Many financial professionals will, for a fee, help you navigate your way to and through retirement. Using a financial advisor isn't mandatory. If you can't afford, don't trust, or otherwise would prefer not to use an advisor, managing your retirement on your own is always an option. You have to map out a sensible plan and be willing to follow it. Here are some of the basics of a do-it-yourself strategy.
Key Takeaways
- You don't necessarily need a financial pro to help you plan for retirement.
- If you don't already have a basic understanding of investing, take some time to learn about stocks, mutual funds, and other places to put your retirement savings.
- Make sure you understand the types of investment vehicles and their rules.
- An important part of managing your portfolio is assessing your preferred risk appetite and matching your retirement savings to that preference.
- As you get closer to retirement, you'll want to read up on withdrawal strategies that can help you maximize your income and minimize your taxes.
Start Well Before Retirement
If you are serious about taking retirement into your own hands, start as early as possible by adopting one simple habit: Pay yourself first. Figure out a consistent sum of money that you can set aside for the future.
Retirement plans like 401(k)s, which take money automatically out of your paycheck, make that almost effortless. Many 401(k) platforms also make it easy to enter what percent of income you want to be deducted and placed into your retirement account. Though you can often easily change your contribution amount, it's important to treat this expense as a current bill, ensuring you have consistent cash flow entered your 401(k).
If you don't have a 401(k), you can sign up for regular automatic withdrawals that will come out of your bank account and go into an individual retirement account (IRA). IRA contributions can't be deducted from your paycheck since you—not your employer—manage your IRA. This gives you even more flexibility in selecting when and how much gets taken out of your account.
Advisors often recommend saving for retirement as early as possible to take advantage of investment compounding. Compounding is the mathematical principle of your earnings generating earnings of their own. This means you generate gains on your gains.
Understanding 401(k) Account Options
There are two primary retirement account options: the 401(k) and the IRA.
When you start a new job, you may have the option to sign up for the company's 401(k) plan. The employer will manage the plan, but you contribute to it and pick the investments.
A very important aspect of a 401(k) is employer matches of contribution. It's important to maximize your employer's 401(k) match, as these contributions are often very worthwhile to take. And since you don't have as much flexibility with the broker or investment options, be mindful to avoid excessive fees and commissions when you invest.
401(k) Contribution Limits
For 2023, you cancontributeup to $22,500 into a 401(k) or Roth 401(k). This limit increases to $23,000 in 2024. Individuals who are 50 and over can make an additional $7,000 catch-up contribution in both 2023 and 2024.
There are also contribution limits based on the total amount an employer and employee can contribute to the account together.
- In 2023, this limit was the lower of the employee's compensation, or $66,000.
- In 2024, this limit increased to the lower of the employee's compensation, or $69,000.
Both of these limits are also subject to (and can be increased by) catch-up contribution increases for those aged 50 and older.
401(k) Income Limits
There is also a limit to the amount of your compensation that can be taken into account for determining your and your employer's contributions. The IRS limit is $345,000 for 2024, up from $330,000 in 2023.
Understanding IRA Account Options
A traditional IRA provides a tax deduction in the years that you make contributions, meaning the contribution amount reduces your taxable income to an IRA. However, in retirement, the withdrawals or distributions are taxable at your income tax rate in the year of the distribution.
A Roth IRA is an IRA that allows certain distributions to be made on a tax-free basis assuming specific conditions have been met. However, Roth IRAs do not provide a tax deduction in the years they're funded, meaning they're funded with after-tax dollars.
For both Roth and traditional IRAs, your distributions can begin at age 59½ and not before‚ although there are exceptions. If you withdraw IRA funds before age 59½, you'll pay a 10% penalty tax in addition to paying federal income taxes on the distribution amount; and possible state taxes as well.
IRA Contribution Limits
The Internal Revenue Service (IRS) limits how much you are allowed to contribute each year to an IRA and a workplace retirement plan. The annual contribution limit for both traditional and Roth IRAs is $6,500 for 2023 and $7,000 for 2024. In both years, individuals who are 50 and over can deposit a catch-up contribution of $1,000.
Keep in mind that there's a penalty for over-contributing. Called excess contributions, these are taxed by the IRS at 6% per year foreach yearthe excess amounts remain in the IRA.
IRA Income Limits
It's important to keep in mind that some IRAs, specifically Roth IRAs, have income limitations established by the IRS. You could be prohibited from contributing, or your contributions could be phased out, depending on your tax filing status and modified adjusted gross income (MAGI). The 2023 and 2024 Roth IRA contribution limits are listed in the chart below.
| Roth IRA MAGI Limits for Contributions | |||
|---|---|---|---|
| Filing Status | 2023 | 2024 | Contribution Limit |
| Single/Head of Household | Less than $138,000 | Less than $146,000 | $6,500 in 2023, $7,000 in 2024 |
| Single/Head of Household | $138,000 to $153,000 | $146,000 to $161,000 | Reduced contributions |
| Single/Head of Household | Greater than $153,000 | Greater than $161,000 | Excluded from contributing |
| Married Filing Jointly | Less than $218,000 | Less than $230,000 | $6,500 in 2023, $7,000 in 2024 |
| Married Filing Jointly | $218,000 to $228,000 | $230,000 to $240,000 | Reduced contributions |
| Married Filing Jointly | Greater than $228,000 | Greater than $240,000 | Excluded from contributing |
| Married Filing Separately | $0 to $10,000 | $0 to $10,000 | Reduced contributions |
| Married Filing Separately | Greater than $10,000 | Greater than $10,000 | Excluded from contributing |
The IRS also has limits on when you're allowed to deduct traditional IRA contributions from your taxes. The table below outlines the deduction amount allowed based on MAGI and tax filing status. Note that the deduction limits below are for employees making IRA contributions while also covered by a workplace retirement plan; deduction limits vary for employees not covered by a workplace plan.
