Retirement Planning Q&A

It’d be nice if there was a magic number or date for everyone, but there really isn’t a one-size-fits-all approach to retirement. How much you’ll need in retirement depends on your lifestyle, living expenses, sources of income (Will you receive a pension? Social security? Rental Income?), life expectancy, etc. It’s easy to find generic information saying you’ll need 60%-80% of your current standard of living (If you make $100,000/year now, you’ll need $60,000-80,000/year in retirement). You’ll also find information that says you can take anywhere from a 2%-6% withdrawal rate (If you had $1M saved, it can generate $20,000-$60,000/year for you in retirement). To find out how much YOU need and when YOU can retire, though, your plan should be customized for YOU.

A common misconception here is that you should only invest the amount that gets matched by your employer. That is actually the absolute minimum amount you should invest to get the most from your employer. In order to realistically hit your retirement goals, though, you should consider contributing at least 12%-15% of your salary up to the maximum allowed. In 2020, the maximum amount you can contribute is $19,500 ($26,000 if you’re age 50+). If these amounts seem out of reach, start lower and make plans to incrementally increase throughout the year(s).

You can still contribute to a Traditional IRA or a Roth IRA for yourself (see “What is better – a Roth or a Traditional IRA”). If you’re Self-Employed, you have additional options as well. You can establish a 401(k) plan for your business or you can utilize other self-employed IRA options including a SEP IRA or a SIMPLE IRA. Each of these plans are unique regarding the cost to establish, eligibility requirements for employees, contribution limits, etc.

First, we need to understand the similarities and differences between the two types of IRAs. Both are considered retirement savings vehicles. With a Traditional IRA, you receive a tax deduction in the year you make the contribution. You don’t pay taxes until the money is distributed. * In retirement, the withdrawals are income taxable. A Roth IRA, on the other hand, does not provide a tax deduction in the year you make a contribution. The benefit is that the proceeds come out tax-free in retirement. It’s important to know that the IRS has rules regarding eligibility, distributions, and contributions for these savings vehicles. In 2020, for example, you can contribute a total of $6,000 ($7,000 if you’re age 50+) into your IRA. This total can go entirely into either IRA type or you can split the total between the two types. *There are tax consequences and penalties for removing funds from both Roth IRA’s and traditional RIA’s prior to retirement.

Absolutely. A stay-at-home spouse can also contribute to a Traditional or a Roth IRA (see “What is better – a Roth IRA or Traditional IRA”). In this case, it’s called a Spousal IRA contribution, but it works the same way as a Traditional IRA or a Roth IRA. Again, the IRS has rules regarding eligibility, distributions, and contributions.

Absolutely. Investing isn’t limited to retirement planning vehicles like 401(k) plans and IRAs. You can open non-retirement accounts like Individual, Joint, or Trust Accounts and save/invest there. There may not be the same tax advantages that retirement vehicles have, but you have the flexibility to access these accounts without age restrictions. This makes them great vehicles for your shorter-term financial goals.

A required minimum distribution or RMD is the mandatory requirement by the Internal Revenue Service to withdrawal funds from our qualified retirement plans, such as 401(k) or Individual Retirement Accounts (IRAs).  The required amount is calculated using a formula at the end of each year, and will begin when you turn 72.  RMDs can be diverted directly to charitable organizations to produce tax savings if the funds aren’t needed for spending.