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Retirement Planning - How to Build Your Dream Retirement

Most people envision their retirement years as an opportunity to accomplish all of the things they dreamt about while still working. Given the recent economic downturn, and diminishing investment returns, it is necessary for individuals to start planning for their dream retirement at the beginning of their careers. Currently, many seniors have put off retirement – and ultimately their dreams – due to unforeseen medical expenses, decreased pensions, and inadequate retirement planning. In fact, the number of working seniors between the ages of 64 and 74 increased from 1 in 5 in 2000 to 1 in 4 in 2006. And, according to the U.S. Bureau of Labor Statistics, the number of seniors eligible for an employer retirement plan has decreased from 52 to 43 percent.

Your retirement dreams do not have to be shattered by harsh economic times,  if two golden rules are followed early on: planning and saving. It is crucial to first envision your retirement dreams and calculate corresponding expenses, and then take financial steps towards those dreams.

Planning For The Ultimate Retirement

During retirement, many seniors’ ultimate fantasies involve lavish luxuries , such as traveling, owning vacation homes, and buying luxury items. In order to do this, retirees need to have large nest eggs.  Retirement dream costs should be calculated out accordingly. For example on average, a vacation home costs anywhere from $300,000 to $900,000, luxury cars start at $30,000, and cruises range from $3,000 to $9,000 depending on the package. To have $1 million saved up by retirement age, workers need to start saving $550/month starting in their 20’s, or over $4,000/month starting in their 50’s. Most financial experts recommend saving and begin retirement planning as early as possible.

Retirement Planning in Advance

During their professional careers, individuals should start to explore the types of available retirement accounts, how they can maximize their savings, and how to manage their investments wisely.

1)    Types of available retirement accounts

Employees typically have several employer-sponsored retirement account options, including 401(k)s, 403(b)s, IRAs  and governmental 457(b)s. 401(k)s, offered by both for-profit and nonprofit organizations, are financial plans that allow workers to save for retirement. In order to qualify, employees must be 21 years of age or older and have at least one year of full employment. Currently, employees under the age of 50 may contribute up to $16,500 annually, and those over 50 may contribute $22,000 annually. Some companies offer to match 401(k) contributions, which means employees may potentially double their 401(k) funds.

403(b)s, only offered by nonprofits, hospital service organizations and public schools/universities, is a type of tax sheltered retirement savings plan that is similar to a 401(k) plan. In general, almost all employees of those sectors are eligible, and they may contribute $16,500 if over 21 years of age, or $22,000 yearly if over age 50. Certain employers also offer to match 403(b) contributions.

IRAs, or Individual Retirement Accounts, allow employees to receive significant tax advantages on retirement savings. IRAs, although not investments themselves, permit employees to invest their IRA account funds in stocks, CD’s, bonds or other similar investments. There are two different types of Individual Retirement Accounts – ROTH IRAs and Traditional IRAs. A crucial difference between the two is that ROTH IRAs are taxed when a contribution is made, but are not taxed later on in retirement. Traditional IRAs are tax deductible when contributions are made, but they are taxed later on in retirement. Any individual with earned income may contribute to a Traditional IRA up to age 70, and any individual who has taxable income or is self employed may open a ROTH IRA. For both IRA types, workers may only contribute $5,000 yearly if under age 50, and $6,000 annually if 50 or over.
 
Governmental 457(b)s are only available to individuals who work for non-profit, for-profit or governmental organizations with fewer than 100 employees. Governmental 457(b) plans allow employees to save money for retirement on a pre-tax basis. In return, employees agree to take salary reductions, and the money taken from their salaries is invested. The interest earned is tax free until the employees decide to collect it at retirement or change jobs. Employees are permitted to contribute $15,500 annually.

2)    How to Maximize Retirement Planning with Savings

The most essential component of building a well-endowed nest egg is having large retirement savings. Money saved early on has the potential to grow exponentially through wise investments, and by saving regularly, this ensures maximum returns on financial investments.

The first step towards maximizing savings is to contribute regularly to retirement plans. Dollar cost averaging, a popular investment strategy, requires a steady monthly, weekly or biannual investment of a fixed amount into a retirement account of your choosing. If this option is chosen, contributions must be consistent. Therefore, it is important to calculate a guaranteed amount that you will be able to contribute regularly to the account.

Another step towards building your dream retirement is to save as much money as possible, even when your salary increases. By placing $500 monthly into a retirement fund at 10% annual interest, over a million dollars will be yielded in 30 years. The more money that can be saved, the better retirement life will be.

Early withdrawals on IRAs, Social Security and 401(k)s should be avoided at all costs. Penalties for early 401(k) and 403(b) withdrawal before the age of 59.5 include a 10% IRS tax. Early simple IRA withdrawals made before age 59.5 are also given a 25% tax penalty for the first two years, and thereafter a 10% annual penalty. If individuals make over $13,560 and also collect social security, they must repay the Social Security Administration $1 on every $2 earned over the limit.

