If you are within 5 years of retirement, now is the time to start preparing for the new phase of life you will be entering soon. We will highlight several of the most important considerations in retirement and explain how to help manage your savings and lifestyle.
Prepare for Retirement with Financial Planning
There are many different types of accounts that can aid your retirement journey. Each account has its own specific requirements and benefits, aiming to shape your savings and income strategy.
Consider a 401(k)
A 401(k) allows an employee to contribute a certain amount of money from their paycheck, before taxation, to a savings plan. Oftentimes, this contribution is matched by the employer. For example, if an employer offers a 3% 401(k) match, this means that if the employee contributes a minimum of 3% of their paycheck to their 401(k), the employer will contribute an additional 3% to the account. 6% of your salary will be invested into your 401(k).
With investment vehicles such as this one, time is a beneficial factor. The more time the funds mature in the 401(k), the greater investment they will yield due to the account’s compounding growth.
Because 401(k)s are intended specifically for retirement preparations, it is important to note that you will be taxed if money is removed from the account before you turn 59 and ½ years old.
However, there are many tax advantages with a 401k, one of which being that it can lower your tax burden over the years. Additionally, for any 401(k) investments that made capital gains, those investments are tax deferred. This means that you will not be taxed on them until they are withdrawn from the account.
Utilize Individual Retirement Accounts (IRA): Traditional and Roth
Traditional IRA
A Traditional IRA is another type of investment account designed to help you save for retirement. It poses certain tax advantages and is tax- deductible, meaning you can make withdrawals from the account to reduce your overall tax liability in a given year.
When considering a withdrawal strategy, it is important to note that withdrawals from retirement savings are taxed as they normally would be. Because the initial contributions to the account were not taxed, they must be withdrawn. As you approach age 73, consider the required minimum distribution (RMD) that must be taken, regardless of if you need the money at that time or not.
Individuals who find themselves near the cusp of a lower tax bracket may find that taking strategic withdrawals is an effective tax mitigation strategy throughout retirement. Additionally, this can help maximize savings.
Roth IRA
Roth IRA is yet another retirement investment vehicle. Its main difference from the Traditional IRA is that the contributions into the account are already taxed. With this, you will not be penalized for withdrawing money from your account during retirement. However, if your Roth IRA is less than 5 years old and you are younger than 59 and ½ at the time of withdrawal, there may be a fee associated with the transaction.
Determining Your Monthly Spending
To help ensure that your retirement is as stress-free as possible, it is important to prepare for unexpected bumps in the road throughout your journey. When designing your retirement strategy, one of the first and most impactful steps in the process is determining your monthly budget. Plan out your monthly expenses today. Take some time to review your current expenditures, noting what you find yourself spending monthly on and compare this with your anticipated monthly retirement income. How do they align? If you feel like your monthly spending is toeing the line with what you will be bringing in in retirement, just remember, there is always room for improvement. Look at each expense to determine what changes you are willing to make. Are there memberships or other subscriptions that you are not using any more or could consolidate? Are you ready to downsize your home? The options really are endless.
After performing this self-assessment, if you still feel uneasy about where you stand, reach out to a member of our team to further discuss income planning strategies. Our advisors are licensed and experienced in creating customized financial and retirement strategies, encompassing retirement income planning, tax management, long-term care planning, and more!
Prepare Your Estate Plan
Estate Planning is an integral, yet often overlooked, piece of the retirement strategy. Your estate is everything you own- your land, car, home, insurance policies, investments, etc. Ensuring that you have a will and trust prepared along with designated beneficiaries not only helps protect your assets from probate but facilitates a smooth transition of your assets to your loved ones.
When thinking about preserving your legacy, you make you want to consider annuities in your estate plan, as these guarantee income on a regular basis. Annuities are a great tool for helping fund your retirement as the accrued wealth can be used to pay off mortgages, fund the activities of your dream retirement, or ensure your beneficiaries are gifted with financial stability.
Activities and Relationships
Find What Makes You Motivated
With all the time that will be afforded to you in retirement, there will be endless possibilities and activities to partake in. It is finally time to learn how to do woodwork or knit your first sweater. What about joining that club that has always been in the back of your mind? Whatever it may be, it is important to realize that the time at hand is something to take full advantage of. These are your golden years- it is the perfect time to partake in fun activities, create new memories, and build on relationships with your loved ones and friends.
Have Structure in Your Day
So much time, after transitioning out of the rigorous workforce, may feel overwhelming, but that is why it is important and encouraged to create structure within your everyday life. Having a routine helps you stay motivated and on top of your personal goals. Will you read on Tuesdays? Cook new recipes on Wednesday? Meet friends for lunch on Thursdays? Explore and establish a routine that leaves you looking forward to seizing the day.
Get Financial Assistance
Schedule a meeting with Capital City Financial Partners today to prepare for the retirement of your dreams.
