What’s your plan for retirement? If the answer is “I don’t know” or “I haven’t thought about it,” we can help! At American National Bank & Trust Company, we believe being local is more than just having an office in the community. It’s about looking out for our customers with better banking options and quick, local decisions. In this article, we’ll share 6 essential tips for planning your retirement. Have questions or need help with your own planning process? Just contact our Wealth Management team and we’ll be happy to help!
Start early and set financial goals.
It’s never too early to start planning for retirement. In fact, the earlier you start the better thanks to compound interest. For example, even if you’re not able to put much away, the contributions you make to a retirement account in your twenties or thirties will yield a higher value down the line because they’ve had more time to earn interest, which then becomes part of the balance and earns more interest.
However, even if you’re getting off to a later start than you’d like, don’t give up and stop saving. Compound, or accumulating, interest is always working for you when you save in a retirement account. Wherever you’re starting from, thinking about what you want to accomplish in retirement can help you set and reach your financial goals. For example:
- When do you want to retire?
- Do you plan on downsizing your home?
- Do you want to travel?
- What is your estimated social security income?
- Will you establish an estate plan?
Answering these questions will help you determine how much you need to have saved by the time you retire. Now it’s time to identify the steps you can take now to ensure you reach your goal.
Focus on paying off debt
This tip may seem obvious, but it’s important to pay off long-term debt like a mortgage before you retire. Otherwise, that monthly mortgage payment will be just one more bill you have to have enough retirement income to cover.
What about shorter-term debt like a credit card balance, student loan, or car loan? The sooner you can pay these off, too, the better as it will free up money in your budget now to put toward retirement savings.
Paying debt off early also has the added benefit of saving you money on the interest you would’ve paid.
Ultimately, your ability to pay off debt early while also contributing to your retirement account will depend on your individual situation and finances. When money is tight, try to allocate something toward both of those goals. If you have multiple debts, you can choose one to pay extra on and just make the minimum payments on the others. At the same time, set up a recurring deposit into your retirement account, however small. Even $50 every other week when you get paid will accrue interest and eventually add up to more.
Open an Individual Retirement Account (IRA)
Individual Retirement Accounts can be opened by anyone—you don’t need to get one through your employer, like a 401(k). As with 401(k)s, IRAs offer certain tax advantages in return for not touching the money in your account until you reach retirement age (you can make early withdrawals but in most cases you’ll pay a fee, so try to avoid this at all costs).
There are two types of IRAs: Traditional and Roth.
- A Traditional IRA provides tax savings now. You make contributions from pre-tax dollars and won’t be taxed for that income until you begin making withdrawals in retirement.
- A Roth IRA provides tax-free withdrawals in retirement. Your contributions are from post-tax dollars, so you don’t have to pay income tax on them again in retirement.
The main benefit of an IRA is to lower your taxable income now. For people without a similarly tax-advantaged retirement account like a 401(k), a traditional IRA is a great alternative.
The main benefit of a Roth IRA is to let your retirement savings grow tax-free. Depending on your income and current tax rates in retirement, you can save a lot of money by paying the income tax now and not in retirement. You also save money by not paying income tax on the interest you earn. This is why a Roth IRA is a great complement to a 401(k) plan or traditional IRA.
As of 2021, both types of IRAs have an annual contribution limit of $6,000 for account holders under age 50 and $7,000 for 50 and up.
Learn more about opening an IRA with American National.
Take advantage of any employer-sponsored retirement plan.
Does your employer offer a tax-advantaged retirement plan such as a 401(k) or 403(b)?
If yes, do they match a certain percentage of your contributions?
- The average employer match ranges from 3% to as much as 5%.
- If you don’t contribute at least enough to get your full employer match, you’re essentially “leaving money on the table.”
Even if your employer doesn’t offer a match, you should still contribute as much (or as little) as you can afford to. Like a traditional IRA, contributions to a 401(k) or 403(b) are made from pre-tax dollars and deducted from your paycheck. So once you set your contribution, you probably won’t even miss it and you’ll lower your annual taxable income as well as saving for retirement.
401(k) and 403(b) plans also have a higher annual contribution limit of $19,500. People 50 and up can make up to an additional $6,500 in catch-up contributions.
Save for retirement with a Health Savings Account (HSA)
Yes, the primary purpose of an HSA is to put aside pre-tax dollars for healthcare expenses when you’re enrolled in a high-deductible plan. But did you also know that your HSA can be a retirement savings vehicle?
Annual contribution limits for HSAs are $3,600 for individuals and $7,200 for family plans. People age 55 and older can contribute an extra $1,000 per year. Once you reach a certain minimum balance in your HSA, you can use it as an investment account to earn interest on your savings and grow your funds. And once you turn 65 you can use your HSA funds for any expense without paying a penalty, not just qualified medical expenses. That’s why an HSA can be a great retirement savings account if you’re able to pay for some or all of your medical expenses with cash and preserve your HSA balance.
Learn more about opening an HSA with American National Bank!
Work with a financial advisor.
Last but not least, our final tip is to work with a financial advisor. Managing your finances and maximizing your retirement savings can be complicated. When you turn them over to a pro, you can gain peace of mind knowing someone with more expertise and experience than you is taking care of your long-term goals and money management for you.
Contact our wealth management team to learn more about how we can help you plan for retirement!