SAVING AND PLANNING

Even if you truly love your work, the day will come when it’s time to punch out for the last time and start your retirement. When that time arrives, you’ll want to have a robust financial plan in place.

How to Plan for Retirement

Your primary financial goal throughout your work years is to amass enough in savings to support that plan—to sock away enough money to support your lifestyle without a steady paycheck. But saving as much money as possible is just the beginning: You’ll also need to account for taxes, determine which investments will best grow your money, account for other sources of retirement income, and plan for retirement expenses.

Retirement Accounts

Saving money must be on your list of priorities. Most financial experts agree that you should save at least 10% of your income every year, and many suggest pushing it to 20% if you can. However, it’s not just about how much you save—it’s also about where you save it.

Over the last few decades, Congress has attempted to incentivize retirement savings by allowing for the creation of special tax-advantaged retirement accounts. The TSP is offered to federal employees and also offers a match. Private employers usually offer a 401(k) as a pretax retirement option. Many employers also offer to match a certain percentage of your contributions, which essentially amounts to free money.

Other retirement accounts can be opened independent of your employer. The most popular is the Individual Retirement Account or IRA. The "Traditional" variety of these accounts is similar to the TSP in that money can be contributed pre-tax; donate a few thousand dollars to an IRA, and the money can be deducted on your taxes. The other variety of IRA is the Roth IRA, in which money is contributed post-tax—that is, you can’t take a tax deduction on it—but it grows in the account and can be withdrawn tax-free in retirement.

Investing Your Savings

It’s not enough to just save a bunch of money in a tax-advantaged retirement account. To make sure that your money grows and multiplies, you should invest it. It is good to keep enough money in savings and checking accounts to cover expenses and emergencies; however, if you keep more than this in savings, it will essentially shrink in value—savings accounts do not provide enough interest to keep pace with inflation. Too often I meet with people who lament the fact they have stayed "too safe" and left their money in the G fund for their whole career.

The time value of money concept states a dollar earned today is worth more than one earned in the future—if that dollar is invested and can earn interest. If you have enough to cover expenses and emergencies, consider investing the rest.

Portfolio Allocation

So what should you invest in? There are volumes of information available on this topic. An accepted rule of thumb is the one in which your portfolio should consist of 100 minus your age in stocks, and the rest in mutual funds and bonds. The older you get, the more you should transfer to funds and bonds.

In general, a portfolio should be allocated to run as efficiently as possible. Think of your portfolio like your car. The more efficient it is running, the better gas mileage you will get. If your car is not getting good gas mileage, it might be time for a tune up. The same holds true for your investment portfolio.

As usual, have a plan and stick to it...

Matt