If you’re relatively new to practice, you may think that you can deal with retirement planning much later. But it takes years to accumulate the savings you’ll need for an ideal retirement. It’s well worth spending time now to strategize how you’ll get from here to there – even if retirement is many years in your future. It’s never too soon to start thinking ahead and taking steps that can make all the difference to an enjoyable future.
Social Security may still be around when you retire, but the benefits that you get from Uncle Sam will likely not provide enough income for your retirement years. People are living longer and must find ways to fund those additional years of retirement. To make matters more difficult, few employers today offer a traditional pension plan that guarantees you a specific income at retirement.
If you decide to own your practice, the task of setting up an appropriate retirement plan for you and for your employees if you have them will fall to you – so sound retirement planning is critical. But there is good news: retirement planning is easier than it used to be, thanks to the many tools and resources now available. Here are some basic steps to get you started.
Determine Your Retirement Needs
Often, one’s desired annual retirement income is calculated as a percentage of your current income and may vary from 60% to 90% or even more. The appeal of this approach lies in its simplicity – but it doesn’t account for your specific situation and needs – nor your plans for retirement.
To estimate your annual retirement expenses, use your current living expenses as a starting point. It’s important to note that your expenses may change dramatically by the time you retire due to inflation, lifestyle, family, health issues, etc. As you near retirement, the gap between your current expenses and your estimated retirement needs may be small. But if retirement is many years away, the gap could be significant, and therefore, projecting your future expenses may be more difficult.
Remember to consider inflation. The average annual rate of inflation for 2022 was approximately 6.2% which is considerably higher than the average for 2021 of 3.6% and 2020 of 1.7%, according to the US Bureau of Labor Statistics website.
In addition to inflation prior to retirement, it’s important to consider that your annual expenses may fluctuate throughout retirement due to inflation and other changes. For instance, you may pay off your mortgage by the time you retire, but other expenses, such as health-related expenses, may increase in your later retirement years. You may plan to travel extensively or participate in expensive sports. All these changes and activities should be considered. A realistic estimate of your expenses will tell you about how much yearly income you’ll need to live comfortably.
How Much Should You Save
Once you estimate your retirement income needs, take stock of your estimated future assets and income. These may include Social Security, the funds you have saved in a qualified retirement plan such as a 401(k), a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, then you will need additional personal retirement savings to make up the difference.
By the time you retire, you’ll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you determine the answer:
- At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you’ll need to carry you through it.
- What is your life expectancy? The longer you live, the more years of retirement you’ll have to fund. You may have some general idea based on your family, health, and lifestyle.
- What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return to reflect bull and bear markets as well as investment fees.
- Do you expect to dip into your principal investment? If so, you may deplete your savings faster than if you are able to live off of your investment earnings. Build your savings to achieve sufficient investment earnings and guard against depleting the principal.
Build Your Retirement Fund: Save, Save, Save
Figuring out how much money you’ll need should become your retirement savings goal. Assume a conservative rate of return (e.g., 5% to 6%), and then determine how much you’ll need to save every year between now and your retirement to reach your goal. Map out a savings plan that can work for you, paycheck by paycheck.
The next step is to put your savings plan into action. Ideally, begin saving in your 20’s for retirement – but it’s never too early to get started. If you are working as an employee, arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice, such as a 401(k) plan or a payroll deduction savings account. If you own your practice, you can make the same types of deferrals in a retirement plan you set up. Regular paycheck deduction reduces the risk of impulsive or unwise spending that will threaten your savings plan; you will be saving automatically. If possible, save more than you think you’ll need to provide a cushion.
Here are some of the most common retirement savings tools to consider:
Employer-sponsored retirement plans that allow employee deferrals like 401(k), SIMPLE or SEP IRA are powerful savings tools. Your contributions come out of your salary as pre-tax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans may include employer-matching contributions and should be a key consideration when it comes to saving for retirement. 401(k) plans can also allow after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, qualified distributions from your Roth account are free of federal, and possibly state income tax.
IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you’ve made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).
Roth IRAs don’t permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.
Annuities are contracts issued by life insurance companies, generally funded with after-tax dollars. Their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity may be subject to certain charges and expenses and provides income payments beginning at some future time, usually at retirement, which may last for your lifetime, for the joint lifetime of you and a beneficiary, or for a specified number of years, depending on the particular annuity contract and on the issuing life insurance company.
The AIA Trust is here to help
The AIA Trust endorses retirement savings and distribution plan products through Equitable Financial that can assist you toward achieving your retirement goals. With over 50 years of experience working with AIA members, Equitable Financial Retirement Program Specialists are licensed to provide the knowledge and resources to assist you and your team evaluate the plan options most suited for your personal retirement goals. In addition, Equitable Financial provides a full range of recordkeeping and plan administration services to complement its suite of retirement product offerings for AIA members and employees. For additional information on these AIA-endorsed member benefits, please call Equitable Financial at 1-800-523-1125 or visit at https://equitable.com/associations/mrp/partners/aia
All rights reserved. This article is prepared and published by Broadridge Investor Communication Solutions, Inc. Copyright 2019 to help keep you up to date on the issues that may affect your financial well-being. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. You should contact your insurance, legal, tax or financial professional regarding your circumstance.
This article has been written for general information purposes only. This material does not constitute an offer or solicitation of any kind and is not intended, and should not be relied upon, as investment, tax, legal, or financial advice or services.
Equitable Financial Life Insurance Company (Equitable Financial) (NY, NY), issuer of annuity and life insurance products, and its affiliates do not provide tax or legal advice. You should consult with your attorney and/or tax advisor before purchasing a contract.
Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (Equitable Financial) (NY, NY), Equitable Financial Life Insurance Company of America (Equitable America), an AZ stock company, and Equitable Distributors, LLC. Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN). GE-5613790.1(04/23)(exp.04/25)