We all think about retirement, but not many of us plan properly. If you want to make the best of your retirement years, you need to start planning now. The sooner you start, the more time there is to save and grow.
Here’s everything you need to know now about creating a foolproof retirement plan that will serve you well in the future.
Know where your money is going
There are many retirement accounts to choose from and they all work differently. Understanding the difference between tax-free, tax-deferred, and taxable assets is crucial when planning your retirement.
Withdrawing funds from the wrong account (or in the wrong order) could negatively impact your retirement income.
Be mindful of inflation and higher taxation rates on tax-deferred accounts. You also want to be aware of tax implications and the amount of risk each of your investment accounts is exposed to.
Maximize your contributions
Saving for something that isn’t happening for decades may seem nonsensical, but it’s the best thing you can do. When planning for retirement, get the most bang for your buck by maxing out your contributions.
Though maximum contribution rates are subject to change, here’s where they stand today:
- 401(k), 403(b), and 457 plans: $19,500 per year
- Roth and traditional IRA: $6,000 per year
- Health savings account (HSA): $3,600 per year
By saving as much as you can now, you’ll greatly benefit from compound interest.
Timing is important
While you may have a rough idea of when you want to retire, do you have a schedule for how you’ll withdraw from your retirement accounts? A big mistake to avoid making is draining your taxable investments too soon.
A better strategy is to take advantage of today’s low tax rates instead of withdrawing assets at higher tax rates later on.
Also avoid withdrawing funds too soon. Incurring a 10% early withdrawal penalty on top of regular income tax is huge.
Figure out Social Security
Most Americans will receive Social Security benefits after retiring. The longer you wait to collect, the more money you’ll receive. Depending on your income at the time of retiring, waiting to collect until you’re 70 versus collecting immediately, can make a huge difference in your monthly benefit payments.
No matter how many years you have until you’re eligible to retire, creating a foolproof plan now is the best way to enjoy your golden years. Keep track of your money, max out your contributions, and withdrawal wisely!