1.0 A Complete Guide to Retirement Planning
1.2 Why is Having a Retirement Plan Important?
1.3 What is Retirement Planning?
1.4 Investment Accounts: How Do They Work?
1.4.1 Traditional 401k
1.4.2 Roth 401k
1.4.3 Solo 401k
1.4.4 403b Plans
1.4.5 457 Plans
1.4.6 Traditional IRA
1.4.7 Roth IRA
1.4.8 SEP IRA
1.5 Steps to Creating a Retirement Plan
1.6 How Much Savings Will You Need?
1.6.1 5 Tips to Figuring Out How Much is Enough
1.7 What is the 4% Rule?
1.8 How to Choose a Financial Planner?
1.9 Avoid These 10 Most Common Mistakes
1.10 Can You Retire and Still Work?
1.11 Retirement Planning Software: Things to Consider
A Complete Guide to Retirement Planning
How is your retirement plan coming along?
When I ask colleagues this question, I usually get a cynical quip in return such as, “What retirement plan?” or “When I’m dead, I’ll be retired!”
I once thought the exact same way. But it doesn’t have to be this way…
If you start planning now, you can ensure that you have enough saved to maintain a great lifestyle and do the things you want to do.
With that being said, start saving as early as possible so you will be on the right path to meeting your financial goal.
Retirement planning is an important part of your overall financial plan.
Investing can be complex, but there are a few basic principles that can help you make wise investment choices such as knowing what types of accounts are available and how they work.
I will cover steps involved in planning, how much is enough for retirement, what is the 4% rule, and how to choose a financial advisor, and more.
Finally, I will also cover mistakes to avoid.
Let’s dive in!
Why is Having a Retirement Plan Important?
Planning for retirement is important because it allows you to save for your future and have a solid financial foundation when you stop working.
It can also help you stay on track with your finances and make sure you’re saving enough.
The best way to employ your strategy depends on your individual circumstances. You may want to consult with a financial advisor to get started.
Don’t depend too much on Social Security because with the rate of inflation, it will be woefully inadequate as it is for many retirees right now.
This guide will help you understand the basics and get you started on the right track.
What is Retirement Planning?
Retirement planning is the process of creating a roadmap to ensure you have enough assets saved up to cover your cost of living.
It involves figuring out how much you will need, deciding when you want to retire, and how you will achieve your goals.
It also involves making sure your assets are invested in a way that will grow over time.
Now, more than ever since we are headed straight into a recession and possibly even a depression, making careful decisions about how to invest is all the more important.
The older we are, the harder it is to recover from mistakes so careful planning is vital for success!
Investment Accounts: How Do They Work?
There are many different types of accounts, and each one has its own set of rules and regulations.
They also have various advantages and disadvantages related to withdrawal strategy, so this is important to understand with each type of account.
Most all the accounts have an early withdrawal penalty of 10% before the age of 59½. There are a few exceptions (i.e., the 55 Rule), but for the most part this is universal.
There is also a withdrawal guideline referred to as Required Minimum Distribution (RMD) that requires you to begin withdrawing funds at age 72. I find this exists on almost every account.
Let’s explore a bit deeper into the various options.
Most of these 401k plans are employer-sponsored retirement accounts. Many come with an employer match program to help growth over time.
Furthermore, these plans are popular due to the tax advantages it provides which is a continued benefit over time.
The dollars you contribute to your traditional 401k is tax-deferred meaning you pay taxes in the year in which you withdraw funds.
For example, say you earned gross income of $400,000 but you were eligible to contribute $24,000 dollars to your 401k. Rather than pay taxes on $400,000, you only pay tax on $376,000.
The $24,000 is tax-deferred until which time you withdraw these funds in the future. The benefit will be that you are expecting to be in a lower income tax bracket in the future.
The 2022 limits for contributions are $20,500 per year for those under the age of 50, and $27,000 per year for those over the age of 50. This changes from year to year so be sure and research the current guidelines.
You cannot make a withdrawal until you reach age 59½ or you will pay a penalty of 10% and of course taxes for doing so.
This is a type of account that offers tax-free withdrawals after retirement.
They are funded with post-tax dollars, which means that you won’t get a tax break on your contributions now, but you won’t have to pay taxes on your withdrawals later.
This retirement account has the same contribution limits as a regular 401k, but it does have income limits.
You can contribute a full amount up to single income of $129,000 and partial contribution up to $144,000. If married and filing jointly full amount up to $204,000 and partial up to $214,000. I recommend checking on the guidelines on this as there are several exceptions listed.
If you make a withdrawal before age 59½, you’ll pay a 10% early withdrawal penalty.
So, if you’re looking for a way to save for retirement without getting a tax break now, a Roth 401k may be right for you.
Notice that on the Roth 401k and the Roth IRA, the income limits are the same, but contribution limits are different.
A solo 401k is type of investment for self-employed individuals.
It is similar to a regular 401k, but there are some differences.
You can contribute more money than with a regular 401k. You can also borrow money from this type of account, which you can’t do with a regular 401k.
This investment is unique in that you can contribute as an employee and make a profit-sharing contribution as the employer.
