Retirement planning gives you pointers towards financial independence in your old age. Whether you are a fresh graduate, a small business owner, or are approaching your retirement age, taking a proactive approach can help you live a comfortable life once you stop working. Ideally, you will want a plan that is an investment tool with rewarding returns.
At Watertree Financial Wellness, we believe retirement planning is essential and aim to help individuals with retirement income planning.
Most people derive their retirement income in three ways:
These include your contributions to:
Employers in the United States offer their employees a 401(k) retirement savings plan. They present their workers with several investment options within the 401(k) accounts. Then, the employee selects and makes monthly contributions towards one of the investment accounts. In turn, the employer matches part or all of the employee's contribution, enabling the employee to save up to twice their contribution. If it is a traditional 401(k) plan, it reduces the employee's taxable income and only taxable on withdrawal. In contrast, salary deductions towards Roth 401(K) are on after-tax income, and their withdrawals are tax-free.
Individual Retirement Savings (IRA) accounts enable you to save for your retirement over a long period. They work like 401(k) retirement savings plans. Unlike the employer-sponsored 401(k), IRA accounts are self-sponsored, excluding any involvement from the employer. That way, the employee has more investment options. Still, there is no additional contribution/employer matching.
An employee can make a 401k rollover to IRA when changing jobs. The benefits are as follows:-
Equity savings and taxable brokerage accounts are ideal retirement plans for small business owners, freelancers, or independent contractors. They include investing in: -
A person living with a disability or a qualified retiree, their spouses, children, and survivors can apply for and derive their retirement income from social security benefits. It is a comprehensive program by the federal government, issuing payments to the beneficiaries who meet the following criteria: -
The amount you get depends on your age when claiming the benefits, area of birth, and earning history. These are taxable amounts of up to $3,345 per month as of 2022 to the retired workers. Hence, you may have to supplement your income if you only have your social security benefits as your source of income during retirement.
Like 401(k), corporations offer varying pension plans to their employees. Still, 401(k) is a defined-contribution plan, and pension is a defined-benefits plan. Here, a pension provides a pre-determined payment amount to the individual upon retirement. In turn, the employer bears the investment risks that arise due to any volatility in the financial markets. For this, most employers prefer 401(k) over pension plans.
As you approach your retirement age:
Set aside some cash reserves that will sustain you as you wait to make your first withdrawal. Indeed, pensions, social security, and other retirement plans can delay due to the necessary paperwork. Ensure you have sufficient cash in a money market account, bank savings, or a checking account to shield your living expenses for three to six months.
Retirement planning allows you to invest now for financial freedom when you retire. You also enjoy cost savings, tax benefits, and other incentives as you contribute to your retirement plan.
There are five key steps in planning for your retirement. These are:
It is essential to acquire a retirement planning guide and start setting aside money for your golden years immediately after you start working. Consult Watertree Financial Wellness and speak to an advisor who can explain and recommend the best investment options for you.