Retirement Planning
Retirement planning is one of the best steps you can take for your future.
No matter your age, you can start setting aside income to ensure your retirement is secure. Tangent Retirement will help you at every step of the way, ensuring your savings plan and annuities stay on track to meet savings and investment goals.
Setting Retirement Goals
While you can start saving for retirement without specific goals in place, setting goals allows you to understand why you’re saving. It also allows you to review cashflow, set annuities, and determine if savings and long-term goals are realistic or sustainable.
How much do you need to save for retirement?
Are your savings goals realistic and sustainable?
What’s your monthly annuity?
Each of these questions is crucial in determining what you should be saving towards your retirement.
How much do you need to save for retirement? For most of us, savings goals are a complex and changing figure. Your savings goal should depend on factors including cost of living, age of retirement, housing costs (rent, property tax, maintenance, repairs), healthcare, transportation, and inflation.
Current cost of living
How much do you, or you and your spouse) spend each year? Consider adding up everything you’ve spent (groceries, outings, luxuries, etc.). While you might be comfortable cutting some expenses, too much downsizing won’t make you happy.
Cost of housing
Mortgage, rent, repairs/maintenance are all important. For example, will your mortgage be paid off? Will you continue to rent? What are home maintenance costs? What are property taxes? What would it cost to replace your roof or floor in case of a natural disaster?
Inflation
While inflation varies considerably and is currently benchmarked at 2% per year by the federal government, you probably want to plan for worst case scenario, or about 3%+ per year.
Healthcare
Healthcare costs are heavily depending on insurance, genetics, and long-term goals. Fidelity suggests you need $295,000 for the healthcare costs of 2 people in retirement.
Other expenses
Will you be paying for commute? Do you have other debts?
When Can You Retire?
Many people like to set an arbitrary goal such as 20, 35, or 45 years and then plan annuity and savings goals around that.
This can lead to unrealistically high monthly deposits. Instead, your retirement age should be based on when you can comfortably reach sustainable savings. Your retirement age is likely fully dependent on factors like annuity (deposits in savings accounts), cash-flow, and investment sustainability. In addition, you might want to set one of several savings goals. For example, many people are recommended to work towards a financial goal that allows them to live off a deduction of just 4% of their portfolio each year.
What does that mean for you?
If you set your retirement goal at $55,000 per year, you’d want:
If you were 25 and starting your retirement planning, reaching $1.6 million by retirement would be a simple matter of saving about 15% of your annual income at $55,000 per year. If you’re 35 and not taking advantage of employer schemes or other aids, that investment might be as high as 23% per year if you wanted to retire at age 65.
Most financial advisors will tell you to save 15-20% of your annual income for your retirement. We might offer different recommendations depending on your passive income, savings goals, current age, and income. Essentially, there’s a lot involved in calculating when you can or should retire.
Choosing a Portfolio
Most types of savings accounts have their own pros and cons. It’s important to review what each has to offer before choosing.
Your financial representative, such as the retirement planning specialists at Tangent Retirement, can help you to do so.
Your primary options include IRA, ROTH IRA, SIMPLE IRA (SEP), and 401(K).
| IRA | ROTH IRA | 401 (k) | SIMPLE IRA | SEP IRA | |
|---|---|---|---|---|---|
| Taxation | Pre-Tax, Taxed on Withdrawal | Post-Tax | Pre-Tax, Taxed on Withdrawal | Pre-Tax, Taxed on Withdrawal | Pre-Tax, Taxed on Withdrawal |
| Contribution limits | $6,000 ($7,000 for 50+) | $6,000 ($7,000 for 50+) | $19,500 ($26,500 for 50+) | $13,500 ($16,000 for 50+) | $57,000 |
| Withdrawal Limits | 10% if withdrawn before 59.5, withdrawals must start by 72 or you face a 50% of minimum withdrawal tax | None | 10% if withdrawn before 59.5, withdrawals must start by 72 or you face a 50% of minimum withdrawal tax | Withdrawals must start by 72 or you face a 50% of minimum withdrawal tax | 10% if withdrawn before 59.5, withdrawals must start by 72 or you face a 50% of minimum withdrawal tax |
| Account Type | Individual | Individual | Employer with $37,500 employer maximum match | Employer, with 3% of compensation employer match | Employer, with $57,000 or 25% of net earnings employer match |
Which option is right for you? It heavily depends on your employer, income, tax situation, and investments. For example, if you’re earning a large amount of income now but expect to stop earning when you retire, an IRA or 401(k) is an ideal option. Why? Your maximum deposit is deducted from your taxable income. You’ll pay tax on it when you withdraw it, but for your income tax level in that year. On the other hand, if you expect taxable income (e.g., passive income) to remain high, you might be better off taking out a Roth IRA, paying tax on income now, and avoiding it in the future.
Many self-employed individuals eventually take a SEP IRA, which offers the same advantages as an IRA, but with a larger contribution limit.
Getting Started
There’s no time like the present to start investing in your retirement. Tangent Retirement can help you get on the right track by evaluating your needs and income to set long-term, achievable goals. We can help you to choose a contribution, determine tax credits, and develop a comprehensive retirement plan to reach savings goals. While this should, naturally, include annual reviews of your goals, income, and annuity, we’ll help you start off on the right track.