In general, total contributions if under 50 years of age is $61,000 and over 50 is $67,500 for 2022.
As you would figure, there is multiple guidelines and criteria so if interested in this one, suggest doing more research.
To open a solo 401k, you must have a self-employed business with no other full-time employees.
Withdrawals are taxed in the year withdrawn and there is a 10% penalty for withdrawal before age 59½.
This is an investment that allows employees of certain organizations to save for retirement.
To be eligible to contribute to a 403b, you must be an employee of a qualifying organization, such as a school, hospital, or non-profit organization.
There may also be other requirements, such as working a certain number of hours per week.
Contributions are made with pre-tax dollars, which means that you will not pay income tax until you make a withdrawal.
Limits are combined employee-employer of $61,000 for those under 50 years of age and $67,500 for those over age 50. The employee is capped at $20,500 if under 50 and $27,000 if over 50.
Withdrawals are taxed as ordinary income in the year of withdrawal such as the 401k.
Age in which you can withdraw is 59½.
Contribution limits are set by the IRS and may change from year to year.
A 457 allows employees of state and local governments to save for retirement.
This is sponsored by the government employer and allows employees to save money on a pre-tax basis.
In addition, many states offer matching contributions, so it’s a great way to save for retirement.
To start a 457, you will need to contact your human resources department. They will have the paperwork that you need to fill out to start contributing.
There are no income limits for starting a 457, so anyone can start one. However, there are contribution limits. For 2022, $20,500 if under 50 and $27,000 if over 50 years of age.
Withdrawals from a 457 are taxed as income and you should wait until you are 59½ years old to withdraw funds to avoid penalties.
There is a unique “extra catch-up” allowance with these plans if you are less than 3 years from retirement you can increase your contribution. There is a list of criteria to qualify but know that it’s available.
A traditional IRA is a tax-advantaged retirement savings account.
Contributions may be tax deductible, and earnings grow tax deferred. Withdrawals are taxed as income in the year withdrawn.
There is no maximum contribution limit, but there is a yearly limit on the amount of tax-deductible contributions that can be made. For 2022, $6,000 if under age 50 and $7,000 if over age 50.
Your ability to deduct contributions from your taxes may be limited if you or your spouse are covered by a retirement plan at work.
If you’re not covered by a retirement plan at work, your entire contribution may be tax-deductible. If you are covered by a retirement plan at work, your contribution may be partially or fully tax-deductible, depending on your income.
Withdrawals are taxed as income in the year withdrawn.
You may also be subject to a 10% early withdrawal penalty if you make a withdrawal before you are 59½ years old.
A Roth IRA is an account that offers tax-free growth and withdrawals.
Contributions are made with after tax dollars, which means that you have already paid taxes on the money you contribute. This can be beneficial if you expect to be in a higher tax bracket in retirement.
To be eligible to contribute to a Roth IRA, you must have earned income and your modified adjusted gross income must be below a certain amount.
Same as the Roth 401k, you can contribute a full amount up to single income of $129,000 and partial contribution up to $144,000. If married and filing jointly full amount up to $204,000 and partial up to $214,000.
Full contribution is $6,000 if under 50 years of age and $7,000 if over 50.
The contribution limits for Roth IRAs are set by the IRS and may change from year to year.
Withdrawals from a Roth IRA are tax-free if you are over the age of 59½ and you have held the account for at least 5 years.
If you make a withdrawal before you are 59½ or before the account has been open for 5 years, you may be subject to taxes and penalties.
A SEP (Simplified Employee Pension) IRA is a retirement savings account that is available to self-employed individuals and small business owners. Contributions are tax-deductible. Earnings grow tax deferred.
This investment allows for employers to contribute to employee’s accounts. The amounts vary depending on the situation.
There are multiple guidelines if interest in this investment so recommend checking for the most current as can change yearly.
Withdrawals are taxed in the year withdrawn. You may also be subject to a 10% early withdrawal penalty if you make a withdrawal before age 59½.
Steps to Creating a Retirement Plan
There are a few important steps to creating a retirement plan.
The first step is to understand how much you will need to have saved to live comfortably in retirement.
This number can vary depending on your lifestyle and expected expenses, but it’s a good idea to have a general idea of what you will need. More on this shortly.
The next step is to understand the different types of investments that are available and how they work, which I have defined the most common ones earlier. I suggest further investigation as I only laid them out to give a general understanding.
Once you are comfortable and understand the different options available, you can begin by opening an account that is right for you.
You should start contributing as early as possible so that you can take advantage of compound interest.
Finally, you need to consider your withdrawal strategy. You will need to consider things like taxes, penalties, and financial emergencies.
How Much Savings Will You Need?
Are you worried about whether you have enough money saved for retirement?
You’re not alone!
It’s important to start planning as early as possible so that you can be sure you have enough money saved.
5 Tips to Figuring Out How Much is Enough
- Estimate how much money you will need in retirement. This will vary depending on your lifestyle, expenses, and health needs, but a good rule of thumb is to plan for 70-80% of your current income.
- Figure out how much money you have saved already. This includes your combined savings accounts and other investments such as real estate, stocks, commodities, and cryptocurrencies.
