Retirement planning. It is typically not high up on the priority list of “stuff to do today.” Between balancing a job, school, family, and a plethora of other activities, it is easy to push retirement planning aside. With the strains on time, it is sometimes hard to plan out a schedule for the next week, let alone 30 years from now.
While it is easy to fall into a pattern of short-term financial planning, it is important not to push off the longer-term financial goals. Here are 10 steps that you can take now that will help you put a strategy in place for retirement.
In this article
- 1 1. Map out your retirement.
- 2 2. Write down your financial goals.
- 3 3. Review your current financial situation.
- 4 4. Contribute to your employer’s 401k plan.
- 5 5. Open a Roth or Traditional IRA.
- 6 6. Get Insurance.
- 7 7. Take out a Return of Premium Term Life Insurance Policy.
- 8 8. Open a college savings account for your children.
- 9 9. Pay Your Taxes
- 10 10. Get organized—create a “finance file.”
Every good plan begins with a map. When you go on vacation, you need a map to know where you are going and how to get there. You also need a map, or general plan, for your retirement. Have some benchmarks in mind, for example:
- “I will start by contributing 1% of income to a 401k plan.”
- “When my income reaches XXX amount, I will increase my contribution to 2%.”
- “I will use my tax return each your to fund my children’s college savings.”
2. Write down your financial goals.
What do you want to have accomplished by retirement? How much longer will you have to pay on your mortgage, or will it be paid off? Do you need to think about saving for your children to go to college? What about a savings account or emergency fund – do you have one in place already? These are all important questions to answer when planning your financial goals. You should also consider:
- How much money will you need to live comfortably during retirement
- What your monthly household bills will add up to
- Will you need a supplemental health insurance policy
3. Review your current financial situation.
In order to know how to get to where you want to go, you must first analyze where you are currently. By putting together a monthly budget, you can easily see how much money you have coming in and what your current bills are. This will help you budget for retirement savings.
4. Contribute to your employer’s 401k plan.
If your employer offers a 401k plan, enroll as soon as possible. Most employers offer some sort of matching contribution, so if you contribute 2% of your salary, they will match that by also contributing 2%. Even if you move or are no longer with that employer, you can always roll the savings from this into a 401k plan at a new employer or open an IRA with it.
If your employer doesn’t offer a 401k or if you are able to budget in for extra retirement savings, opening an IRA will not only set you up for a financially secure retirement, but also offers significant tax breaks. A traditional IRA offers a tax deduction for your current year taxes — and who doesn’t want to be able to get as many tax breaks as possible?!
A Roth IRA, however, does not offer a current year tax break for your contribution, but it does offer tax-free growth. This can mean a huge tax savings overall because when you draw the funds out at retirement, you won’t be taxed on any of the growth.
6. Get Insurance.
You may not realize that being fully insured — auto, life, and health — is actually a necessary part of a good retirement plan. You may be young and healthy now, but the unexpected can happen at any time. Imagine what a car accident, a major surgery, or the death of a spouse would do to your finances. It can absolutely devastate your financial situation with mountains of debt that may follow you into retirement. Having insurance to protect you and your family against any of these catastrophic events is crucial.
This type of life insurance policy is different than a regular term policy or even whole life, because it combines the two. A typical term policy gives you coverage for a specific period of time and when that time is up, if your family has not had to use the death benefit, the money that you have paid in is a sunk cost—no cash value, and no more insurance coverage.
A whole life policy does build cash value, but can be pretty costly because it is set up to be an active policy until you pass away—no specific term.
A return of premium life insurance policy is nice because you have life insurance coverage for a specified period of time, but if you live beyond that term, then you get the value of the premiums that you have paid returned to you. So at that point, you now have thousands of dollars set aside in a savings account which means extra savings for retirement!
8. Open a college savings account for your children.
So what does saving for your children’s college education have to do with retirement planning? Well, potentially, a lot. Parents (and Grandparents) help their children pay for college and this is a huge expense that can come relatively close to retirement. Starting a college savings account for your child when he is young will help ease the shock of the increased expenses for your family at that time—and allow you to continue contributing to your retirement.
9. Pay Your Taxes
If you thought raiding retirement accounts was beneath the Internal Revenue Service, think again. If you don’t pay your taxes, the IRS can garnish your pension and retirement accounts. This is particularly likely if the IRS determines your conduct was “flagrant.” What is considered flagrant conduct? Saying you can’t afford to pay your taxes but continuing to pay into your retirement account. It’s a sobering thought. In most cases, even bankruptcy court won’t touch your retirement accounts. And in the few cases where it does, it will at least let you keep the first $1.28 million. If you are facing a large tax debt, find out what your tax relief options are. The IRS’s Fresh Start Program has recenly expanded tax relief programs for delinquent taxpayers. These options include an offer in compromise, release from tax liens, and installment agreements. Learn more about the Fresh start initiative.
Click here to get a free consultation with a tax relief professional and find out what programs you can apply for. When choosing a tax relief company, always choose firms that have tax attorneys on staff. Tax lawyers can help navigate the complex IRS procedures for levying retirement accounts.
You can do this on the computer with digital copies, buy a binder to put papers in, or create a file in your desk drawer. It doesn’t matter how you do it, but creating one centralized place that you have all of this information will help to keep you organized and on track. Having a “finance file” also forces you to take the time to look at the statements as they come monthly or quarterly before you file them, and not just take a quick look and throw it out. Keeping these things at the forefront of your finances will make it easier for you to notice if something needs to be changed or re-evaluated. Your finance file should include:
- 401k and/or IRA statements
- insurance policy information: auto, home, life, health
- savings/investing account statements
Putting a retirement plan in place can seem overwhelming and unmanageable to do on your own. This is where a financial advisor comes in. A financial advisor can go over your current financial situation, saving and investing goals, college planning, and retirement planning, and will periodically review your information with you to account for life changes and make sure that you are staying on track with the plan that you have implemented.
It is important to remember that planning for retirement is an exercise in patience. You won’t get to enjoy the benefits of saving and planning for several decades. The small steps that you take today, tomorrow, and for the next 30 years will ensure financial freedom for your golden years, and the peace of mind that comes with not having to worry about being on a fixed income and having to choose between buying medication or food.