Saving For Retirement: How Do You Start?

August 31, 2018by Brian Fry CFP®
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How do you start? This is one of the most important questions in saving for retirement. Whether planning for retirement in Austin, TX or elsewhere, you should start by building a retirement plan customized to your unique financial situation.

Saving for Retirement

Review your budget

Draw a line in the middle of a piece of paper. On the left, write down your income. On the right, write down your spending. Is your spending less than your income and if so, how much money do you have left over? Are there other considerations to take into to your budget?

Review your debt

Most financial service firms project all equity portfolios to have an average Rate of Return under 7% over the next 10 years. Do not hold any debt that’s higher than the highest rate of return. If you have debt above this rate, it is essential to build a debt management plan. Here are some other questions that may be important to fully understand your debt: Do you consider your debt to be good debt? What are the terms for your debt, is it short-term or long-term? Have you considered restructuring your debt?

Replenish your emergency fund

Safe Landing Financial recommends to clients that are over five years away from retirement to build emergency funds of at least 3 months of spending. For clients closer to retirement, Safe Landing Financial recommends building emergency funds to at least 6 months of spending.

Review your financial goals

Are you focused on saving for retirement or are you planning for saving for a home purchase, saving for college or paying off student debt, travel, or another large purchase? Without building a savings plan for more immediate needs, it’s hard to build a savings plan for retirement.

Now that we’ve determined that you have money left over to save and invest for retirement, it’s important to decide how to contribute efficiently.

Where should you contribute first between an IRA and 401(k) and how much?

2018 Contribution Limits chart
Vehicle Contribution Limit Over 50 Catchup Defined Contribution Limit
IRA $5,500 $1,000  –
401k $18,500 $6,000 $55,000
  1. Contribute at least enough to your company’s qualified plan to receive the full match.
  2. Max out your IRA Contribution. If you’re married filing jointly, contribute to an IRA for each spouse.
  3. Do you feel comfortable with your discretionary budget?
  4. If no, go back to your financial plan and budget to decide how much should go to your shorter term financial goals and how much should go towards retirement.
  5. If yes, max out your 401k.

Should you contribute to a Traditional or Roth IRA?

Traditional IRA vs. Roth IRA
Traditional IRA    Roth IRA
2018 Contributions Deductible? Yes No
Full Partial
Single, Active Participant in Qualified Plan AGI > $63,000 > $73,000 Not Applicable
Married Filing Jointly, Active Participant in Qualified Plan AGI > $101,000 > $121,000 Not Applicable
Single, Non-Active Participant in Qualified Plan Full Amount Not Applicable Not Applicable
Married Filing Jointly, Non-Active Participant in Qualified Plan AGI > $189,000 > $199,000 Not Applicable
Contributions after 70 No  Yes
RMDs Must start taking the tax year they turn  70.5 (for first year can be delayed until April 1 of the following year) Never
Are Distributions Taxed?  Regular Income – Withhold federal and state No
2018 Roth IRA Phaseout
Full Contribution Partial Contribution up to
Single MAGI < $120,000 > $135,000
Married Filing Jointly MAGI < $189,000  > $199,000

This is an interesting discussion that should be treated case by case. Should you take the tax savings now or later during retirement? It’s hard to know without fully understanding your financial plan. An easier way to think about it is with a couple more questions.

  • Do you expect to be in a higher bracket during retirement than this tax year?
  • Can you afford a higher tax bill this tax year?
  • Do you prefer to pay more in taxes this tax year to receive a larger payout during retirement?
  • Do you qualify to make a Roth IRA contribution? (see Roth IRA Phaseout chart above)

If you answered yes to any of the first three questions and you qualify, then you should choose to contribute to a Roth IRA. In most other scenarios, you should likely choose to contribute to a Traditional IRA.

For More:

Click here to learn more about retirement planning services

What is a fiduciary financial advisor?

What is a fee-only financial advisor?

Roth IRA vs. Traditional IRA

 

Retirement Planner Austin, TX

Still have questions in determining how to best save for retirement?

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by Brian Fry CFP®

Safe Landing Financial is an Austin, TX fee-only financial advisor providing financial planning, retirement planning and investment management to individuals and families. When you work with Safe Landing Financial, you work with Brian Fry, a fiduciary and CERTIFIED FINANCIAL PLANNER™ that puts clients’ best interests first. Financial planning services include: retirement planning, charitable giving, asset protection, estate planning, saving for college, debt management, tax strategy and investment management. Safe Landing Financial is located in Round Rock, TX and offers in-person financial planning in Austin, Cedar Park, Georgetown and Pflugerville, Texas. Safe Landing Financial serves as a virtual fee-only financial advisor to individuals and families nationwide.