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How to Come up with a Retirement Plan that Works

Nobody really likes retirement planning: it’s a source of stress and anxiety, as well as the main reason financial planners never really run out of business. Today’s economic climate is not exactly conducive for saving, so a lot of people worry that they’re not going to be able to balance the kind of life they are living right now, with the kind of life they want to live further down the line.
However, retiring on time doesn’t have to be a hassle. In fact, I’m actually living proof that you can ‘retire’ a whole lot earlier than the typical age. All you need to do is come armed with a plan that works for you, your income level, and your needs.
Join me as I dole out a couple of commonsensical tips and tricks for a hassle-free retirement and also walk you through some of the most popular types of retirement plans out there. And, don’t worry, I’ll explain them in plain English, so you can actually understand what each of them is all about!

pie chart of how many Americans in the private sector are participating in an employer-based retirement plan

Planning for retirement: How to quit the 9 to 5

The easiest way to plan for retirement is to use one of the many freely available retirement planning calculators online. Typically, such a calculator will ask you to input some basic data, like how much you can save and how much you need to live on. But I’m going to explain just why these questions matter and why you need to be honest with yourself when answering them. Here are the questions:
  1. How much money do you need to live on?
Get real here. Don’t overestimate your needs, or you’ll end up feeling discouraged, like saving for retirement is an absolutely impossible goal for you to attain. Don’t underestimate either, because this can be a very tricky trap to get out of, once you actually retire.
A good, albeit too generic, rule of thumb, is to assume you’re going to need 80% of whatever you’re living on right now, once you retire. You might dream of a time of cruises and leisure, but health costs are likely to be quite high, as well, especially in your later years. Speaking of which…
  1. Can you predict your health care costs in retirement?
The answer is probably no. Yet, given the statement above, you should be able to have at least a rough idea. Remember that health care costs in old age are almost inevitable. In fact, recent estimates indicate that a 65-year-old couple, retired in 2012, will spend $240,000 on average on retirement healthcare alone. And, no, don’t assume that Medicare will be there to cover all those costs, because that’s simply not how Medicare works.
  1. Do you have a long-term care plan?
You should. Long-term care for the elderly can take a heavy toll on their loved ones’ time and budgets. The US Department of Health explains that 70% of people over 65 do end up needing care sooner or later in life. The costs of long-term care amount to over $100,000 per year in Washington DC—and half of patients need care for more than one year.

Types of retirement plans

Yes, understanding the differences between various types of retirement plans can feel like learning a foreign language. Sure, you can always head out to the official website of the Internal Revenue Service, but you’re only likely to get more confused there.
are Texans saving for their retirement
Image source: Business Wire
So, to save you some time, as well as potential embarrassment and confusion, check out the section below. I’m going to walk you through some of the most popular retirement plans out there, as well as their benefits and limitations. First things first: IRA stands for Individual Retirement Account. Start from there and make your way through the list.

The 10 best retirement plans that actually work

Let’s get one thing straight, right off the bat. There’s no such thing as a foolproof, 100% guaranteed plan that’s always going to work. I’m not the one to say it, but an actual financial service founder and president—Jennifer Landon, writing for This is why, when you consider retirement, you should always approach it not as one asset, but a complete package of income sources.
Here are the ten top retirement plans to consider:

1.       A pension plan

Don’t take it for granted though: in recent decades, pensions have become much less the norm and much more of an exception in the corporate environment. Sure, they’re your safest option, since the money is entirely contributed by your employer and managed by professionals. All you have to do is be eligible by having a long enough work track record.
However, while pensions continue to be offered to most government and municipality workers, they’re also all around less profitable. The majority are not adjusted for normal increases in the cost of living. In other words, expect to have to live on an amount of money calculated now, which is definitely not going to be worth as much in a few decades down the line.

2.       A defined contribution plan

More commonly known as a 403b or 401k, a defined contribution retirement plan puts you in charge. You’re the one who gets to decide where, when, and how much to pay up. At the moment, they’re considered the best option for most employees, as many of the employers who offer them will match every one of your dollars with one of your own.
Bear in mind that even such plans come with their constraints. For instance, if you were under 50 and contributed to a 401k in 2015, you could only contribute up to $18,000. People over 50 could provide an additional $6,000. A Roth 401k is taxable upfront, but most such plans are taxed on withdrawals.

3.       A Roth IRA

If you can get a Roth IRA, most experts agree that you should, after you’ve had a 401k plan from your employer. This way, you can contribute pre-taxes to the 401k and after taxes to the Roth IRA. Roth IRAs are tax-free, both to grow and to withdraw money from. They’re great, the younger you are—and you don’t need to have had a 401k before you open a Roth IRA.
The best part about contributing to a Roth IRA early on is that you can pay taxes at a known rate today and be tax-free down the line, in the unforeseeable future. However, the bad part about such a plan is that you might not be eligible for it, depending on your modified adjusted gross income and tax filing status. On the upside, though, you can keep contributing well into your retirement, since you don’t have to make any withdrawals. Furthermore, you can withdraw contributions penalty-free (although withdrawing earnings will be penalized by the federal government at a 10% rate).
eggs plated with inscriptions in gold on a stack of cash, marked Roth, IRA, and 401k
Image source: Dromo

4.       A regular IRA

If you’re an older saver, you can also opt for a traditional IRA and thus benefit from tax deductions upfront and tax deferrals down the line. In 2015, the contribution limit was $5,500 for people under 50 and $6,500 for those over 50. There are, indeed, some key differences, between one type of IRA and the other. Here are the most important ones:
  • Regular IRAs are not subject to eligibility rules based on income;
  • Though you can grow a typical IRA without having to pay taxes and can deduce taxes on your contributions, you will be taxed for those contributions and earnings when you start making withdrawal;
  • You can only contribute until age 70.5 and distributions are mandatory from that point on.