- Calculate how much money you will need to reach your retirement goal. This will depend on factors like your age and the growth of your investments.
- Use a retirement calculator to estimate how much money you will have saved at retirement. This can help you figure out if you are on track to reach your retirement goal.
- Speak with a financial advisor about your retirement planning. They can help you figure out how much money you will need and give you advice on investing.
Retirement planning is important, but it doesn’t have to be complicated.
What is the 4% Rule?
The 4% rule is a guideline for the amount of money to withdraw while maintaining adequate saving for retirement.
It suggests a withdrawal of 4% of your retirement savings account in the first year and then increase the percentage of withdrawal by the amount of inflation each year.
You may need to adjust the amount of withdrawal each year depending on your individual circumstances.
How to Choose a Financial Planner?
When it comes to choosing a financial planner, there are a few things you should keep in mind.
The most important is finding someone who is qualified, trustworthy, and offers the services you will need.
Ask around for referrals, and check with the National Association of Personal Financial Advisors (NAPFA) or the Certified Financial Planner Board of Standards to find qualified planners.
Once you’ve found a few potential planners, interview them to get a sense of their philosophies and what services they offer.
Make sure you’re comfortable with their approach, and that they’re willing to work with you on a long-term basis.
This is a complex process. Luckily, there are financial planners who specialize in working with physicians. We have unique situations and often will not qualify for some of the investments available to others.
Finally, be sure to ask about fees. Many financial planners charge by the hour, by services offered, while others charge a percentage of your assets under management.
Make sure you’re clear on how they’re charging and that you’re comfortable with the fees.
Avoid These 10 Most Common Mistakes
Putting a retirement plan in place can be a complicated process, and there are several things that can go wrong if you’re not careful. Here are ten of the most common mistakes people make:
- Not saving enough money. This is the biggest mistake by far. Start saving early so there is more time for growth. Take advantage of tax benefits and compound interest when you can.
- Not investing wisely. If you don’t invest wisely, your money won’t grow as much as it could. For example, be sure you’re diversified. Investing in a variety of different asset classes, such as stocks, bonds, and mutual funds. Another thing to consider is how much risk you’re willing to take. If you’re more risk-averse, you may want to invest in more conservative investments.
- Not having a strategy. You need to have a strategy in place so that you know how much money you need to save and how you’re going to invest it. Without a strategy, it’s easy to make mistakes that can jeopardize your retirement.
- Making withdrawals too early. Retirement accounts are meant to be used for retirement. This means that you shouldn’t withdraw from them until you’re retired. If you do, you may be subject to taxes and penalties.
- Not considering all your options. When it comes to retirement planning, there are several different options available. You need to consider all your options and pick the one that’s right for you.
- Failing to plan for inflation. Especially now! Inflation is a reality, and it can have a significant impact on your savings. Inflation is devaluation of the dollar!
- Not staying disciplined. Stay disciplined in your savings and investments so that you can reach your goals.
- Taking on too much debt. If you have debt, you need to make sure you’re working on paying it off before you retire.
- Not considering health care costs. We see this every day!
- Failing to have a strategy for long-term care costs. This can also be a big expense. If you’re not prepared, it can eat into your retirement savings big time.
These are just some of the mistakes people make that you’ll want to avoid being financially free in your later years.
Can You Retire and Still Work?
Many people enjoy working after they retire. They find that it gives them a sense of purpose and helps them stay active and engaged.
If you plan to keep working, there are a few things to consider.
First, you need to make sure that your retirement income does not impede on your ability to collect Social Security benefits.
If you are still working and paying into Social Security, your benefits will continue to grow.
However, once you begin to receive social security benefits, if your retirement income earns more than the annual limit, your benefits may be reduced.
Check the limits on this because as a physician, you will likely exceed the limit and get your social security benefits reduced. (Yes, I know what you’re thinking…)
Retirement Planning Software: Things to Consider
Retirement planning software can help you in many ways in your planning journey.
There are many different types of software, so it’s important to find the one that is best for you.
Some of the things to consider when choosing software include the features it offers, the ease of use, and the price.
Retirement planning software should be able to help you calculate how much money you need to save based on your current salary, your desired retirement age, and your desired retirement lifestyle.
It should also allow you to enter in different retirement scenarios, such as if you plan to retire early or if you expect to have a long-life expectancy.
The best retirement planning software for you is the one that has the features you need, and it should be straightforward and easy to understand. It should also have helpful customer support in case you have any questions.
The price of retirement planning software can vary, so it’s important to find the one that fits your budget.
Retirement planning software ranges in price from free to several hundred dollars.
The most expensive retirement planning software is not necessarily the best, so be sure to consider all the factors before deciding.
Retirement planning can seem complicated and time consuming, but it doesn’t have to be.
By understanding the different types of investment accounts available and how they work, you can start planning for retirement today.
Additionally, knowing what mistakes to avoid when planning for retirement will help you stay on track and achieve your goals.
Imagine how nice it will feel to know your retirement strategy is in place and you can sit back and watch it grow!
Finally, if you’re not sure where to start or need more help, there are plenty of resources and services available to support you in your journey.