What Is Retirement Planning*?
Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning* includes identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk. Future cash flows are estimated to determine if the retirement income goal will be achieved. Some retirement plans* change depending on whether you’re in, say, the United States, or Canada.
Retirement planning* is ideally a life-long process. You can start at any time, but it works best if you factor it into your financial planning from the beginning. That’s the best way to ensure a safe, secure—and fun—retirement. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.
- Retirement planning* refers to financial strategies of saving, investment, and ultimately distribution of money meant to sustain one’s self during retirement.
- Many popular investment vehicles such as IRAs and 401(k)s allow retirement savers to grow their money with certain tax advantages.
- Retirement planning* takes into account not only assets and income but also future expenses, liabilities, and life expectancy.
- It is never too early—or too late (although earlier is better)—to start retirement planning.
Types of Individual Retirement Planning*
Traditional Individual Retirement Arrangements (IRAs)
With an IRA, you open and fund the IRA yourself. This is not a plan you join through an employer.
Income Taxes: You may receive an income tax deduction on contributions (depending on your income and access to another retirement plan through work). The balance in the IRA will always grow tax-deferred, and withdrawals will be taxed (the amount will vary depending on whether contributions were deductible or non-deductible).
To consider: There is a 10% penalty for withdrawing funds before age 59½. You cannot deduct IRA contributions if you’re already covered by a retirement account through your work and earn more (according to your modified gross adjusted income) than $74,000 (with a phase-out beginning at $64,000).
A Roth IRA is another individual retirement account that you open and fund yourself.
Income Taxes: Roth IRA contributions are made with after-tax money, which means you won’t receive an income tax deduction for contributions. But your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.
To consider: To contribute to a Roth IRA, you must have an earned income. Your ability to contribute begins to phase out when your income (specifically, your modified adjusted gross income) reaches $122,000. As a joint filer, your ability to contribute to a Roth IRA phases out at $193,000.