The holy grail of retirement planning? A humongous retirement nest egg. Or at least one large enough to support you in the style of living you want during your golden years.
Maybe that means a retirement savings balance big enough to provide you with $100,000 of annual income. Or maybe you’re still working and already pulling down $200,000 a year. Or $1 million.
And you don’t see any reason to scale back once you stop working. Fair enough.
Retirement Planning: Six Key Steps
The most important thing is how to reach that goal. In fact, there are six key steps, says Rob Williams, a financial planning expert at Charles Schwab (SCHW).
They are the keys to protecting and growing your wealth, Williams says. That makes them the six key steps to retirement planning.
Trim your high-cost debt. Whether your income is $50,000, $100,000 or higher, high-interest debt is a killer of retirement planning dreams. One of the most common types of high-interest-rate debt is credit card debt. Credit cards have average interest rates of 19.59%, according to the latest weekly data from CreditCards.com. A year ago, rates averaged 16.13%.
Pare down that debt by paying off card balances on time every month so you don’t get whacked by interest rate charges and late fees. And shop around for a card with a lower rate than the one you’ve got now.
Pony Up The Money
Maximize your retirement account contributions. Increasingly, retirement planning and retirement saving are largely your own responsibility.
The earlier you start, the fewer dollars you must kick in from each paycheck. “And contribute enough to get the maximum employer match,” Williams said. “If you don’t, you’re turning down free money.”
And this time of year, any annual bonus you’re entitled to can be a good source of extra dollars for retirement savings, Williams says.
Roth IRAs, Roth 401(k)s
Tilt toward Roth-style accounts. You contribute money left over after you pay taxes. So withdrawals, probably years later in retirement, are free from tax and penalty if you follow all the rules.
Let’s say thanks to diligent retirement planning you’re in a higher tax bracket by retirement. You will not have to pay income tax on withdrawals from Roth-style accounts, Williams says. Even if Congress has raised tax rates by then, your withdrawals will be immune.
To qualify for withdrawals that are free from tax and penalty, you must be at least 59-1/2 years old. In addition, the account must be open at least five years.
An IRA can be Roth-style. So can a 401(k) account, if your plan allows that.
You can put new contributions into a Roth IRA. But that’s only if your modified adjusted gross income (MAGI) is below certain limits. For example, married joint filers must be under $214,000 in MAGI in 2022 or $228,000 in 2023.
If you don’t meet those income ceilings, contribute money to a traditional IRA — which has no income eligibility rules. Then convert the money to a Roth IRA. No income eligibility rules apply to a conversion.
Just remember, there are income limits for being allowed to deduct your traditional IRA contribution.
No income limits apply to Roth 401(k) accounts.
Fund your emergency savings. Many people are afraid we’re heading into a recession. And several big firms have already announced worker layoffs.
How large should an emergency savings account be? “We recommend putting in enough money to pay three to six months of regular living expenses,” Williams said.
Having emergency savings is part of retirement planning because it helps you avoid premature withdrawals from retirement savings.
Check your budget. The idea is to identify unnecessary expenses, which you can cut.
This is part of retirement planning because it frees up dollars that you can contribute to an IRA or 401(k).
If making a budget for the entire year seems too hard, instead make a budget for one month or one quarter. “Year-end is a good time to do this,” Williams said.
To find expenses you can cut, look into bundling various insurance policies with a single provider. Also, consider downgrading club memberships. Yet another tactic: Ask your cable provider for discounts.
Retirement Planning Tune-Up
Tune up your investment plan. Do that annually. The ideal is to make sure your investment game plan still reflects your retirement planning goals, time frame and risk tolerance. Ask yourself whether your chosen investments still look like the best vehicles for building the balance you want by the time you want it.
Need help? Compare your portfolio’s asset allocation with one or more target-date funds you like. Say you’re a brassy 45-year-old who plans to retire in 25 years. You’re comfortable with an aggressive investment strategy. How does your asset allocation compare with target-date funds aimed at middle-of-the-road investors?
The $219.5 million Schwab Target 2045 Fund (SWMRX) had 57% of its shareholders’ money at work in U.S. stocks as of Sept. 30. It held 30% in foreign stocks, 7% in U.S. bonds, nearly 3% in foreign bonds and nearly 3% in cash. The balance was in securities like preferred stocks and convertibles.
You can find funds whose asset allocations are more aggressive (more stocks) or more conservative (more bonds). And you can find funds with more or less volatility, measured by what Morningstar.com calls their upside- and downside-capture ratios. Also, don’t forget to check annual fees. They really add up.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and strategies of the best mutual funds.