Retirement Planning 101: What You Need to Know

These days, people are living longer and healthier lives than ever before. That means that retirement is no longer just a few short years at the end of your life. It's a significant portion of your lifespan, and it's important to be prepared for it.

But retirement planning can be daunting. There's so much to think about: How much money will I need? What kind of lifestyle do I want to have? How will I invest my savings?

Don't worry, we're here to help. Advance Capital Management has been helping people create personalized retirement plans since 1986. In this article, we'll cover the basics of retirement planning, from setting goals to investing your savings.

So whether you're just starting out or you're close to retirement, this article is for you. Let's get started!

This article covers the following:

• Why retirement planning is important
• When to start planning for retirement (spoiler alert: now)
• Where to save for retirement
• How to invest your retirement savings
• Set your retirement goals
• Prepare to change your retirement plan

Why retirement planning is important

Retirement planning is an investment in your future. Why?

• First, people are living longer than ever before. This means that you'll likely need your retirement savings to last for 20 or 30 years.
• Second, the cost of living is rising, so you'll need to have enough money to cover your basic expenses, such as housing, food and healthcare.
• Third, Social Security benefits are only expected to replace about 40% of your pre-retirement income. This means that you'll need to rely on your own savings and other financial assets to make up the difference.

Therefore, planning for retirement is a way to make sure that you can enjoy your later years without having to worry about money.

When to start planning for retirement

It’s never too early nor too late to start planning for retirement. But the sooner you start planning for retirement, the more time your money has to grow. Even if you can only save a small amount each month, it will add up over time.

How much you need to save for retirement

The amount of money you need to save for retirement will depend on a number of factors, including your desired retirement lifestyle, your age, your income and your expenses. 

However, a general rule of thumb is to save about 10-15% of your salary annually, which will allow you to replace 70-80% of your pre-retirement income. We, however, think it’s a good idea to save enough to replace 100% of your paycheck (learn why here).

There are online calculators that can help you calculate your retirement savings needs. But for an accurate assessment, you can work with a financial adviser to develop a personalized retirement plan.

Where to save for retirement

Most people save for retirement in an employer-sponsored retirement plan.

These include:

• 401(k)
• 403(b)
• 457
• Thrift Savings Plan (if you’re a federal worker)
• Roth 401(k)

Generally, these are tax-deferred accounts in which you save money from your paycheck on a pre-tax basis. This means that your contributions will reduce your taxable income. You then pay taxes on any withdrawals at your ordinary income rate.

The annual 401(k) contribution limit for employees is $22,500, or $30,000 if you are age 50 or older (2023).

Meanwhile, contributions to a Roth 401(k) account are taxed and withdrawals in retirement are tax-free. Check out this article to better understand whether a pre-tax or Roth account is right for you.

Whatever type of account, take advantage of your employer-sponsored retirement plan. Many employers offer matching contributions, which can give you a boost to your retirement savings.

IRAs are individual retirement accounts that anyone can open. There are two main types of IRAs:

• Traditional IRAs: Contributions are pre-tax, which means you will have to pay taxes on your withdrawals in retirement.
• Roth IRAs: Contributions are made with after-tax dollars, but your withdrawals in retirement are tax-free.

The annual IRA contribution limit is $6,500, or $7,500 if you are age 50 or older (2023).

Retirement plans for small business employees and owners include:

• Simple IRA
• SEP IRA
• Solo 401(k)
• Payroll Deduction IRA
• Profit-Sharing Plan

The best retirement account for you will depend on your individual circumstances. You may want to consider working with a financial adviser to choose the right retirement account for your needs.

Take a closer look at them with this article on retirement accounts and plans.

How to invest your retirement savings

There are a variety of investment options available, such as stocks, bonds and mutual funds. But you may be limited to only what investments are offered in your employer’s retirement plan.

It's important to choose investments that are appropriate for your risk tolerance and time horizon. Generally, you should invest aggressively early in your career and then gradually reduce risk as you near retirement.

If you're not sure how to invest your retirement savings, you may want to consider working with a financial advisor. A financial adviser can help you develop an investment strategy and choose investments that are appropriate for your individual needs.

Set your retirement goals

Retirement planning is more than just numbers.

What do you want your retirement years to look like? Do you want to travel the world, spend more time with your family, or pursue new hobbies? With a good understanding of your specific goals, it is easier to develop a plan to achieve them. Most importantly, it will help you estimate your retirement expenses. To learn how we can hep you, visit our retirement planning page. 

Prepare to change your retirement plan

Your needs and goals may change over time, so it's important to review your retirement plan regularly and make adjustments as needed. For example, if you have a major life change, such as a job loss or the birth of a child, you may need to plan on working longer or saving more.

You should also review your retirement plan if there are any significant changes in the tax code, economy or in financial markets.

That’s why retirement planning can be complex. And that’s also why it’s important to remember that it’s never too early or late to start. Get started today by scheduling a free retirement consultation with an Advance Capital Management adviser.

Are you taking the right steps to reach retirement? Get your retirement on track with this free retirement planning guide.