Putting together retirement plans means dealing with a number of financial issues. Whether retirement is decades away or just around the corner, it's a good idea to address the following four areas of concern.
Timing and Taxes
A number of retirement accounts are designed to have tax benefits that only kick in if you hold onto the money until a certain point. The classic version of this is being able to withdraw money from certain kinds of 401k accounts at or after the age of 59.5 years. If you're planning to retire early, such as age 55, you need to take into account whether you can afford the intervening 4.5 years between then and when some of those tax advantages are accessible.
Inflation
In an ideal world, you'd dump all your savings into an interest-bearing account and let compound interest do all the work for you. Unfortunately, inflationary pressures cause the costs of most items to go up every year. It's critical that your retirement planning efforts focus on investments that allow you to stay out in front of inflation. That may mean achieving a year-over-year return of at least 5% over several decades.
Costs and Fees
One of the less-noticed issues many people encounter is paying out a portion of their investments in expenses associated with their accounts. For example, a stock brokerage may charge a $5 fee per transaction. This means someone trading stocks as part of their retirement planning portfolio will want to limit the number of times they buy and sell to prevent fees from eating up their profits.
Drawing Down Money
A major mistake many people make in their retirement plans is not looking at a long-enough timeline. It's easy to assume, for example, that you'll live about as long as your parents did. There's a risk, however, that you might live 10 to 25 years longer than they did. If you end up in a situation after retirement where you're slowly drawing down the money you've accumulated, leaving you broke at an age like 90. It's important to keep your money making money even after you've retired.
It's wise to purchase some financial vehicles that offer sure and steady cash. For example, an annuity can provide you with a reliable stream of money indefinitely. You can also use financial tools like bonds and CDs to keep rolling your unspent money into safe vehicles that provide near- and medium-term access.
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