). There are two types of Individual Retirement Accounts — a traditional IRA and a Roth IRA. Each has different tax treatment and withdrawal methods depending on the IRA you choose. 

It’s easy to set up a direct deposit with your IRA. Any money entering your checking or savings can go directly into your IRA. As long as you keep making a comfortable wage, you can set up your IRA and forget about it. 

You can deposit up to $6,000 a year into your IRA, and even more if you’re over 50. IRAs give you certain tax deduction advantages, so check with your local jurisdiction to see what the law says about your retirement account.

6. Don’t pull funds out of your retirement savings. Taking money out of your retirement fund reduces the principal, which is the total amount of money in a fund — and what gets augmented by interest. 

You’ll not only lose interest growth if you reduce your principal, but you can lose tax benefits (you may need to pay income tax) and incur withdrawal penalties. Try to limit what you have to pay to the IRS (Internal Revenue Service).

You should leave your savings invested in your current plan if switching jobs. You could also roll them over to your new employer’s plan or into your own IRA, if possible.

We understand life can throw you curveballs that necessitate you dip into your savings to pay for a large expense, but try to avoid it as much as possible.

7. Ask questions. No one is born knowing how to plan for retirement. In fact, a 2020 survey from the Employee Benefit Research Institute found that over 30% of people find it hard to understand the financial security that retirement planning can offer.

Talk to people at your bank or refer to a financial adviser to learn everything you need to know about the retirement planning stage.

What Should You Invest In?

Roth IRAs and 401(k)s are among the most popular ways to invest in your retirement. But there are more plans than meet the eye.

401(k)

Many employers offer 401(k) retirement plans to their employees. The retirement plan gets its name from the U.S. Internal Revenue Code, and it offers tax advantages for those who sign up for it. 

When an employer pays you, they withhold a little bit of your income. That income gets divested into the 401(k) plan. Some employers also match whatever deposits you make into a retirement plan, doubling your investment efforts every month. 

With a 401(k) plan, the money you save doesn’t get taxed until you withdraw it in retirement. Roth 401(k) plans allow you to withdraw your money without incurring a tax fee. 

We recommend a 401(k) if your employer offers it and you plan on being with that job until you retire. It’s a useful benefit to receive on top of a job you already love.

Roth IRA/SEP IRA

A Roth IRA lets you save for retirement without the aid of an employer, so it’s best suited for self-employed individuals. It’s named after William Roth, a former Delaware Senator who helped establish this form of retirement saving.

A simplified employee pension (SEP) IRA lets employers (including self-employed people) establish a retirement plan for themselves and their employees. 

They’re easy to set up, and employers can make tax-deductible contributions for their employee’s SEP IRAs.

Index Funds & Dividend Stocks

You don’t have to wait for your investments to mature to grow your wealth — you can use dividend stocks and index funds to bring in money during retirement. 

Dividends are payouts a company gives shareholders when the company makes a profit. You make money from a dividend-paying stock when you invest part of your portfolio in a dividend index mutual fund or dividend index exchange-traded fund. 

You get income from both of these when a company issues stock held in the fund. When people talk about a retirement portfolio, they’re talking about these types of stocks.

Real Estate/REITs

Real estate can be a great way to earn money in retirement. When you own a property, you can charge rent per room that equates to an amount above the monthly mortgage — giving you a profit. 

Buying and owning property gives you the most reward. If you don’t want to deal with property maintenance, though, you can participate in a real estate investment trust (REIT). 

And REIT is a company that owns, maintains, finances income-generating real estate, and uses capital from multiple investors. When the REIT makes a profit, it splits the dividends among the investors.

Investing in Yourself/Owning a Business

Many of the top entrepreneurs in the world like Bill Gates, Jeff Bezos, and Mark Zuckerberg don’t worry about retirement money.

Why? They invested in themselves and started a profitable business.  Starting and owning a business will take a significant amount of time and resources to get started.

If all goes right, though, you can make it big and never have to worry about retirement or pension income again.

How to Build Your Wealth

Growing your wealth is like raising a garden — you can enjoy the fruits of your labor once everything matures, but there are a million ways your plants can die before their prime. 

Here are the top five ways to protect your money and grow your wealth until you retire.

1. Automate your savings. Let a robot save for you. You can visit your retirement fund every few months or so to see how much you’ve saved — without using any of the mental power to remember to do so. 

2. Creating yearly milestones for your savings goals. How much money do you hope to have this time next year? In five years? Ten? Having yearly milestones keeps you motivated and accountable in your retirement saving journey - it also makes you more aware of living expenses.

3. Taking advantage of compound interest. Compound interest is a powerful way to vastly grow your savings. Compound interest works faster than simple interest, and so compound interest is the key to achieving millions in savings before retirement.  

4. Find new ways of creating cash flow. Having multiple streams of income lets you grow your retirement savings plans faster. Finding ways to have passive income lets you accrue wealth without maintaining the effort over time.

5. Being a disciplined investor. Being disciplined investing money involves investing early and often, using facts rather than emotions to guide your investment decisions, and respecting the vacillating behavior of the market. 

Take the Next Step

We recommend you start saving for retirement as soon as possible if you haven’t already done so. The best way to do so is through opening up a Roth IRA if your employer doesn’t offer a 401(k). 

You should also start diversifying income streams so that they mature when you retire, such as through dividend stocks and index funds, real estate, or entrepreneurship.

When it comes to retirement planning, the worst you can do is nothing. Just start and see where things go.

Retirement Planning FAQ's