10 Frequently Asked Questions About Retirement Planning

June 2, 2022

No matter where you’re at in your retirement planning (whether you’re just getting started or reevaluating a current strategy), it’s natural to have questions. You want to be sure that you have a basic understanding of where you’re at and what to do next. To help you achieve the best retirement possible, we’re answering ten frequently asked questions about retirement planning.

1. How much money do I need to retire?

Most experts say your retirement income should be about 80% of your final pre-retirement annual income. That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce. According to Investopedia, this amount can be adjusted up or down depending on other sources of income, such as social security, pensions, and part-time employment, as well as factors like your health and desired lifestyle.

2. At what age should I retire?

The best time to retire will fluctuate based on your personal needs and circumstances. It all depends on when you have the financial resources to stop working. However, sometimes that’s not a choice. In 2018, 37% of workers reported being forced into retirement earlier than planned, primarily due to changes in health. When deciding what age to retire, you should also consider your full retirement age (FRA). Full retirement age refers to the age you must reach to receive full retirement benefits from Social Security.

3. When should I claim Social Security?

Your age is significant in retirement planning and when to claim Social Security. You can claim as early as age 62, but you will have a permanently reduced benefit if you begin collecting before you reach your full retirement age. That reduction can end up costing you long-term. The full retirement age for receiving Social Security benefits is 67 for people born in or after 1960. After you reach full retirement age, Social Security retirement benefits increase by 8% annually until you reach age 70. Benefits won’t increase any further after 70. For most people, it’s best to wait until you’ve reached your full retirement age to claim Social Security.

4. What’s the difference between a 401(k) and an IRA?

401(k)s and IRAs are both retirement savings vehicles. However, a 401(k) is an employer-sponsored plan and an individual retirement account (IRA) can be established by an individual without an employer’s involvement. Each option has its own set of rules and benefits. You can learn more about the differences in our article, “Smart Investing: IRA Versus 401(k).”

5. Is it better to have a 401(k) or an IRA?

To optimize your retirement accounts, experts recommend investing in both a 401(k) and an IRA. The best strategy is to max out your 401(k) match, then max out your IRA, and then max out your 401(k) – saving the maximum legal amounts each year. The earlier you start saving, the more money you’ll be able to save, and you’ll save money faster due to the tax advantages on your retirement accounts.

6. What’s the difference between a traditional IRA and a Roth IRA?

The key difference between a traditional IRA and a Roth IRA is the timing of their tax advantages. Traditional IRA contributions are tax-deductible in the year that they’re made, and withdrawals (distributions) are taxed at your income rate when you make them. Roth IRA contributions are not tax-deductible when you make them, but withdrawals made during retirement are tax-free. Check out the IRS’s Traditional and Roth IRAs chart to see highlights of their other similarities and differences.

7. What assets should I invest in with my retirement accounts?

401(k)s and typical IRAs can invest in traditional assets like stocks, bonds, and mutual funds. However, a self-directed IRA (SDIRA) can also invest in alternative assets like real estate, cryptocurrency, private equity, precious metals, LLCs, and more. To help diversify your portfolio and mitigate risk, it’s best to invest in a range of different assets. When it comes to alternative investments, experts recommend investing in assets that you have prior knowledge of or experience in. For example, a real estate agent would benefit from investing in real estate using their IRA. No matter what assets you choose to invest in, it’s essential to always do your due diligence and protect yourself against fraud.

8. How will I pay for medical expenses in retirement?

Anyone age 65 or older qualifies for the health insurance program Medicare. However, Medicare does not cover 100% of your health care costs in retirement. Even with traditional Medicare, a 65-year-old couple retiring in 2022 can expect to spend an average of $315,000 in health care and medical expenses in their retirement. One way to plan for these costs is with a health savings account (HSA). Although you are no longer able to contribute to an HSA once you enroll in Medicare, you can continue to use the funds for qualified medical expenses.

9. What are “catch-up contributions?”

Starting the year you turn 50, the IRS allows you to make annual “catch-up contributions” into your retirement accounts. These are additional contributions that you can make above the annual contribution limits for 401(k)s and IRAs. The idea behind catch-up contributions is to make up for years when you weren’t saving for retirement or didn’t have the money to max out your contribution limits.

10. How long will my money last in retirement?

For most of your life, you’ve spent money based on the amount of income you’ve earned. During retirement, there’s a psychological adjustment that can be difficult to make. That’s because, in retirement, you’ll spend based on your savings and level of comfort. By putting together a plan and budget before retirement, you’ll have a better idea of how much you can afford to spend during your golden years.

Retirement planning can feel confusing and daunting at first. However, the more you research, plan ahead, and speak with trusted professionals, the easier saving for retirement will be. At RITA, we want you to feel informed, confident, and prepared for their future. Your dream retirement awaits!