5.       A simplified employee pension plan IRA

If you’re self-employed, the simplified employee pension (SEP) IRA is probably your best option. You do have other types of plans at your disposal and what sets them apart is the amount of time they each require for managing them. The SEP IRA is the best bet for people who are sole owners, with no other employees but themselves. These plans are fairly easy to manage, their contribution limit is huge (a whopping $53,000 before taxes in 2015), and they also come with low costs.
For the self-employed who want to cut back on their owed taxes after a very profitable year, a SEP IRA is a great place for stashing some of that cash away. And, what’s even better is that on years when you don’t do so well, you don’t have to make much of a contribution.

6.       A nonqualified deferred contribution plan

NQDC plans work much like Roth plans, sans those pesky income restrictions and contribution limitations. For those lucky few who have already reached the maximum contribution limit on their other plans, an NQDC will accommodate their needs. This is also the reason why they’re known as the rich man’s Roth plan.
Though you may not be aware of this, execs and people in upper management echelons don’t benefit from a defined contribution plan or an IRA, like the rest of us, mortals. Don’t weep for them just yet, though. Unlike us, they can simply defer a fraction of what they earn, tax-free, until an undetermined point in the future. The money saved up this way is tax deferred and tax free. You can contribute however much you want, and, of course, contribute as much as you can afford to.

7.       A guaranteed income annuity

Annuities can work out very advantageously for the contributor. Simply buy this type of insurance today, invest your money in it, and then benefit from it after you retire. You get to choose if the money is disbursed annually, or on a monthly or quarterly basis. You can even get a one-off pay out of all the money at the same time.
Of course, in order for such a plan to work, you need to be absolutely sure that the company will be around for long enough. It has to be very stable, safe, well rated, and have a history of at least 50 to 75 years. That’s because it needs to be solvent and have enough liquidities down the line, when you actually retire and need the money.
Here are the types of annuity products you can benefit from:
  • Single-premium immediate annuity (SPIA). This kind of annuity works better in a different kind of economic climate, when interest rates are high and the income can be triggered upfront.
  • Deferred-income annuity (DIA). This kind of annuity puts you in control of the income stream and comes with an option for cash refunds. This means that the family is refunded the money, in the event of an untimely death. Don’t need the money? That’s okay, you won’t necessarily have to annuitize it.

8.       A cash value life insurance policy

Forget 401ks and IRAs: opt for this kind of tax-free vehicle if you can. You pay upfront for a plan that doles out accumulated cash value over time. It works as a loan, taken out against the death benefit, and use it as retirement income.
This income can either be taken out in regular installments or as a lump sum, at any point in your life, whenever you need it. The distributions on such a plan are tax-free, because the accumulated wealth has already been taxed. Basically, if your cash-value life insurance is worth $1 million, you can take out $500,000 when you retire, while the beneficiary of the policy will receive $500,000 after your death. If you’re a stay-at-home partner, this kind of policy works great as both life insurance and retirement money.
percentages of American men and women who believe life insurance is a necessity
Image source: PLJ Income

9.       Social security benefits

The debate on Social Security is heated, but the truth is that 90% of Americans aged 65 and over are on it—says data from the Social Security Administration. Indeed, none of us can tell if the system will survive, but the reality remains that, for the time being, it’s an essential ingredient to planning for your retirement.
The most important aspect about Social Security is when you decide to take it. Before retirement age, it offers a payout of 75%. Past the full retirement age, it goes up to the full 100%, but if you hold on until age 70, you actually get a 132% payoff.

10.   Real estate

It’s not within the scope of this post to address the viability of investing into real estate in general—suffice to say that if you’re a decade or less away from retirement, with not enough savings to your name to cover your living expenses, now’s the time to think about it. In fact, your priority should be to focus on the best income streams for whatever capital you have at your disposal. And real estate can be it.
Of course, it goes without saying that the best way to go about it is to buy property with the money upfront. Otherwise, you’ll be dragging along more debt into your old age, while also allowing for contingencies and other financial risks. These include taxes and money for repairs.
If you do opt to do this, bear in mind that generating rental income is not passive income. It entails putting in some work, which you may or may not feel up for in your olden years. However, if it’s a matter of risks versus opportunities for income generation, real estate is clearly one opportunity you should not pass up.

This article was written by Dividend Mantra. If you enjoyed this article, please subscribe to my feed [RSS]