Key Takeaways:
• Put simply, planning for retirement income means setting a savings target that covers your core expenses and contributing consistently from your paycheck to meet it.
• Healthcare tends to get more expensive as you age, so be sure to factor in this cost when you are determining your ideal retirement number.
• Required minimum distributions (RMDs) usually begin at age 73 for traditional accounts. Missing an RMD can lead to penalties.
You do not need a perfect plan to make progress towards your retirement goals. You only need a strategy that aligns with your salary, workplace benefits, and timeline. Once you set a target, you can elect to contribute money from each paycheck, which can be taken automatically by your payroll provider before the funds hit your account.
You can also make manual contributions if you prefer. In this guide, you’ll learn how to determine your ideal retirement income, how to manage contributions and taxes, and what American Hartford Gold has to offer.
How Much Do You Need in Retirement?
The ideal retirement number covers housing, food, healthcare, transportation, and anything else that is important to you. When you convert that monthly budget into an annual figure, you can estimate how much of it will come from predictable sources, like Social Security, and how much needs to come from your savings.
Think about your future. Will your home be paid off? Do you expect to work part-time for a few years? Are there family commitments you need to contribute to? These choices affect your budget and the rate at which you need to save. If you expect to have significant financial responsibilities during retirement, you’ll need to save aggressively before leaving work.
Building a Budget
Start with the basics, things you already pay for today, and adjust them as needed once you are no longer working. Consider housing, utilities, groceries, transportation, and health insurance. Also include annual costs like property taxes and insurance, then divide by 12 to find your monthly obligation.
Next, consider discretionary spending, travel, hobbies, and other leisure activities so your plan reflects both needs and wants. Estimate how much of that monthly budget will be covered by Social Security and other guaranteed sources. Subtract those sources from your total budget. The remainder is what your retirement savings must cover.
Once you know how big the gap is, you have your target. Then, you can decide on a savings rate that helps you reach that amount before you retire. If the gap is large, don’t get discouraged. You can increase your savings rate over time as your income grows or as debts get paid off.
Which Retirement Account Type Do You Have?
Workplace plans like 401(k), 403(b), or 457(b) allow you to save via automatic payroll deductions. Many plans also offer employer matching, which can help you reach your retirement goals faster. IRAs add flexibility for those who want to save outside of a workplace plan or are between jobs.
Workplace Plans and IRAs
Workplace plans have two major advantages: automatic payroll deductions and the potential for employer contributions. If your employer is willing to match a percentage of your contribution, 45% of the first 4% you contribute, for example, deduct the full 4% to maximize your savings.
Payroll deductions also mean you won’t accidentally overspend before you can save, since the amount is taken from your check before you receive it. IRAs are a great option when you do not have access to a workplace plan or if you want to supplement it.
You can set up automatic bank transfers on a schedule that works for you. If you are married, a spousal IRA can help a nonworking spouse build savings, too. Withdrawals from a spousal IRA can be tax-free if all conditions are met.
Navigating Taxes and Mandatory Withdrawals
Your retirement paycheck is a mix of taxable and nontaxable sources, each with its own set of conditions. Traditional workplace and IRA withdrawals are typically taxed like ordinary income. Roth withdrawals can be tax-free when you meet certain terms. Health savings accounts (HSAs) can cover qualified medical costs tax-free at any age when used properly.
Managing these sources carefully can help stretch your savings further. Additionally, when you’re older, you will have to take required minimum distributions (RMDs) each year. These usually begin at age 73. RMD withdrawals are mandatory, even if you do not need the money at that time.
Required Minimum Distributions (RMDs)
For RMDs, your plan or IRA provider will calculate the minimum amount based on your balance and the IRS life expectancy table. You must take at least that amount each year by the deadline to avoid penalties.
If you continue working past the typical RMD age (73) and own less than 5% of the company, some workplace plans may allow you to delay RMDs. This exception does not apply to IRAs. If you own 5% or more of the company, you have to take RMDs at age 73, even if you’re still working.
