Your One Stop Guide To Retirement Planning

March 01, 2019

Do you feel overwhelmed thinking about retirement planning? It’s one of the most common topics we’re asked about. One way to make it more manageable is to break it down into a series of decisions:

How much do you need to save?

This is the most complex and the most important question. After all, none of the other questions matter if you don’t have enough in retirement savings.

While there are lots of rules of thumb, the actual number depends greatly on your particular situation like your expected retirement expenses, how much you’re projected to receive in Social Security and pension benefits, when you plan to retire, how much you’ve currently saved, and how aggressive an investor you are. Your best bet is to run a retirement calculator that takes these factors into account. If you’re unable to save the amount you need, consider slowly increasing your retirement savings over time (some retirement plans have a contribution rate escalator that will do this for you automatically) and/or adjusting your retirement goals.

Where should you put your retirement savings?

First max out any match your employer is offering you. It’s hard to beat a 50% or 100% guaranteed return on your money.

Second, contribute as much as you can to an HSA if you’re eligible. That’s because the money not only goes in tax-free but can be used tax-free for qualified health care expenses, which you’ll almost certainly have in retirement. (This includes select Medicare and qualified long term care insurance premiums.) HSAs can also be used for any purpose penalty-free starting at age 65. That’s why you might also want to avoid tapping into your HSA even for qualified health care expenses and instead invest it to grow for retirement.

Unless you have unique investment options in your employer’s retirement plan that you want to take advantage of, you might want to contribute to an IRA next. That’s because you’ll have more flexibility in how the money is invested (almost anything) and how it can be withdrawn. You can use IRAs penalty-free for qualified education expenses and up to $10k for a first-time home purchase. Roth IRA contributions (but not earnings) can also be withdrawn for any reason without tax or penalty. If your income is too high to contribute to a Roth IRA, here’s a backdoor method.

Then go back and contribute as much as you can to your employer’s retirement plan. (If you have access to a 457, start with that because there’s no early withdrawal penalty.) If you max out your pre-tax and/or Roth contributions, see if you can make after-tax contributions and convert them to a Roth to grow tax-free. Finally, if you’ve maxed out all of the above, other options include cash value life insurance or just a regular taxable account.

How should you invest your retirement savings?

You may want to invest in your employer’s retirement plan, an HSA, a Roth IRA, and a taxable account all differently. However, the commonality is to make sure you’re properly diversified according to your time frame and risk tolerance and to minimize costs as much as possible. Then stick with your plan and don’t chase performance or try to time the market. If you take these steps, you’ll find that investing is actually the simplest part of your retirement planning.

What insurance policies will you need?

You need to consider your options for health insurance before you’re eligible for Medicare at age 65 and for supplementing basic Medicare coverage afterwards. Keep in mind that Medicare and other health insurance policies don’t cover long term care. Medicaid does but it may require you to spend down most of your assets and a growing number of institutions no longer accept it so you may want to consider a long term care insurance policy. Finally, if you’re worried about running out of money in retirement, an income annuity provides you income you can’t outlive.

How will you get income from Social Security, pensions, and retirement savings?

You’ve spent your whole life building up retirement assets and now you’ve got to decide how to use them. If you can afford to delay Social Security, you may want to do so to allow your retirement and survivor benefits to grow. If you can take a pension as a lump sum, here are some things to consider. Finally, see how much you can safely withdraw from your retirement savings and how to minimize taxes on those withdrawals.

As you can see, there’s a lot involved with retirement planning, but breaking it up into key decisions can help. (You should address the first three questions now, the fourth when you get closer to retirement, and the last in retirement.) If you have more questions or would like to walk through the decisions, you may want to consult with an unbiased financial planner. In any case, make sure you have a plan and continue to monitor and update it periodically. Your future (retired) self will thank you.