Self-Directed IRA Expert: Horizon Trust BlogJuly 8, 2022by horizontrustRetirement Planning: 5 Steps to Financial Success

Planning for retirement is an exercise in financial self-care, and starting as soon as possible will help you reach your retirement goals and provide security in your later years.

However, if you haven’t started saving – or even if you have – walking through the steps below can help you build a strong blueprint for your future and a foundation that will take you into your retirement years. 

Regarding financial planning, your retirement goals should play a key role in the type of investments you choose and the amount of money you contribute. With several tax-advantaged retirement accounts to choose from, it can be difficult to know where to start. 

If you want to start saving for retirement, here are five retirement planning steps that will put you on the path to success.  

 

1. Determining Financial Goals

 

If you’re thinking about retirement, it’s safe to say one of your financial goals is to have enough money to step back from your full-time job and enjoy your later years. But retirement planning requires us to ask other important questions.

One of the most important ones is when you’d like to retire and how your current finances fit into that plan. Evaluate your current income, existing debts (e.g., student debt, mortgage, etc.), and how they fit into your current and future financial plan.  

For instance, if you have a significant amount of student debt accruing interest at a high rate, then it’s important to understand how that debt will impact your current finances and your long-term retirement saving goals. 

You should also evaluate your existing investments, whether you have a stock portfolio or compound interest investment you can use to fund your account or invest alongside a retirement account. 

Once you account for the essentials, you can expand to your actual retirement goals and their financial significance. 

Are you planning to stay in your current home, or do you have your eyes on a beach-side abode? Do you want to have a budget that supports travel or allows you to pursue a hobby? What about your spouse or partner? 

Identifying your financial obligations and imagining the retirement you want will allow you to set specific goals and build a blueprint to get you to retirement. 

 

2. Figuring Out How Much You Need to Retire

 

Your goals may serve as the blueprint for your retirement, but you won’t get very far without some hard numbers. For many, this is the hardest part of the process because it forces us to merge our financial goals with our financial reality. 

How much do you really need to retire? Unfortunately, the answer isn’t always so simple. Depending on who you ask, the answer is a percentage of your income (e.g., 80%), 12 times your annual income before retirement, or even a flat number of $1 million. But how much you need depends on your goals, financial needs, and obligations. 

Two primary factors to consider are how much you think you’ll need to support your lifestyle and the age at which you’d like to retire. It’s also helpful to account for the following if they are relevant to your situation: 

  • Mortgage or housing cost
  • Tax obligations
  • Utilities 
  • Student loan payments
  • Healthcare costs
  • Recurring payments (e.g., groceries, household services, etc.) 

 


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3. Choosing a Retirement Plan

 

Today’s investors have access to numerous retirement plans, and they can choose more than one in many cases. Here are some of the most common retirement plans available: 

  • 401ks are employer-sponsored retirement plans. They are tax-advantaged, meaning they reduce your taxable income, and you won’t need to pay taxes until you withdraw funds during retirement. This option is easy to manage for many, and if your employer matches your contribution, it can help boost your investment power. However, the type of assets available are typically limited to stocks, bonds, ETFs, and mutual funds, and you typically have less control over investments compared to some other types of independent investment vehicles.
  • Individual Retirement Accounts (IRAs) are popular among investors who don’t have access to employee-sponsored programs or those who want to add another investment channel to their retirement planning.  IRA investment assets, also known as investment instruments, are typically limited to stocks and bonds, mutual funds, ETFs, money market accounts, etc.

There are two primary types of IRAs available:

  • Traditional IRAs are similar to 401ks in that they offer a tax advantage that reduces your taxable income each year and grows tax-free. Taxes are only paid when you withdraw funds. Traditional IRAs have lower contribution limits – $6,000 annual in 2022 ($7,000 if you’re 50 or older). However, they typically offer slightly more control or asset variety than an employer-sponsored 401k.
  • ROTH IRAs offer similar flexibility and asset control but offer a different type of tax advantage. In addition, Roths are often an attractive option because they allow for withdrawals before the age of 72. 

Another significant difference is that ROTH IRAs are taxed at contribution, meaning you can withdraw tax-free. Therefore, a ROTH IRA can be more beneficial if you think you may be taxed at a higher rate closer to retirement. 

Traditional and Roth IRAs aren’t the only IRAs available. Other types of IRAs available include a SEP IRA and SIMPLE IRAs, which are designed for small business owners or those who are self-employed. 

Self-Directed IRAs (SDIRAs) are very similar to IRAs in that they are individual plans available in various forms, including Traditional and ROTH IRAs. But, unlike IRAs, account owners have expanded access to unusual or less-traditional assets, like real estate or cryptocurrency. 

Self-directed IRAs are becoming increasingly popular as more traditional investment instruments, like stocks, are becoming increasingly volatile. With an SDIRA, you can include both traditional and less-traditional assets, making it easier to diversify your portfolio and mitigate the risk associated with events like market crashes. 

 

4. Choosing Investment Instruments

 

Once you choose the type of retirement account you prefer, it’s time to determine how you’d like to invest your funds. Here are the most common options: 

  • Stocks 
  • Bonds
  • ETFs (exchange-traded funds)
  • Mutual funds
  • Index funds

If you choose to invest in an SDIRA, your options will expand. Here are some of the most common SDIRA assets

  • Real estate
  • Deeds of trust/mortgages
  • Certain precious metals
  • Promissory notes
  • Cattle and other livestock
  • Limited liability corporations (LLCs) and Limited Partnerships (LPs)
  • Venture Capitalist (VC)

Before you choose an asset, it’s a good idea to thoroughly research your options and compare them to your goals. Many investors choose to build a foundation with mutual or index funds and then add other instruments that fit their needs or interests.  

If you’re unsure what’s right for you, it’s a good idea to talk to a financial advisor or investment expert. 

5. Protecting Your Retirement Savings

 

Investment always carries a level of risk, but there are numerous steps you can take to reduce your risk. Here are a few things you can do to protect your savings:

  • Diversify your investments:  Relying on a single or just a few investments can leave you vulnerable to unexpected crashes. Diversifying your account with various assets can help you limit your overall risk. Investing in a range of assets can also help you fight inflation. 
  • Plan for long-term health care: People are living longer, and the cost of medical services is on the rise. Incorporating this into your planning can help you avoid eliminating your savings should you face a health issue or need to increase your insurance or care expenses. 
  • Don’t overreact to the market: It’s easy to watch a volatile market and think the best course of action is to withdraw your funds, but that’s not typically the best option. Markets tend to rebound over time, and withdrawing your funds can do more damage than good if retirement is several years away. 

Planning for retirement is an exercise in financial self-care, and starting as soon as possible will help you reach your retirement goals and provide security in your later years. However, if you haven’t started saving – or even if you have – walking through the steps above can help you build a strong blueprint for your future and a foundation that will take you into your retirement years. 

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