Retirement planning is actually incredibly simple and straightforward for most people. However, it can quickly sound complex because of all the edge cases, exceptions, and possibilities that really only affect a small number of people. If you eliminate all of that noise, however, there really isn’t much to the average American’s financial plan. Follow the following information and there really is no reason you can’t make your own simple retirement plan.
Obviously, every situation is different. If you have unusual circumstances such as a coming inheritance, money in trusts, or other legal situations, this plan won’t work for you. If you have regular income, a family, and just need a plan, this is perfect for you.
Do It Yourself Financial Plan
One of the things that quickly complicates financial planning is the idea that you have to predict how much income you will need in retirement. This step is a waste of time for 90 percent of people.
Because, for most people retirement saving and investing is about how much they can save, not how much they will need. To put it another way, consider this. If I tell you that if you can save $10,000 per month, you will have an amazing retirement, does that help you?
It only helps if you actually CAN save $10,000 per month. It’s completely irrelevant if you can only save $2,000 per month, or even $7,000 per month. Projecting your retirement needs is a fools errand. Not only is that number a complete guess, but it will change greatly over the course of your life.
Instead, for a simplified retirement plan, focus on how much you can save. Chances are you need to save more than what is comfortable for you, but you can’t do it today. So, what should you do?
Enroll in your 401k plan. No matter what you think you see or hear about better options, for 90 percent of working Americans, nothing is better than your 401k plan. What’s more, for most Americans, the maximum amount that you can put in a 401k plan is more than you have the ability to actually save anyway. So, just ignore all of that other stuff and start socking away as much money as you can in your 401k savings plan.
If you are contributing the maximum percentage, or if you are maxing out the highest possible 401k contribution for the year, skip to advanced retirement planning.
How Much Should You Save For Retirement Calculator
The next thing that overly complicates retirement planning is calculating how much you need to save. That number is based upon the previous calculation about how much you will need. Don’t bother. Trust me when I tell you that unless your expenses are a very low percentage of your income, then it is virtually impossible to over-save for retirement. In other words, just save as much as you can. If you’d rather see numbers than trust me, read on.
The maximum 401k contribution for 2015 is $18,000, or $1,500 per month. Put another way, that’s 10% for a person making $180,000.
Do you make $180,000 or more for the year?
If not, stop worrying about other kinds of retirement plans and load up your company 401k plan with as much money as you can afford to save for retirement.
For the best retirement, you’ll want to be saving 10 percent of your income at minimum. Can’t afford 10%? Most people can’t, at least not right away.
Here is how to build your retirement savings.
First, start by setting your 401k contribution as a percentage instead of a flat amount each paycheck. The result is that every time you get a raise, your contribution amount automatically increases thanks to the way percentages work. But, that’s not good enough if you aren’t already contributing 10%.
So, second, every time you get a raise, increase your contribution percentage by 1% until you reach 10 percent.
Do that, and you will have the best retirement you can afford.
Do I Need Advanced Retirement Planning?
That wasn’t so bad, was it? But, now you are thinking, about that one thing you read about. And, what about a Roth IRA, or shouldn’t I worry about…
Stop right there.
Let me break it down for you, in numbers, realistic financial advice style.
First, unless you are maxing out the full annual 401k contribution every year, chances are very unlikely that you are going to need to worry about your taxes in retirement. That means you don’t need to worry about getting any tax-free retirement income from things like a Roth IRA, or other tax-deferred retirement plan.
Unless you are maxing out your full 401k contribution, you most certainly do not need anything like an annuity, whole life insurance, or anything else to manage your taxes in retirement.
Fact: Unless you are in your 20’s and already pumping money into your 401k, chances are you will retire with around $1 million.
Fact: In order to never outlive your money, you’ll want to keep your withdrawal rate in retirement around 5 percent.
Fact: 5 percent of $1 million is $50,000 per year.
Fact: You do not need a way to “manage your taxes in retirement” if you are only have $50,000 per year in income.
- $1,000,000 in retirement nest egg.
- Withdraw 5% per year = $50,000 as taxable income (all gains inside account still tax-deferred).
- Standard deduction for a couple (assuming you are married) = $12,600.
- Taxable income = $37,400
- Income tax on $37,400 for married filing jointly = $4,687 (2015 tax tables)
That’s an effective tax rate of a little less than 10%.
Do you pay less than 10% in taxes today?
Then, you are coming out ahead by getting the tax savings now versus a Roth IRA, or any other tax-free later retirement program.
If you retire with less than $1 million, then you have even less of an issue.
What about inflation? All of the numbers above will adjust with inflation, but there is a catch. Your salary, your taxes, and your final retirement number in the future will all be hire, but the end result is the same because those numbers tend to move up together over time. So, if you are 25 now, yes, you’ll retire with more than $1 million thanks to inflation. Of course, you’ll need 5% of whatever that amount is in order to live like the same as $50,000 gives you today.
If you have more than $500,000 in your 401k retirement plan today, or if you are maxing out your 401k contributions, you may need more advanced financial planning. Otherwise, stick with loading up your 401k until you either:
- maxing out your 401k contributions and still want to save more for retirement
- your retirement account balance is $500,000 or higher and you are more than 10 years from retirement
I’ll be putting together an advance personal retirement planning guide soon, or make an appointment with a professional financial advisor. With that much money, you’ll be sure to get the attention you need.
Tags: 401k, financial planning, Investing, IRA, Retirement, roth ira, Saving Money