Retirement Planning for Individuals
In 2022, it was found that 49% of people between the ages of 49 and 56 were not prepared for retirement. They didn’t have the right savings, investments, or sources of income to get them there.
This can be an extremely scary thing. The last thing you want around that age is to be unprepared. Luckily, this article will walk you through tips to follow in order to be prepared for retirement. From learning more about the maximum allowable annual contribution to how to mentally prepare, this is a full guide for retirement planning tips. Our expertise in proactive tax planning is also a huge component to a great retirement.
Plan for a Maximum Allowable Annual Contribution
When you are considering investing and saving for retirement, you want to diversify the various places you put your money. We like to think of the buckets, with each representing a different type of retirement investment. There’s taxable, tax-deferred, after-tax tax-free, and pre-tax tax-free. Working with an expert to find the right mix in these buckets is critical for the best possible outcome.
Tax diversification in retirement can help you earn more and make your earnings go further.
So what are in these different buckets?
For starters, you will want to consider stocks, bonds, and mutual funds. These are in the taxable bucket but can often have good returns to plan for retirement. CDs, Money Market products, and savings of other taxable tools can fall in this bucket.
You should also be placing money into a tax-deferred bucket like a traditional IRA, simple IRA, SEP IRA, Roth IRA, or a 401(k). Profit-sharing plans and defined benefit plans fall in this category too.
The after-tax tax-free bucket holds some popular investment tools, such as the backdoor Roth IRA, muni-bonds, backdoor Roth 401(k) plan, and the 7702 plan.
In the pre-tax tax-free bucket, you’ll find some of the big buzzword investment tools. Health Savings Accounts (HSAs), restricted property trusts, family endowment plans, and using a management C-Corporation with fringe benefits are all popular tools.
In April 2022, our founder David Auer published “The Richest Doctor: A Modern Parable of Financial Independence.” The book has gained notoriety as a #1 New Release in Taxation and Personal Taxation categories. Following the four characters in the book provides a look at how mixing and matching the techniques and tools from the buckets can play out over a healthcare professional’s career.
Pay Attention to IRA Contributions
If you are still working this year and not planning to retire yet, consider adjusting your IRA contributions for 2023. The limits have expanded for the first time since 2019 so that your maximum allowable annual contribution is larger than before.
The contributions are 8% higher in 2023 than 2022. However, keep in mind that catch-up contributions remain the same for investors who are over the age of 50.
Determining the Right Mix of Investments
When it comes to figuring out the right mix of investments for you, a lot depends on how much time you have to invest the money before you will need it again. You must also determine how much risk you are willing to take.
So how should you start?
If you are young and planning for retirement already, you can be a bit more aggressive with your investments. As you age, you will start to change these investments to be a bit more conservative.
Mixing your investments with stocks and index funds is a great way to get started. It is also important to note that once you invest, you do not need to monitor this every single day. The point is to put money into the market and let it do its thing.
Monitoring it daily will only make you more nervous and stressed about something that is not necessarily in your control.
Understand Sequence of Returns Risk
If you are planning on retiring in a difficult market, understanding sequence of returns risks is one of the first things that you need to do.
So what does this mean exactly? In simple terms, at some point during your retirement, there will be at least one bear market. When this happens, your finances are going to look like they’re in much worse shape.
In this case, you want to ensure that you are investing as early as possible. When you have more money, there is more time for it to give compounding returns. You absolutely do not want to take any money out of your retirement investments during a bear market as it is going to reduce the compound growth that you will see over time.
To avoid diminishing returns, avoid withdrawals during a market downturn.
Delay Starting Social Security
Delaying starting your Social Security benefits is key, especially when there is high inflation at the time. It is better for you, in the long run, to delay until you get larger checks later in life rather than taking out smaller checks while you are in your early 60s.
In some cases, it may make more sense to tap into an IRA or a 401(k) before taking out Social Security.
Know Your Health Care Plan
If you want to take full advantage of your retirement benefits, you need to plan to enroll in Medicare before the age of 65. If you don’t, you could face a penalty for not signing up on time.
If you plan to retire before you are 65, you will have to look into other healthcare options. You may be able to look into COBRA or the Affordable Care Act to ensure you are covered. You may also want to ask your employer to see if they would provide retiree health coverage before Medicare kicks in.
Consider Continuing to Work
We don’t mean you should be working a full-time job at the age of 75. However, you may want to consider continuing to work a part-time job.
In fact, over 9 million Americans are working jobs after they turn 65. Although you may not want to be working because you must, you may decide that you want to have a little more income coming your way.
In reality, every dollar you earn will help you out. Instead of pulling from retirement, you are saving that for later down the road when you either really don’t want to work or can’t work.
Get Professional Help
Although you may feel that you have a good handle on retirement savings and setting retirement goals, you may benefit from getting professional help.
Retirement math can get really confusing if not done carefully. You should also consider estate planning as part of the mix as well.
Hiring a financial planner can be a game changer for your retirement plan and savings. With so many different decisions that you must make about your future, having someone there to guide you can be extremely helpful.
Just like in The Richest Doctor, having mentors that have been there before that will work with your proactive tax planner is a great way to maximize your retirement.
Create Purpose and a Sense of Meaning in Your Life
Before you retire, you want to make sure you feel that you have a purpose and a sense of meaning. This can help you feel fulfilled after you retire since you are going to be able to enjoy more things that you want to do rather than what you feel you have to do.
You can take up new hobbies, volunteer, be physically active, travel, and the list goes on. You can read more books, practice gratitude and journaling, and get into meditation.
Not only will this help you feel better during retirement, but it will also lower your risk of death and increase your longevity.
Focus on Health
As much as focusing on your sense of meaning and purpose is, you should also focus on health during retirement. Eating healthy, walking, gardening, and staying active will improve your overall well-being during your retirement.
You also will not have to worry as much about medical bills and doctor’s visits if you stay healthier as you enter retirement age.
In addition to focusing on your physical health, you should also make it a point to focus on your mental health as well. It is important to stay in a routine since humans thrive on having a routine and maintaining order.
Follow These Retirement Planning Tips
From learning more about your maximum allowable annual contribution to staying active and healthy, this retirement planning checklist is a good start to checking off critical elements required to have a happy and successful retirement.
No matter what your age is now, you need to start planning. The earlier you start – the better.
At Physician Tax Solutions, we can help with tax planning, tax compliance, and retirement planning. The three can work together and help to improve your retirement portfolio. If you are ready to hire a professional and get some help with your planning, we are here for you! Contact us today to get started.
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