The Best Retirement Planning Guide — Top 10 Plans

Retirement without the best planning would bring some uncertainties, and the impact can be felt mentally and emotionally. As a matter of fact, a retirement plan brings happiness and a sense of achievement. It is less likely to experience anxiety, depression and your physical health will improve if you have good planning.

Age at which you plan to retire plays an essential role in defining your goals. Some people go for early retirement while focusing on making assets and passive income streams that will be pursued as a full career after they get retired in their early thirties while others complete their years-long service.

These five steps followed by the best retirement plans will help you towards safe, secure, and fun retirement planning. Let’s discuss these in detail with references and recommendations from successful people!

Understand the Time Horizon

Your current age and likely retirement age create the fundamental groundwork of effective retirement planning and strategy. The term “present value” plays a vital part in assessing your retirement planning. So what does it represent? In simple words, the present value indicates a sum of money you need to have in your bank account today, to meet future obligations or a list of future cash outflows after retirement, given a particular rate of return.

If put into mathematics, the present value formula would be: [tie_tooltip text=” Here, C is the future sum, i is the rate of return, n is the time horizon or time period.” gravity=”n”]PV= C / (1+i)^n[/tie_tooltip]

How to invest your retirement money? Well, it mostly depends on the time period you have before retirement. It is obvious that no one can predict the future, but you can be ready well ahead of difficult times. These present value assessments are quite valuable for evaluating good job offers.

A 60-year-old employee who is planning on retiring this year does not have the same concerns about a rise in the cost of living as a much younger 30-years-old professional who has just joined the industry.

A young entrepreneur who has invested in assets would not bother about these situations at all. It is wise to invest in riskier stocks and businesses which have high ROI if you have a long time horizon. The preservation of capital concept should come into play when you are old and near to retire.

Planning for the unexpected is what wise people do. What are your plans?

Breaking up your retirement plan into various components such as a child’s education, relocating, and starting a small business or a farmhouse in the countryside. These steps should be planned earlier keeping in mind the time period you can avail. This brings us to the second point.

Define your Expenses

I am sure that you know that the four stages of retirement have unusual expenses. By the way, the four stages are:

  • Peri-Retirement (50 to 62)
  • Early Retirement (62 to 70)
  • Middle Retirement (ages 70 to 80)
  • Late Retirement (80 and up)

Your stage of retirement could be different depending upon your personal decisions. Many people quit their jobs for businesses. Yes, you heard it right. People resign from jobs for the business.

Having realistic expectations would help you live a happy life. Many people believe that their expenditures will get reduced to 70% of the spendings of today but that is not a realistic calculation.

Well, for the retirees to have adequate savings for retirement, I think that the ratio should be nearly 90%.

Things you would wish to save money for may include:

  • Education of the children
  • Buying a new house or car
  • Healthcare (if not supported by the government)
  • Transportation
  • Food, clothing, utilities, communications
  • Long-term care

I’m planning to build an expense calculator that will calculate things while noting all the earnings and expenses using mathematical formulas. I shall update you on it soon.

Update: Calculate your average monthly expenses

Calculate After-Tax ROI

Once you have calculated time horizon and expenses, it is time to know actual [tie_tooltip text=”Return on investment is a ratio between net profit and cost of investment.” gravity=”n”]ROI[/tie_tooltip]

The formula for ROI = Net Income / Cost of Investment

Net income is the earnings after taxes are paid. You must know that the United States imposes a tax on the profits of US resident corporations at a rate of 21 percent. You can go for 401(k) plans if necessary.

Depending on the standard type of retirement account you hold, investment gains are usually taxed. Therefore, the actual rate of return must be determined on an after-tax basis. Nevertheless, defining your tax status when you begin to withdraw funds is a critical part of the retirement-planning process.

Risk Assessment

In investments, risk equals price volatility. A riskier investment is likely to make you rich but there is always a fear of a big loss. There are some investors who choose the safe preservation of money over the potential for higher returns when invested. This is where risk assessment comes into play.

Risk Assessment in Investment

You need to know that you completely understand the risk and you are comfortable with the risks being taken in your portfolio and also identify what is compulsory and what is leisure.

The average retirement length, according to the U.S. Census Bureau is 18 Years.

Estate Planning

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Assets management and estate planning is also an essential part of retirement planning. You must know that in estate planning each aspect requires the expertise of different professionals to minimize risks and errors.

A carefully drafted plan also assists in avoiding an unreasonably expensive and usually a lengthy probate process. Tax returns preparation is another critical part of the estate-planning process. If the person wishes to leave assets in inheritance to relatives or a charity group, the tax implications of either gifting the benefits or transferring them through the estate process must be analyzed properly.

