Retiring by the age of 37 is a wonderful goal. Moreover, it is attainable if you approach it with the right strategy and get an early start with savings and investing. You could pay a financial planner a hefty sum of money to create a great retirement plan for you and regularly update your plan to keep you on track. However, paying fees unnecessarily is counterintuitive to your primary goal. That is to save and invest as much money as possible. Do it yourself retirement planning is a great option to consider if you want to maximize every dollar. You can start preparing your retirement plan today.
The Best Three Solutions
Investing your funds into a tax advantageous retirement account is a veritable necessity for an early retirement plan. You certainly want other funds available in non-retirement accounts. In this way, you can live comfortably in the years before you reach retirement age. You may even set up passive income streams to live off of during this period.
When taking a DIY retirement planning approach, you can more easily determine how much money you should allocate to each of the different types of accounts available. The reason is that you understand more about what the various retirement account options are.
Many companies offer their employees a 401(k) retirement plan. However, not everyone works at a company that offers these plans. In fact, many are self-employed individuals who need a different retirement planning option.
A solo 401(k) plan is a great retirement account for those with a DIY retirement planning approach or are self-employed. You can also take advantage of it if you work full-time in a salaried position and have a part-time side. Through this type of retirement plan, you can contribute your business funds as well as your personal funds into the account. As a consequence, this gives you the enhanced ability to better control your finances.
Your contributions into a solo 401(k) plan use pre-tax dollars. This means that you can dramatically offset your tax burden now. Max out your contributions to the account. The funds in your solo 401(k) account will be taxed when you withdraw them at a later date.
However, many people will be in a lower tax bracket in their years of retirement. Therefore, this strategic financial move can result in considerable tax savings. Your gains on the account balance will also not be taxed until you take out distributions.
If you are under 50, you can contribute up to 25 percent of your income per year toward this account. The maximum contribution limit is $54,000 per year. There is a higher limit if you are over 50.
As you can see, you can contribute an incredible amount of money into this type of retirement account. Moreover, these are funds that can continue to grow for you until you reach retirement age. If you plan to contribute funds to an employer-sponsored plan rather than to a solo 401(k) account, keep in mind that these types of plans have different contribution limits.
With a solo 401(k) plan, there is a limitation regarding the number of employees you can have and the number of workers that can work for you per year. A Simple IRA is like a solo 401(k) plan in that it is there for self-employed individuals. However, you can use this plan for do it yourself retirement planning if your business has up to 100 employees. These plans may also have fewer fees and are less restrictive than a 401(k) plan. Therefore, many self-employed people prefer them.
Notably, with a Simple IRA, the employer or business has to match your contributions up to three percent of your gross income. Otherwise, the employer may pay at least two percent regardless of whether you contribute personal funds or not. When you are self-employed, these requirements give you a great deal of flexibility. You can determine where your retirement contributions will come from.
If you are under 50, you can contribute up to $12,500 in a Simple IRA each year. This does not include the employer-matching contribution. Therefore, it is possible for this account to accumulate up to $25,000 per year. This is based on both employer and employee contributions. The contribution limits are considerably lower in comparison to a solo 401(k) account. However, a Simple IRA is preferable when you plan to contribute less per year. That is because of the lower fee structure.
Many people will roll over an employer 401(k) into a Simple IRA after they leave their job. The reason is the benefits of a Simple IRA. If you are planning to retire early, you can consider taking advantage of your employer-sponsored plan in your working years. After that, you can roll over the funds into a more advantageous Simple IRA account. There is no cost in association with rolling funds over into a new account. The process can often get to completion with a simple phone call.
Bonus read – Early Retirement Health Insurance Options
Simplified Employee Pension
Another type of retirement account you should consider if you are thinking about taking a do it yourself retirement planning approach is a Simplified Employee Pension. It also goes by the name of SEP. A SEP also speaks to self-employed individuals rather than employees with a salary. These plans use pre-tax dollars as contributions, and the funds grow tax-free. The money is not taxed until you withdraw it, and it is then taxed at your current tax rate level. In this way, this type of account is similar to the previous two options that I described here.
As is the case with the 401(k) plan, you can contribute a sizable amount of money into this account each year. The limit remains at 25 percent of your net income. There is a cap on the contribution amount of $53,000 per year. This amount receives an adjustment for inflation each year.
You can easily open a Simplified Employee Pension account at most banks or brokerage firms within a matter of minutes. These accounts typically have no fees. However, you may find a few financial institutions that charge low fees.
With do it yourself retirement planning, you can avoid paying a financial planner unnecessary fees. However, it is important that you consider the big picture when creating your financial plan. You need retirement funds to grow at a great rate from now until the time when you can take distributions. You also need other passive income streams to rely on. That is between the time you retire at age 37 and the time when you can take distributions.
The best approach to do it yourself retirement planning is to look at these two stages of your life separately. Plan for each one fully and carefully. Use these various retirement accounts to help you achieve your goals. Feel free to leave your comments and suggestions about do it yourself retirement planning below for others to read.