One of the most important components of your financial plan is the management of your retirement fund. If you want to be prepared for the future, set yourself up for a seamless transition from your career to retirement. Here are a few tips on how to prepare for a comfortable future at every stage of your life.
Young adults: don’t procrastinate – invest early!
So you’re in your 20s or early 30s, working hard, and you don’t have an incredible amount of discretionary income. It may seem premature to enroll in an employer-sponsored retirement plan. You hear “retirement” and think “that’s a million years away.” Let it be said; time is your greatest advantage. Contribute whatever you can to your plan, as even small amounts add up through the power of compounding. Over time, compounding accelerates the income potential of your original investment exponentially.
Rome wasn’t built in a day. You can prepare and invest gradually. After you enroll in a plan, aim to increase your contribution by a percentage point or two every year, until you reach the plan’s contribution limit. As your salary increases, make sure your contributions do the same. You’re earning more, so you should be saving more.
Starting a family: should I leave the workforce?
With a new family comes an abundance of new expenses. In this phase of your life, I recommend reviewing your investment strategies each year, as they may need to be adjusted to accommodate major life events (e.g., marriage, divorce, the birth of a child, job change). Although it may be tempting to dip into your retirement savings, remain diligent and focused on the future.
If you plan on leaving work for a certain period of time, consider temporarily increasing your plan contributions before you leave and again after you return. This will help make up for the lost time and savings. Keep in mind that leaving the workforce for prolonged periods may also affect the size of any pension or Social Security benefits you receive down the road.
In the Home Stretch – Almost there!
If you’re 50 years of age or older, you may be eligible for catch-up contributions, which allow for a higher contribution limit compared to younger employees.
Now is also a good time to familiarize yourself with required minimum distributions (RMDs). The IRS requires drawing down your retirement plan assets by April 1 after you reach age 70 1/2. If you continue working past this age, and your plan allows for it, you may be able to delay as long as you don’t own more than 5 percent of the company.
If at any point you find yourself facing financial difficulty, try to avoid taking out a loan or hardship withdrawal from your account. These moves will not only stunt your retirement saving progress but could also result in a penalty tax on your income.
Preparing to retire and beyond
With retirement quickly approaching, it’s time to begin thinking about when and how you will draw down your plan assets. Taxes can dramatically affect your retirement nest egg, and there are many retirement withdrawal strategies to consider. A financial professional can help address the various decisions you will face at this important time including:
● Health care needs and costs, as well as retiree health insurance.
● Income-producing investment vehicles.
● Tax rates and living expenses in your desired retirement location.
● Part-time work or other sources of additional income.
● Estate planning.
It’s important to remember that having the right withdrawal plan in place can protect your assets, minimize taxes and help to ensure that desired assets are passed on to your heirs.
If you’re interested in learning more about planning for retirement, please visit www.firstambank.com or reach out to one of our financial professionals.
John O’Rourke is a Private Banker and Wealth Advisor in South Florida for First American Bank. If you have any questions or comments, contact John at Jorourke@firstambank.com. First American Bank investment products are Not FDIC insured, not bank guaranteed, and may lose value.
