Essentials of Retirement Planning and Strategies to Consider

Various Pennsylvania pension systems have only 483,802 active members, which highlights the lack of awareness regarding retirement planning among the working adults in the state. Moreover, it is essential to safeguard your post-retirement life with a sound plan so that you do not have to face hardship in the later stage of life.

While retirement planning may be a cumbersome task for those who do not have a lot of financial expertise, an accountant in Allentown, Pennsylvania, can help you draft an effective one. Not only will it save you time, but also ensure financial efficiency and safeguard your future.

Factors to consider when planning for retirement

While a lot goes into creating a sound retirement plan, the following are the main factors that you must not overlook.

Mind the time horizon: Your current age and the anticipated date of your retirement are key factors when deciding how much to invest in a retirement plan. With a longer time to retirement, you can take chances and withstand a higher risk level to create a huge retirement fund. 

For example, if you have more than 30 years left for retirement, you can put your money in more volatile assets like stocks. However, if you have less than ten years left for retirement, then you should adopt a relatively conservative approach and invest in bonds or cash equivalents to ensure guaranteed returns.

Calculate your retirement spending needs: Another important factor in creating a retirement plan is determining your retirement spending needs. You need to have realistic post-retirement spending projections and define the required size of your retirement portfolio. Moreover, you must also consider your longevity because you won’t want to outlast your retirement savings.

Consider taxes when calculating returns on investments: After determining the expected time horizon and spending requirements, the next thing to consider is the after-tax rate of return on investment. Withdrawal of money from some retirement accounts, like traditional IRAs, is taxable. Therefore, you must consider the applicable taxes while calculating the actual return on the investment.

Risk tolerance vs. investment goals: A good retirement plan will provide the desired returns while averting investment risks. To achieve this, you need to distinguish necessary expenses from luxury and determine the maximum contribution you can make.

Estate planning is essential: A proper estate plan intends to distribute your assets among your loved ones in a manner of your choosing so that they do not face financial hardship when you are not around. However, the process may involve taxes that can be reduced significantly with efficient tax planning. 

Where to invest for optimal retirement planning

Following are some of the most popular retirement plans that can help you ensure a financially secure post-retirement life. You can have access to one or more of them depending on your nature of employment.

Employer-sponsored plans: Employer-sponsored plans, like 401(k) and non-profit employer plans 403(b), are the most common types of employer-sponsored retirement plans. The benefit of an employer-sponsored plan is that your employer has an option to match the amount you invest up to a certain level. Moreover, your contribution to 401(k) is tax-free, but the withdrawal attracts tax.

Individual Retirement Accounts (IRAs): An IRA is similar to a 401(k) plan, except that it can be obtained at any brokerage or bank. IRAs are primarily meant for self-employed individuals who do not have access to a 401(k). However, anyone can invest in an IRA.

Other investments: If you have exhausted the limit of all the tax-incentivized retirement plan options, then you can consider other investment options like Certificate of Deposits, real estate, blue-chip stocks, and much more to create a substantial retirement fund.

Retirement planning is a crucial part of individual financial planning that must not be overlooked to ensure a financially secure and stable post-retirement life. Therefore, you should start as early as possible. Nonetheless, you can also seek help from professionals to provide effective retirement planning.