A traditional retirement-plan investment approach is based on producing returns that meet annual inflation-adjusted living expenses while maintaining the value of the portfolio.

retirement planning

The responsibility of retirement planning is hanging on people now more than ever. There would be employees count upon an organization provided pension, especially in the private sector but they are less in numbers.

The following are important things to focus on!

The Best Retirement Plans to Consider

If you want to start a perfect retirement plan, let’s help you with some of the practical ideas that actually work.

What are the best retirement investments? Some of the practical ways to save money for retirement include the following ideas.

Defined Contribution Plans

Since the introduction, defined contribution plans have become the most successful plans ever. These include 401(k)s, 403(b), and 457(b).

Almost all of the fortune 500 companies offer direct contribution plans rather than traditional pensions.

Why is this so? Here is the retirement planning you will never regret.

[box type=”shadow” align=”aligncenter” class=”” width=””] Bonus: The best investing for retirement: Pension vs 401k[/box]

401(k) is pretty well known—most of the employers offer this. 403(b) plan is offered to employees of public schools and certain tax-exempt organizations whereas 457(b) is for 457(b) plan is for state and local governments.

The contribution upper limit for each savings plan is 19,500 USD in 2020 (6500 USD additional for those age 50 and over — nearing retirement).

This means that you can save up to 234000$ in a year if you are below age 50 and 312000$ if you are 50 and above.

There is yet another version called Roth. In this plan, you pay all the taxes upfront and no taxes at the time of taking out your money when retiring. This is a better option if you think taxes will grow with time. Choose this while opening the account at the time of retirement planning.

Have you heard about the bonus “match”? 401(k) retirement plan may offer this matching contribution. Matching of your 401(k) contributions means that your employer contributes a certain amount to your retirement savings plan based on the amount of your own annual contribution.

IRAs Plans

This is the second-best retirement investment option provided by the US government to workers who wish to save money for retirement.

An individual can save up to 6000$ in IRA if age below 50 and 7000$ if age is 50 or above.

There are many types of individual retirement accounts such as traditional IRA, Roth IRA, rollover IRA, SEP IRA, spousal IRA, and SIMPLE IRA.

Traditional IRAs allow you to contribute pre-taxed money for retirement but tax will be deducted at the time of retirement. In Roth IRA, you pay the taxes and then contribute so that your withdrawals will be tax-free.

Spousal IRAs are the additional IRAs for the worker’s spouses if their taxable income is more than the contribution to the IRAs.It can be either Roth or traditional whichever you choose.

The SEP-IRA is set up like a traditional IRA and it is for small business owners and their employees. The contribution limit is this year is 25% or 57000$ whichever is less. SIMPLE IRA is just like 401(k) with fewer restrictions and opportunities to get matching contributions from the employers in their retirement savings.

Solo 401(k) Retirement Plan

The Uni-k or solo-k is specially designed for business owners and their spouses. There are two kinds of contributions — elective deferrals and non-elective contributions. The first type offers $19500 while the latter saves 25% or 57000$ annually for Inc. businesses while 20% for non-inc.

The Pension Plan — Retirement Planning

Pensions or the defined benefit plans are the simplest and easy to manage because nothing is required from you. But this makes it riskier as well. All the savings are not in your control and there is no surety of timely fundings when you are retired.

Guaranteed Income Annuities (GIAs)

If you’re watching for a guaranteed stream of income during retirement, then annuities may be the best retirement plans for you. The GIAs offer a lifetime income, tax-deferral, and many other advantages that can help to make your retirement financially secure.

Read this: Lovely Retirement Gifts for Women

This isn’t a free cookie, the annuity contract comes with a technical trap, it will charge an annual fee to all investors who opt for one of these guaranteed income riders, and this amount is taken from the actual contract value reducing the ROI. It’s inheritable. For more details of GIAs, read this blog.

Profit-sharing Plans

Some organizations offer a profit-sharing plan to their employees as an incentive for them to be productive. This could be a great idea for saving money. Since it doesn’t cost anything. It’s good to do it.

The Federal Government Retirement Plans

Thanks to Congress for creating the Federal Employees Retirement System (FERS) that offers the following three-legged retirement-planning stool for civilian employees.

  1. Social Security Fund
  2. A basic defined benefit plan
  3. The Thrift Savings Plan—TSP

Conclusion

With all the retirement planning options, there is are certain risks or uncertainties involved due to the complications of the plans. Since you don’t know what amount will you have in your savings, it’s all measures for a secure retirement.

Some people suggest making passive income streams such as properties and other small businesses to make things go smooth for you. What are your thoughts? Let us know.

References / Credits:

  1. Investopedia helped us with some terminologies.
  2. Statistics are taken from the United States Department of Labor
  3. FERS information is available at Benefits.gov
About Faheem Rafique

The author is a digital marketer who loves technology, design, marketing and online businesses. He has pretty good experience in automation, strategies, digital marketing. We can help you to manage and build brands on the web.

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