If you’re young, retirement seems so far away. If you’re older, not so much. Either way, you should have set goals when it comes to your retirement. Afterall, you don’t want to work forever and if you’re not saving now, you just might have to. Even if you can’t contribute too much into a retirement plan, such as an IRA or 401(k), you should contribute something. Here are a few tips to help reaching your retirement goals.
First off is to contribute to an IRA. Anyone can do this as long as you have earned income for the year. This can come from a salary, contracting income or from a business. The maximum you can contribute to an IRA for 2013 is $5,500 plus an additional $1,000 if you are at least age 50. The advantages of an IRA include tax-deferred growth of your contributions, a tax deduction if you qualify and a broad assortment of investment opportunities.
Further, you should set up automatic transfers to fund your IRA. If your financial institution allows it, you can set a schedule for how much and when money is transferred into your IRA. When done automatically, you won’t forget to contribute to the plan. If your IRA holder does not allow this, you may want to find one that does. It makes saving that much easier.
Next, you should diversify your savings between tax-deferred, tax-free and taxable accounts. You never know what may or may not happen with taxes down the road so it’s best to not put all your eggs in one basket. As mentioned, traditional IRAs are tax-deferred meaning you don’t pay taxes on your contributions. When you withdraw the money during retirement, you pay the taxes on the principle as well as the earnings. Roth IRAs are tax-free plans. They are funded with after-tax money. The advantage is that all withdrawals are tax-free during retirement. Note that there are income limits for opening a Roth account. If you are above the threshold, you may make nondeductible contributions to a traditional plan and then roll them into a Roth if you so choose.
Roth IRAs offer a great many benefits which include tax-free withdrawals, no required minimum distributions (RMD), easy access to contributions, contribute as long as you want, not matter your age and is a great estate planning tool. Check out our recent articles on Roth IRAs here.
It’s also important to know what will happen in the case of your death. You should always keep your designated beneficiaries up to date with all your retirement plans. This is especially true if you go through a major life change such as marriage, divorce or childbirth. Note that your beneficiary designations will supersede what’s in your will.
Rebalance, rebalance, rebalance! We cannot stress this enough. Your investment strategy determines your asset allocation strategy. This is based on many factors including age, retirement goals and risk tolerance. As these (and other factors) change, so should your asset allocation. One factor that is out of your control is the markets’ ups and downs. Your asset allocation shifts based on their market performance which can unbalance your investments. It’s important to rebalance them from time to time to make sure you’re not taking on too much (or too little) risk.
Lastly, you should look to consolidate your retirement plans. Most people will go through several jobs before finding the right fit. If so, you probably have old 401(k) plans that you might not be following closely or may not be invested the way you want it to be at this stage of your life. It’s best to take those old plans and merge them into one plan that you watch regularly. That way, your investments will be working together to provide you the best chance at a successful retirement.