When it comes to choosing a retirement plan, the process can quickly get overwhelming. Understanding the nuances of the different types of accounts and which one is going to be best for you can seem nearly impossible. The good news is, taking the time to think about and figure out your retirement goals can simplify the process.
Things to Ask Yourself Before Choosing the Best Retirement Plan
The road to retirement is different for everyone. Asking yourself a few questions early on in the retirement planning process can help you find the plan that will help you achieve the retirement you’ve dreamed about. Here are nine things to think about before choosing the best retirement plan.
1. When Do I Want to Retire?
Some individuals aim to retire at 50, others work until the mandatory retirement age of 65 to collect Social Security, while others keep working to maximize their social security benefits. It’s also important to note that your Social Security benefits can be adversely affected by early retirement. Therefore you should carefully consider when you want to retire so you can plan accordingly.
2. When Do I Want to Pay Taxes?
Different retirement plans are taxed differently. Some retirement plans are tax-deferred, meaning you don’t pay tax until you take withdrawals. Meanwhile, other retirement plans, such as a Roth IRA, don’t offer tax deductions on contributions. This means you will pay taxes on your contributions now, but will not have to pay taxes when you take withdrawals. The tax bracket you are in now versus the bracket you anticipate being in will play a key role in this decision.
3. How Much Do I Need?
Let’s assume you are planning on having $500k for your retirement. How long will this last? Well, this depends entirely on how much you need. Consider what you want to do in retirement and estimate your retirement expenses. This will help you make sure you put enough aside to supplement any retirement income and still live the lifestyle you want.
4. What Will My Retirement Income Be?
Just because you stop working doesn’t mean your income has to stop. Take the time to determine your retirement income. Don’t forget to consider your Social Security benefits, annuities, whether you’ll opt for a reverse mortgage, and whether or not you have any investment portfolios.
5. Will I Need the Money Right Away When I Retire?
Most IRAs or 401(K)s require you to start making withdrawals at a certain age. These withdrawals are based on the IRS life expectancy table. However, if you won’t need the money right away or are considering leaving it to your heirs, a Roth IRA may be a better option since there is no requirement on when to make withdrawals.
6. How Much Do I Make?
It’s important to know that your adjusted gross income (AGI) affects your ability to make contributions to a Roth IRA. These income limits are determined by the IRS, and they fluctuate. For 2020, the contribution limit is $6,000 per year, with income limits of $139,000 AGI for singles and $206,000 AGI for joint filers.
7. Do I Want Early Access to the Money ?
Most retirement plans penalize you for early withdrawals. However, you can avoid these penalties if you use traditional IRA funds for college expenses. If you opt for a Roth IRA, you can withdraw the amount you contributed at any time without penalty. This makes it a good option since it can also serve as an emergency fund.
8. Does My Employer Offer Matched Contributions?
Always double-check as to whether or not your employer offers matched contributions to a 401(K) or IRA account. Taking advantage of these contributions is essentially free money that will add up substantially over time.
9. What’s My Risk Tolerance?
Before you decide on your retirement plan you need to determine your risk tolerance. If you have a high risk tolerance you may be comfortable with a single-stock retirement plan in the hopes of faster and bigger gains. However, if you have a lower risk tolerance you’ll want a plan that is more diversified with safer companies but this will have slower growth. It is also important to revisit your risk tolerance regularly as life circumstances change.
“I think I have an idea already on what’s the best retirement plan for me…” Now what?
As you begin thinking about these aspects of retirement, you may find that you still have questions.
We can help! Here at Arapaho Asset Management, we’re ready to help you find the best retirement plan option to help you achieve your retirement goals. If you want to learn more about the different retirement plan options, consider taking one of our retirement classes to help you make effective retirement decisions.