During your earning years, you work hard. For the most part, you are working to establish the best standard of living you can possibly secure. That will usually include you looking for ways to save and invest your money wisely.
While you are able to earn wages, you need to keep one eye on the present and one eye on the future. After giving all you have to build a comfortable lifestyle, you don’t want to have to settle for less in retirement. You have an absolute right to maintain the standard of living you want in your golden years.
With an eye on retirement, you need to start planning your finances now. To assist you, here are some retirement planning tips you can implement while heading into 2022.
Make a Plan
With your future on the line, you can’t afford to try to “wing it” for the next few years. You need to start financial planning for your retirement now.
There are a few things you will need to decide. First, you need to decide when you want to retire if money is available. It doesn’t have to be a hard date, just a date you can use as a guideline for planning.
Once you have a general idea of when you want to retire, you can calculate how much you will need to save between now and retirement. The target amount should be the amount you anticipate needing in order to maintain the retirement lifestyle you desire.
Once you have a general idea of what financial resources you will need, you can start to develop a savings and investment strategy that will get you what you will need. Be cautious about putting too much emphasis on Social Security. Your savings and investment strategy should be based on the resources you can create now and in the immediate future.
Best Investments for Retirement
To be clear, it will take discipline and sacrifice for you to meet your retirement goals no matter what they might be. The earlier you can start saving and investing, the earlier you will be able to move towards your goals. With that in mind, let’s take a look at a few investment options that work well for people with long-term retirement goals.
Self Employed 401(k) or Individual 401(k)
If you are under the age of 40, your best investment options will be those that allow you to defer taxes while earning. If you work for an employer who offers access to an individual 401K savings account, that’s an option you must consider.
Why? First, all of your contributions would be made with pretax dollars. That effectively defers your tsx liability until you start drawing down your retirement account at age 59 1/2 or later. Any earnings you have before retirement will also be tax deferred. Also, many employers will offer a “matching” incentive to get employees to save and invest. If you were to invest 6% a month with a 100% match, your employer would effectively be giving you a 6% raise to put towards your retirement. It might take a few years to vest in that money, but eventually, it could be yours.
If you are self-employed, the IRS allows you access to a Self Employed 401(k). Your investments and earnings would be tax deferred, but you wouldn’t get access to matching contributions.
Simple IRA, Sep IRA, Roth IRA
If you are self-employed or work for an employer who chooses not to offer a 401(k) option, you can invest in an IRA account. The simple IRA option is ideal for employees who do have access to the 401(k) option. All contributions and earnings are tax deferred until retirement.
If you are self-employed, the SEP IRA would be ideal. The IRS would allow you to invest the lesser of 25% of your income or a statutory limit amount on a tax deferred basis.
A Roth IRA works in reverse. You would make all of your contributions with after-tax dollars. However, all of your earnings from that point on would be tax-free.
Some investors prefer a very conservative approach to their investing. With an annuity, the principal portion of your annuity payments is guaranteed, meaning the principal is never at risk. That’s conservative.
Procedurally, you would purchase an annuity contract from an insurance company. The effective return on investment would be very small, but the principle is secure. You would make your annuity payments over a prescribed number of years at which time the payments would cease. As part of the annuity contract, you would also establish a payment schedule for you to receive your distributions. You would likely have the option of starting to take distributions right away or deferring them until sometime in the future. You would not be obligated to pay taxes on any earnings until you start getting distributions.
There are dozens of other retirement investment options at your disposal. It’s incumbent on you to match your needs in retirement to the option that will best serve those needs.