Another way to maximize retirement savings is to take advantage of employer matching programs. If an employer offers to match 401(k)s, then employees should contribute enough to receive that free benefit. Employer matching will enable individuals to maximize their 401(k)s, which means a cushier nest egg later on. Human resource departments typically offer extensive information on company 401(k) matching policies.

3)    Make Retirement Planning Easy with Wise Investment Management

Once your investments have been made, it is essential that they are managed regularly and wisely. This includes managing and adjusting any investment portfolios and IRAs.

Investment portfolios should be assessed regularly for any investment loss, and withdrawal rates should be adjusted accordingly. As a general guideline, financial advisors recommend that retirees withdrawal no more than 4% annually to prolong their retirement savings.

Managing IRAs involves reviewing investment  progress, setting regular financial targets, and taking advantage of employee benefits. All investments, should be assessed to see how successful they are. If need be, consider consulting a financial planner if your mutual funds are not growing enough. An IRA target growth number should also be  set quarterly, and IRA accounts should be assessed monthly for goal progress. To maximize Traditional IRA growth, employees should take full advantage of any employer retirement account matching programs or other retirement benefits. This allows for the potential of earning twice as much Traditional IRA funds.

Planning Right Before Retirement

A few years prior to retirement, individuals should start shifting their focus toward organizing their accounts, considering investing in longevity insurance and establishing a retirement age in addition to continuing to save for retirement.

1)    Organizing  and Updating Your Accounts

It is crucial that individuals are aware of all of their accounts, and how to access them. Accordingly, all account statements and previous tax forms should be collected, recorded and filed away. Each account record should contain its present value and instructions of how to access it. Soon-to-be retirees should also consider consolidating their accounts as a way to simplify their finances. Any beneficiaries listed on retirement accounts should also be reviewed and updated, especially after a death or divorce.

2)    Considering Longevity Insurance

At the onset or right before retirement is a good time to consider investing in longevity insurance.  Longevity insurance can help to cushion and extend your retirement years by providing regular monthly income.  All that is required is a down payment of anywhere from a few thousand dollars to tens of thousands of dollars, and starting at an age of your choosing, you will start to receive monthly payments until death. Extensive research should be done before choosing a company and a plan.

3)    Establishing a Retirement Age

Establishing a retirement age depends on how much money has been saved, how much will be spent, and your projected life expectancy. In order to reap the full benefits of IRAs and 401(k)s without any tax penalties, retirees should be at least 59.5 years old before collecting them. To also receive full Social Security benefits, retirees should wait until age 70 when they will receive the maximum payout allotted. The advantages of delaying retirement until age 65 or older include being able to still contribute to IRAs and 401(k)s, allowing assets to continue to grow, and not receiving any penalties or reduced benefits.

Manage Retirement Planning during Retirement

Even though individuals have spent time envisioning and planning their ideal retirement , they still need to manage their retirement funds while  living out their retirement dreams.  This includes establishing retirement budgets. appropriate withdrawal rates and factoring in healthcare expenses.

1)    Planning a Retirement Budget

At the onset of retirement, a retirement budget should be constructed that takes into account monthly expenses, future vacations or purchases, healthcare costs, and unexpected events.

Common regular expenditures include mortgages, utilities, insurance, entertainment, groceries, taxes, credit card and loan payments, and money allowances. Retirees should also research the costs of their dream vacations, purchases and healthcare.

2)    Establishing Appropriate Withdrawal Funds

At the beginning of retirement, retirees should calculate how much they can withdrawal from their savings without having it run out prematurely. Most financial advisors recommend a conservative withdrawal rate of 4%-5% for the first few years of retirement. However, each retiree’s financial situation is different, and their Social Security income, pension, personal savings, and investment returns must be assessed collectively before determining a withdrawal percentage. Retirees should consider discussing their retirement plans and withdrawal rates with a financial advisor to ensure that they are able to sustain their retirement and fulfill their dreams

3)    Factoring in Healthcare Expenses

Senior citizens are the most financially affected age group when it comes to medical expenses. This is due to unforeseen medical expenses and skyrocketing prescription drug costs. However, retirees do not have to lose their retirement savings to unexpected medical costs if they budget this factor while planning their retirement. On average, retirees who are insured spend approximately $5,000 annually on  out-of-pocket medical expenses, and older retirees end up spending $8,000 or more. For those who lack insurance, healthcare expenses have the potential to exceed hundreds of thousands of dollars. To reduce healthcare costs, retirees are encouraged to look into Medicare, Medicaid, health savings accounts and prescription discount programs.

Retirement Dreams Can Come True With Sound Retirement Planning

Despite lengthening life expectancies, increasing medical expenses, and dwindling investment returns, individuals still have the ability to plan and live out their dream retirement. If individuals are persistent about saving money, make wise financial decisions, and calculate a practical retirement budget, then they should be able to retire comfortably.