| Traditional IRA MAGI Limits for Contributions | |||
|---|---|---|---|
| Filing Status | 2023 | 2024 | Deduction Limit |
| Single/Head of Household | Less than $73,000 | Less than $77,000 | No deduction limit |
| Single/Head of Household | $73,000 to $83,000 | $77,000 to $87,000 | Reduced deduction |
| Single/Head of Household | Greater than $83,000 | Greater than $87,000 | No deduction allowed |
| Married Filing Jointly | Less than $116,000 | Less than $123,000 | No deduction limit |
| Married Filing Jointly | $116,000 to $136,000 | $123,000 to $143,000 | Reduced deduction |
| Married Filing Jointly | Greater than $136,000 | Greater than $143,000 | No deduction allowed |
| Married Filing Separately | $0 to $10,000 | $0 to $10,000 | Reduced deduction |
| Married Filing Separately | Greater than $10,000 | Greater than $10,000 | No deduction allowed |
Choose the Appropriate Investments
Because your retirement could be years—even decades—in the future, you need to put money into investments that will generate interest, pay dividends (or cash payments), and grow in value so they can be sold later for a profit. You should be mindful to also keep up with inflation—the pace of rising prices—since inflation is not going to stop when you retire.
The first step in choosing your appropriate investments is to assess your risk appetite. Your risk appetite is how you feel about financial risk and taking investment chances. Questions to assess your risk appetite include:
- Would you be up at night worrying about your portfolio during an economic downturn?
- Do you see market crashes as buying opportunities, or are they worrisome since you will likely lose money?
- Would you prefer riskier investments that may gain/lose more money, or would you prefer safer investments that may not grow as much?
Very broadly speaking, stocks/equities are riskier forms of investments compared to bonds. An investor usually sets a portfolio allocation to divide their portfolio into riskier (i.e. stocks) and safer (i.e. fixed income securities) investments.
Mutual funds have many advantages and should probably be the centerpiece of most retirement portfolios. You can buy mutual funds that invest in stocks, bonds, a combination of the two, or many other types of assets. Index funds also have the advantage of relatively low fees and costs—another important thing to keep an eye on as you invest.
It's crucial to control investment expenses in retirement as high fees can erode returns.
While buy and hold is a time-honored investing strategy, you will also want to review your asset allocation over time. Investments that are appropriate for a 24-year-old may not be for a 64- or 74-year-old.
You can lower your risk by finding bonds with a short maturity date, CDs, fixed annuities (not equity-indexed or variable), safe dividend stocks, physical real estate, or other assets that you would consider yourself an expert in.”
What to Do as Retirement Draws Closer
Before you retire, try to make a reasonable estimate of how much money you and your family will need to live comfortably during retirement. Then, add up all your likely income sources and compare the two. If your income won't be adequate to cover your expenses, you'll need to make some adjustments.
Be mindful how your drawdown percentage may compared to your projected rate of return. For example, if you anticipate needing only 3% of your portfolio each year and expect annual growth of 4%, you will have enough retirement money. However, should the market not grow one year, your portfolio balance will decrease and impact future withdrawal periods.
Social Security
You will probably have multiple sources of retirement income, starting with Social Security. You can get an estimate of your future benefits at the Social Security website If you earned at least 40 credits (roughly ten years of work), you can obtain a personalized estimate using the SSA's Retirement Estimator. You can plug your current income and planned retirement date into the Social Security Quick Calculator for a ballpark figure.
If you're married, bear in mind that even if your spouse isn't eligible for Social Security based on their work record, they may be entitled to spousal benefits based on yours. You may also be able to increase your Social Security income substantially by taking benefits later, rather than when you're first eligible.
Other Sources of Income
Your other sources of retirement income might include one or more defined-contribution plans, such as a 401(k) or 403(b), a traditional defined-benefit pension, and any IRAs you've established over the years.
Outside of retirement accounts, you will probably have other assets, such as individual stocks and bonds, mutual funds, exchange traded funds (ETFs), annuities, and CDs.
When the time comes (or earlier, if at all possible), you will also want to read up on withdrawal strategies that can help you maximize your retirement income, minimize your tax bill, and—especially important—not deplete your savings prematurely.
What Is a Good Amount of Money for Retirement?
What is considered a good amount of money for retirement will vary depending on the individual. It will depend on a person's job before retirement, their current lifestyle, their expected lifestyle in retirement, their financial obligations, such as children or grandchildren, and their health. In general, a good amount of retirement money is considered to be 70% to 80% of the income from your last job before retirement.
What Is the Contribution Limit for a 401(k) Plan?
The annual contribution for a 401(k) plan in 2023 is $22,500. This amount increases to $23,000 in 2024. If you are 50 or older, you are allowed an additional contribution amount of $7,500 in 2023 and 2024.
What Are Some Good Ways to Manage Money in Retirement?
Some good tips to manage your retirement money include waiting as long as you possibly can to start receiving Social Security benefits, adjusting your spending habits, creating separate funds for out-of-pocket healthcare costs, analyzing your home equity and possibly downsizing your home, being tax-efficient with withdrawals from retirement funds, and generating retirement income.
The Bottom Line
It is not necessary to hire a professional to plan for your retirement. There is a tremendous amount of information that is easily accessible to educate yourself on some of the best strategies and tips for creating a retirement nest egg that will allow you to live a comfortable life in your post-working. years.
