Fundamentals of retirement planning

Most people identify a financially secure retirement as one of their primary financial goals. While retirement may seem to be far over the horizon and not worth thinking about, spending a little time now and doing some relatively easy things can put you on the road to a financially secure retirement.

Four common sources of retirement income:
  1. Employer Sponsored Retirement Plans
  2. Individual Retirement Accounts (IRAs)
  3. Other Personal Savings
  4. Social Security
Even though the future of the Social Security system and the benefits you may receive may be open to question, you control the first three items. Starting early and making a few wise decisions can help determine the type of financial lifestyle you will enjoy during your retirement years, regardless of how far in the future that may be.

Employer Sponsored Retirement Plans

Many employers provide an employer-sponsored retirement plan as part of their overall employee benefits program. When employer-sponsored retirement plans first started, they were predominately defined benefit plans, most common being a defined pension plan. With these plans, the ball is in the employer’s court. They use calculations to determine how much of a retirement benefit you will receive in the future, typically monthly. They are also in charge of investing that money on your behalf.

Over the last several years, defined contribution plans have become much more popular with the 401(k) and 403(b) being the most widely used. With this type of plan, employees contribute a portion of their wages. Typically, this can be pre-tax (tax break now) or Roth (tax break in the future). From there, the employer usually matches some portion of what the employees contribute. In other words, the company helps fund your retirement and you get a tax break either now or in the future. Additionally, within a 401(k) and 403(b), the investment responsibility lies on the employee. Employees typically can choose from a catalog of different investment options to choose how they fund their retirement.

There are limits on how much can be contributed. With recent tax law changes, these contribution limits continue to go up, allowing you to defer a significant amount for retirement.

2024 limits
  • Employee deferral limit - $23,000
  • Additional contribution limit for those ages 50 and over - $7,500
  • Maximum total contribution limit (employee and employer) - $69,000 for those under age 50, and $76,500 for those 50 and over

Individual Retirement Accounts (IRAs)

If you have earned income, you may be eligible to contribute to an IRA to supplement other planned retirement savings. Both Traditional IRAs and Roth IRAs can provide tax advantages, making them great vehicles to utilize for retirement savings. Additionally, their contribution limits are separate from your employer sponsored retirement plan, so you can do both. For Traditional IRAs, your contributions may be tax deductible based on earned income, which allows for an immediate tax break. For Roth IRAs, your contributions are not tax deductible, but your earnings and distributions are tax-free, if used for retirement (must be 59.5 and have an existing Roth IRA for 5 years). This allows for an incredible tax break down the road. You should always consult with a tax professional for any tax advice. Traditional and Roth IRAs are subject to contribution limits.

2024 limits
  • Under age 50 - $7,000
  • Age 50 and older - $8,000
If you can afford it, add to your retirement nest egg by funding your IRA every year. Annual contributions of even $1,000 can make a big difference down the road.



Other personal savings

Another source of retirement funds/ income will be your other savings. Accumulations in savings accounts and non-retirement investment accounts might not have the same tax advantages of 401(k) plans and IRAs, but they are still a major component of most individuals’ retirement plan. Saving more and earning more on these funds can add greatly to your retirement lifestyle. These non-retirement accounts can also provide you with more flexibility if you plan on retiring early.

Consider leveraging an automatic savings plans with monthly transfers to a savings account or a non-retirement investment account. Be sure that your investment strategy matches your goals’ time horizon and your risk tolerance.

Social Security retirement benefits

The Social Security system has played a major part in Americans’ retirement planning for decades. The current examination and debate over the future of the system will probably produce some changes for future retirees. Here are some basic facts you may want to remember:
  • Full Retirement Age – the age when you can start receiving "full" benefits is gradually moving from 65 to 67.
  • Early Retirement Age – at age 62, you can start receiving a reduced retirement benefit.
  • 40 Credits - you need 40 credits to be eligible for your own Social Security Retirement Benefit. Essentially this is 10 years of earned income.
  • Spousal Benefit - if you aren’t eligible for your own Social Security Retirement Benefit, you might be able to receive a portion of your current or ex-spouses’ benefit.

At this point, we can’t be certain what future legislation will do with social security benefits; however, we can position ourselves for success by going to ssa.gov and getting an understanding of what your future benefit options might be, plus, understanding that your Social Security benefit alone typically won’t be enough to supplement the cost of retirement.

We can help

Visit one of our branches or speak with a banker at 1-800-288-3425 to learn about more retirement savings options.