If you save in a 401(k) or IRA, congratulations! You’re taking a great step toward financial success and well being — and potentially making use of tax advantages through these accounts, or picking up free money in the form of employer contributions.
There’s no doubt that contributing to these retirement plans is a must if you want financial independence and stability down the road. But the phrases “employer-sponsored retirement plan” or “IRA plan” can be a little misleading. A 401(k) or IRA is not actually a retirement plan.
They are useful investment vehicles in helping you save for retirement. These accounts help you develop the resources you need to live the life you want.
But they’re only pieces to a retirement plan — not a retirement plan in itself.
A retirement plan is a well-thought-out blueprint towards achieving your specific retirement goals. The foundation of this blueprint is defining the retirement lifestyle you want to have and then putting a price tag on it. It is on this foundation that your retirement savings and investment strategies should be built.
If Your 401(k) or IRA is Not a Retirement Plan… What Is?
If you have a 401(k) or IRA, that’s great! Again, these accounts are part of a plan that can help set you up for the kind of lifestyle you want once you quit working.
The overall plan should include the following:
- Your current financial situation: Where are you right now? What have you saved up to this point for your retirement years? How much are you currently saving each paycheck, yearly for retirement?
- Your goals: What do you want your retirement lifestyle to look like? When would you like to retire? Where would you want to live in retirement?
- Your estimate of what you need and how long it will take you to get there: How much will you need to live the life you want? What will your tax situation look like when you retire? How will you pay for unforeseen healthcare costs? What’s the difference between how much you will need saved versus where you are today? What adjustments will you need to make in terms of the amount you are saving?
- Your Investment Selections: Have you properly linked your retirement account’s investment decisions with your retirement goals and risk tolerance? Are you monitoring and adjusting your investment portfolio as your life evolves and the economic environment changes? Have you sought our professional help in doing so?
- Your tools and resources: What’s available for you to use to help you reach your goals? How will you use these resources effectively?
- Your action steps: What will it take for you to get to where you are today to where you want to be in retirement?
A retirement plan isn’t just one thing. It’s an entire system, or a roadmap, that plots out how to get to where you want to go and what you need to do along the way.
It’s a powerful tool because it allows you to be proactive rather than just reactive. You can see what needs to get done — and how! And perhaps even more importantly, your plan can help you foresee challenges before they become problems that are hard to solve.
Considerations for Your Retirement Accounts in Your Plan
Your 401k or IRA comes into play in a few places in your retirement plan.
The balances of these accounts contribute to the assets in your net worth. The balances also help you determine where you are today versus how much you need to have before you can retire. And you can list these accounts as some of the tools and resources at your disposal.
You’ll also want to look at exactly how your accounts, whether you have a 401k or IRA or both, best fit into the overall big picture.
Retirement planning includes asking (and answering) questions like:
How long should I max out my 401(k) if I can?
- Does my 401(k) offer the best funds (with reasonable fees) for my goals?
- Should I rollover my 401k?
- Does it make more sense to contribute to an IRA or Roth IRA?
- How do I withdraw money from my 401(k) or IRA?
- How do I deal with Social Security?
- What’s the best way to minimize my tax burden?
- What do I do if I’m self-employed?
These questions may or may not apply to you — and that’s because each retirement plan should be unique to your goals, needs, challenges, and available resources.
Do You Have a Plan?
Now that you know a 401(k) or IRA isn’t a retirement plan in itself — just one piece of a much larger puzzle — it’s worth asking: do you have a plan?
If not, the time to start is now. It doesn’t matter how young or old you are. You need a plan in place to help you make the most of the opportunities available to you. It’s never too early or too late to take action and be proactive about living the life you want.
Eric C. Jansen, ChFC is the founder, president and chief investment officer of Westborough Massachusetts-based Finivi, which provides fee-based retirement income planning and investment management services for successful individuals and families nationwide. Do you need help planning for retirement? You can click here to schedule a complimentary consultation with a financial plan.