How to Start Retirement Planning Early

Retirement looks different for everyone. Whether that includes lounging on a beach reading your favorite books, having the flexibility to volunteer your time, or just plain enjoying your post-career life. Regardless of your retirement goals however, one thing remains the same. Planning for retirement is a process that takes years and should be started as early as possible—ideally, at the beginning of your working career. Below, you’ll find our top tips on how to start planning early so you can retire when and how you’ve always dreamed.

Investing is a great way to grow your funds and secure your financial future. However, choosing your first investments can be tricky. If you are currently employed, you likely already have a retirement plan available through your workplace. There are many ways to maximize this account or even open additional retirement options. Here are some of the most common retirement plans:

1. 401(k) is an employee-sponsored retirement plan. It allows eligible employees to save and invest for their own retirement on a tax-deferred basis. Employees can decide how much money they want deducted from their paycheck and regularly deposited into their 401(k), as long as contributions fall within IRS limits. Sometimes, an employer will offer to match all contributions, which is essentially free money with a guaranteed return.

Goal: Save for retirement.

Pros: Contributions are tax-free and there is generally no minimum for contributions.

Cons: Fewer investment options than other retirement accounts, may have high account fees, and early withdrawal penalties.

Best choice for: All employees with a W-2, especially employees who have an employer offering to match contributions.

Best age to invest: As soon as you start working at your first job.

2. Traditional IRAs are retirement accounts that offer most individuals an upfront tax break.

Goal: Save for retirement.

Pros: Contributions and investment earnings aren’t taxed. Contributions may be tax-deductible and significantly lower your taxable income. There are no income limits for contributors.

Cons: Withdrawals during retirement are taxed at your tax rate during that time. Also, at a designated age, you can no longer make contributions but instead must begin taking distributions even if you are still employed (and therefore, possibly in a high tax bracket).

Best choice for: Individuals who are currently in a higher tax bracket than what they anticipate being in during retirement and employees who don’t have access to a workplace-sponsored retirement plan.

Best age to invest: Age 18, or the minimum age allowed in your state.

3. Roth IRAs are retirement plans that do not allow for tax-deductible contributions, but feature tax-free withdrawals during retirement.

Goal: Save for retirement.

Pros: Withdrawals are tax-free. There is no age limit for making contributions.

Cons: Contributions and growth are both taxed and are not tax-deductible. There are

also income limits for eligible contributors.

Best choice for: Individuals who anticipate being in a higher tax bracket during retirement and individuals who may need to access some of their savings before they retire.

Best age to invest: Age 18, or the minimum age allowed in your state.

4. Annuities are a contract between a contract holder, or annuitant and an insurance company. The contract stipulates that the insurer promises to pay the annuitant a predetermined amount of money on a periodic basis for a specified period, in exchange for regular contributions. Many people purchase annuities to serve as retirement-income insurance, which guarantees them a regular income stream even after they’ve left the workforce, often for the rest of their life.

There are two primary categories of annuities:

Immediate annuities require the annuitant to give the insurance company a lump sum immediately and then begin receiving payments right away. The payment amount may be fixed or variable.

Deferred annuities allow the annuitant to make contributions throughout their working life which can be converted into an income stream when the annuitant reaches retirement. They can also be purchased with a lump sum.

Within these broad categories, there are several types of annuities from which to choose:

• A fixed annuity provides a specific amount of money every month for the rest of the annuitant’s life, or for the period of time chosen, regardless of how the annuity performs.
• Indexed annuities blend the features of fixed annuities with the potential for additional growth, depending on how the markets perform. The annuitant is guaranteed a minimum return along with a return that is directly linked to any rise in the relevant market index.
• Variable annuities provide a return based on the performance of a portfolio of mutual funds that the annuitant has selected. The insurance company may also guarantee a minimum income stream if stipulated in the contract.

While each specific annuity will have its own pros and cons, all annuities share commonalities:

Goal: To guarantee a regular income stream even after retirement.

Pros: Generally, during the accumulation phase of an annuity contract, earnings grow tax-deferred. Withdrawals are taxed at the same tax rate as the annuitant’s income. Contributions to annuities funded through an IRA may be tax-deductible.

Cons: May have high fees. There is generally a minimum age for allowable withdrawals without penalty.

Best choice for: Immediate annuities can be a good choice for individuals who have had a one-time windfall, or who are close to retirement and have significant retirement savings they’d like to invest. All annuities can be a beneficial addition to a retirement plan, especially if the annuitant is afraid they will outlive their retirement savings.

Best age to invest: In general, the best age range for purchasing annuities is between 40-70.

Planning for retirement can be tricky and is best spread out over the span of your entire career. By making smart money choices and taking advantage of the great retirement savings opportunities above, you can set yourself up for success.

Ready to talk to an Investment Representative about your retirement planning options?

Community Financial has a dedicated Investments & Insurance team ready to talk you through your options at a no-cost, no-obligation meeting. Gather critical planning information, learn about your choices, and make plans today by calling (877) 937-2328 ext. 8868 or visiting cfcu.org/Investments.

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