I remember the first time I thought about retirement planning. I was just starting my first job. I was attending new employee orientation, and the human resources staff members were explaining the company’s pension plan and 401(k) program. I was young, and retirement seemed so far away. And the words and programs seemed complicated and confusing. Their discussion went in one ear and out the other.
Then I filed my first federal income tax return and found out I owed even more of my hard-earned money than I thought I would. I asked my friends for some help and got some good advice from one who was a banker and another who was an investment advisor. They both suggested that I consider retirement planning as one way to set aside money for the future and reduce my taxes.
Regardless of when you undertake retirement planning, it may help to adopt an organized, well-thought-out approach. It certainly helped me.
With that in mind, here are my three suggested steps you can consider taking when it comes to retirement planning.
First Step in Retirement Planning: Determine Your Retirement Goals.
The first step is to figure out what you want your retirement to look like. Some questions that I have found to be helpful:
- Timeline: When do you want to retire? Are you aiming for early retirement?
- Location: Would you like to move overseas when you retire, move to a state that has a lower or higher cost of living, or stay where you are?
- Big Purchases: Do you hope to buy a vacation home where you can spend part of your retirement? Are you dreaming of global travel?
- Estate Plans: How would you like your assets to be distributed to your heirs? What might you be able to do to ensure that as much of your wealth as possible is protected for them?
Knowing your retirement goals is an important step to help you calculate how much money you might need to save for retirement. For example, financial services provider Fidelity suggests that if you wish to travel more during retirement than when you were working, you might want to save 12 times your annual salary—but if you envision a simpler retirement, you may only need to save 8 times your annual salary.
Whatever you would like to do during retirement, the U.S. Department of Labor states that retiring Americans typically will require 70 to 90% of their pre-retirement annual income each year to have the same standard of living they had before retiring.
While this makes sense to many of us, almost 50% of my fellow Americans have never calculated how much they need to save for retirement. By estimating this amount, you take an important first step toward achieving your retirement goals.
Second Step in Retirement Planning: Pick a Retirement Savings Plan.
Once you have an idea of how much money you want to have during retirement, you’ll discover the chances are that amount will exceed what you might receive from Social Security alone. The second step, then, is to decide how to supplement your Social Security with retirement savings plans—or more specifically, to figure out which retirement savings plans might be right for you. The good news is that you have many options to choose from, and you can tailor your retirement portfolio to your individual needs. The bad news is that you have many options to choose from—and it can be hard to figure out what the best mix of retirement plans is.
Most options fall into employer-sponsored retirement plans and individual-owned retirement plans.
There are two kinds of employer-sponsored retirement plans: pensions and 401(k) plans. Those of us who have been around awhile would have likely heard of pension plans. These are defined-benefit retirement plans where the employer is responsible for funding the plan regardless of any costs associated with providing those benefits.
However, because pension plans have become very expensive for employers, many employers now offer 401(k) plans, which are defined-contribution plans. These are basically savings plans that allow employees to contribute a portion of their paycheck before taxes are taken out. And many employers will match what the employee contributes, up to a certain amount (hence “defined-contribution”). This is basically free money to you, so it makes sense to take advantage of this if it is available.
If your employer doesn’t provide a retirement plan, or you wish to supplement that plan, one option to consider is an individual retirement account (IRA).
The two most popular types of IRA are traditional IRAs and Roth IRAs. The main difference between these accounts is when you pay the taxes owed to the federal government. With a traditional IRA, you don’t pay income taxes on the money you contribute to your IRA or on the growth over time of your contribution (the income is tax-deferred). Instead, you pay income taxes on your contributions and any earnings on those contributions when you withdraw your money (eligible after age 59½). With a Roth IRA, you contribute after-tax dollars and are eligible to withdraw your contributions and earnings on your contributions after age 59½. If you have held those funds for more than five years, you do not have to pay any income taxes on any withdrawals you make, including the earnings on your contributions.
Regardless of whether an account is a traditional or Roth IRA, you can choose to have a financial institution or a broker allocate your money with or without your approval (non-self directed IRA), or you can make those decisions yourself and have them implemented through a custodian or broker (self-directed IRA). A self-directed IRA allows you to allocate funds to both traditional paper-based assets like stocks and so-called alternative assets such as precious metals, real estate, promissory notes, and cryptocurrencies.
To me, it’s important to diversify my retirement portfolio because I don’t want to depend on one source for all my retirement income. In addition to Social Security, I have a corporate pension plan, a few corporate 401(k) plans, a traditional IRA, and a self-directed IRA through U.S. Money Reserve with both gold and silver bullion coins made by the United States Mint.
Regardless of which types of accounts make up your retirement portfolio, experts recommend that you save at least
- an amount equal to your salary by age 30
- 3 times your salary by age 40
- 6 times your annual salary by age 50
- 8 times your salary by age 60
- 10 times your salary by age 67
In calculating your retirement income, be sure to factor in sources of money other than savings, such as Social Security and any passive income from real estate or other sources you envision receiving once you retire.
Third Step in Retirement Planning: Assess Your Retirement Spending.
The third and last step of beginning your retirement planning is to estimate your total expenses you will have on a regular basis. While these may change by the time you retire, gaining a basic understanding of your future expenses now may help you create a more accurate blueprint for retirement.
Here are two questions you may wish to consider when estimating your retirement spending:
What will your regular expenses be?
To help estimate your expenses during retirement, you can add up your current regular expenses—including mortgage payments, utility bills, groceries, healthcare, and insurance premiums. Then remove or replace any expenses that you do not expect will continue into retirement (for example, remove mortgage payments if your home will be paid off by retirement) and add any other expected expenses. If, for instance, you take an early retirement, you may wish to calculate how much money you will need to spend on health insurance before you become eligible for Medicare.
How will your spending habits change once you retire?
Once you have calculated your current regular expenses, you can add optional spending and how that may change once you retire. For example, if you intend to do extensive traveling, you may wish to set a higher savings or passive income goal for your retirement portfolio.
Answering these questions may help you broadly identify where you might set your retirement portfolio goals. This, in turn, may help you plan and achieve a more comfortable retirement.
One essential step in retirement planning is learning about your retirement portfolio options, including precious metals IRAs. Precious metals IRAs are available to everyone, even if you already have one or more existing retirement accounts. Download a free Gold IRA Kit from U.S. Money Reserve to learn more.