Social Security and Coordinating With a Spouse
For most households, Social Security is the primary source of retirement income. Your monthly check amount is determined based on your highest 35 years of covered earnings and the age you start collecting benefits. Collecting early means more months of payments with smaller checks. Waiting can increase the benefit, up to a certain limit.
If you’re married, coordinating with a spouse is important. One partner may start collecting benefits earlier while the other waits, or both might start at the same time for more stability. Additionally, when one spouse passes away, the higher of the two checks typically continues for the survivor, and the smaller payout ends.
Estimating Your Benefit
You can create a free account on the Social Security website to review your earnings history. Fix any errors you find; your record directly affects your benefit amount. The site will show you estimates across potential starting ages. Compare those amounts to your expected budget and other income sources.
If your health or other factors force you to collect benefits earlier, build your plan around the number you will actually receive. Remember that claiming Social Security before full retirement age (FRA) while earning above a certain limit can reduce your benefit amount.
At full retirement age, the earnings test no longer applies, so you can continue working and earning any amount while also collecting Social Security. Withheld benefits are added back to your monthly payout once you reach FRA.
Planning for Healthcare Needs in Retirement
Healthcare tends to get more expensive as you age, so it’s important to account for medical costs when considering how to save for retirement. Most people enroll in Medicare at age 65. You’ll still be responsible for premiums, deductibles, and any out-of-pocket costs. Also plan for prescriptions, dental, and vision. Thinking ahead helps preserve retirement funds longer.
Health savings accounts (HSAs) can be valuable too (for those eligible), since funds taken out and used to pay (or be paid back) for qualified medical expenses are 100% tax-free. Traditional contributions can reduce your taxable income today. Roth contributions are taxed now, and qualified withdrawals can be tax-free later on.
Medicare and HSAs Explained
Medicare has multiple moving parts. Part A, known as hospital insurance, typically covers inpatient care, nursing facility stays, hospice, and some home health services. Part B typically covers outpatient services, doctor visits, durable medical equipment (DME), and preventive care. These lists are not exhaustive; review your plan for coverage specifics.
Part D covers various prescription drugs through private plans. Many people also purchase a Medigap policy to help cover costs Medicare does not, or they join a Medicare Advantage plan that bundles coverage. Healthcare plans have different enrollment windows, and late enrollment can result in penalties.
HSAs pair with a qualifying high-deductible health plan before you join Medicare. Once you enroll in any part of Medicare, you can no longer contribute to an HSA, but you can still use the balance for qualified expenses at any age.
Diversify Your Retirement Holdings With AHG
Planning ahead for retirement ensures your core household expenses and healthcare needs are met after you stop working. Enroll in your workplace plan or open an IRA, automate your contributions, and increase them a little each year (as you’re able) to meet your goals faster.
When it comes to retirement planning, American Hartford Gold has a variety of offerings that can add value to a portfolio. A Gold IRA, for example, can help you protect the value of your savings. Discover how to save for retirement with precious metals.
FAQs
Should I use traditional or Roth contributions?
It depends on your personal preference. Traditional contributions can lower your taxable income today, but Roth contributions can offer tax-free withdrawals later (conditions apply). Many individuals use both to maintain flexibility in retirement.
When should I claim Social Security benefits?
It depends on your health, level of financial need, and other personal factors. If you’re married, you may want to coordinate your claim with a spouse. Claiming Social Security before full retirement age (FRA) while earning above a certain limit can temporarily reduce your benefit amount. At FRA, you can work and earn any amount while also collecting Social Security.
What happens if I fall behind on saving?
You may not always be able to reach your retirement savings goal each month, and that is fine. Increase your contribution amount as often as you can. You can also lower it during the months or years you aren’t able to set aside as much. Unexpected life events can happen, so don’t stress too much if you have to temporarily allocate funds elsewhere.
Sources:
Health Savings Account (HSA) Rules | H&R Block®
What is a spousal IRA and how do you open one? | Fidelity
Social Security Benefit Amounts | SSA
Benefits Planner: Retirement | Receiving Benefits While Working | SSA
