A Basic Overview of Developing a Retirement Plan
When we think of our financial goals, one goal that most of us share is a prosperous retirement. Whether we are retired, want to retire soon, or still have quite a while before we're ready, it's important that we have a proper plan in place that utilizes the tools we have available to us. We often hear about different IRA's, 401k's, Roth accounts, etc. but you may be wondering what's right for you? Let's talk about it.
When we sit down and begin planning for retirement, I think it's important that we first get a chance to look at the big picture of our current financial situation. What tax bracket are we in? What tax bracket do we plan on being in? What retirement and cash accounts do we have open? Where are those accounts invested? All these things (and more) are important when determining the proper steps for a retirement plan. The first thing I like to do when helping someone, is gather all this information, and have it summarized in one place. This gives us an overview of where we are right now. This can be an eye opener for a lot of people, because over the years they've opened multiple different accounts, and have likely had a few retirement plans with previous employers. Getting all this information in one place, in an easy to understand format can be crucial.
So now we know where we stand financially. We know about any upcoming expenses, tax liabilities, employer contributions, etc. Now let's develop a plan. Often times the first thing we think about is the employer match/contributions to any accounts. It's pretty common for an employer to offer a 401k, as well as match part of your contribution. Let's take advantage of this. It's free money that shouldn't be left on the table. So now we're taking advantage of our employer's contribution, now what? (There's plenty of different employer sponsored plans besides a 401k, but will stick to talking about this type of plan for now.)
Next let's consider opening a Roth IRA. Roth accounts are powerful. They're funded with after tax dollars so they grow tax free, and the distribution is also tax-free. Why is this important? Like your 401k, you get the chance to avoid capital gains. This is a huge advantage because we get to realize the entire amount of growth that we achieve without losing a portion of that to capital gains taxes. This makes a big difference in the long run and is one of the great advantages of a Roth IRA and many retirement accounts. The other advantage is that we get to take qualified distributions without paying income tax. This provides a steady stream of income that we get to use in its entirety, regardless of our current tax situation. We don't have to worry about income tax on this because we're paying into the Roth account with after tax money. Roth IRA's are a great tool that most people should definitely be utilizing. It's important to start early and be well invested when working with these accounts.
Lastly, we need to be consistent. With both our employer sponsored plans and our IRA accounts, it's important to develop a plan, and stick to it. The real growth in these accounts comes from compound interest, so being diversified and determined is a must. We're investing our money for the long term, exposing it to the market for as long as we can, not timing the market. Finally, it's also important to be aware of contribution limits and rules. We should also be aware of the rules when taking distributions, as well as consider what affects the retirement accounts will have when estate planning.
I hope everyone learned something from this article, and would be more than happy to answer any questions you still have. I should note that this is a pretty basic and brief overview of developing a retirement plan. Everyone has a different situation, so the steps can vary and tools we use may change along the way. If you need help getting a retirement plan in place, or would like me to review what you have going on right now, please don't hesitate to ask! Let me serve you as not only your financial advisor, but also your friend.
Tanner Millar
Investment Advisor - Core Planning
tanner@yourcoreplan.com
(660)-998-4639
https://www.yourcoreplan.com/disclosures