How much do I need to save and how much can I afford to save?
Saving for retirement can sometimes be overwhelming. This is because while you’re saving for the future, you have to pay the bills in the present, according to the Twin Cities Pioneer Press in “Your Money: Helping you live in the moment and plan for the future.” Can it really be accomplished?
The question is asked frequently by people at all ages and stages of their lives. Here are some tips on how you can use comprehensive financial planning — by looking at a variety of retirement income savings methods and income strategies — to make the most of retirement savings. Some of them may not apply now, but you’ll need to know about them in the future, like Social Security.
Do you have a retirement savings strategy? Not everyone takes advantage of the 401(k)s, 403(b)s and IRAs that are available. Some of these retirement accounts come through an employer, and a traditional IRA can be set up on your own. If you work for a company that offers the option of having a Roth IRA and you’re just starting your career, it could be a great option. You pay taxes on contributions now, when your income may be lower, but when you take distributions, you won’t pay income tax on them. There are no required distributions for a Roth IRA — other retirement accounts require a certain amount of yearly withdrawals. If you are in a high-income tax bracket, the Roth IRA is not for you.
Social Security strategies make a big difference in retirement income. Deciding when to take benefits is complicated. However, it is well worth the effort. It could be a difference of thousands of dollars over time. Realize that the later you start taking benefits, up until your 70th birthday, the greater the benefits will be. Your Full Retirement Age or FRA is currently age 66 for Americans born between 1943–1954, and a few months older for those born later. You can apply for benefits as early as age 62, but you’ll get a reduced benefit — as much as 25%!
What about a Roth conversion? For some people, enhancing their retirement savings by moving existing savings into accounts that offer better tax advantages, adds up nicely for current and future tax brackets. A Roth conversion is when you pay the tax on all or a portion of a traditional IRA and move it into a Roth IRA, where it continues growing. If you have owned the account for at least five years, you can then take withdrawals out tax free, once you turn 59½. Note that this is a complicated decision that must be made in conjunction with all of your other retirement and investment funds.
Planning for retirement income is just that: planning. The alternative — winging it and hoping for the best — rarely works out. The earlier you begin planning for your retirement, the more likely it is that you’ll enjoy this phase of your life.
Any of our estate planning attorneys would be happy to advise you on creating an estate plan that fits your unique circumstances, as well as plans for retirement.