Key areas of pension planning include defining a time horizon, estimating expenditure, calculating the necessary tax returns, assessing risk tolerance and estate planning. Whether you or a professional money manager is responsible for making investment decisions, the right allocation of portfolios and balanced consideration of risk aversion and return targets are important steps in pension planning. If you have a workplace retirement plan (such as a 401 (k))) you may want to save additional money beyond the annual 401 (k) contribution limit.

A 401 (k) plan or 457 (b) allows you to put money from your paycheck into your retirement account before taxes. If you do not have a company pension plan, contributions to a traditional IRA are tax deductible. If this is the case, it is best to save into your own Individual Retirement Accounts (IRAs) or pension schemes.

Other pension plans, such as annuities, are not subject to the IRS Contributions Limit so that you can invest as much for your future as you want. The best retirement planning will enable you to have enough money to support yourself in retirement for decades to come. The most common investment approach to retirement planning is to achieve returns that cover the annual inflation-adjusted cost of living while preserving the value of the portfolio.

In this article, we look at the importance of smart retirement planning and the steps you can take to move towards a worry-free retirement. Unlike other pension schemes, your employer does not have to make contributions to a SEP or IRA. Some pension schemes offer tax advantages, but these are only available upfront if the savings are paid in full and before you withdraw money.

Determining your tax status before you start withdrawing money is a crucial part of the pension planning process. At the very least, you should have a workplace pension plan before you start making contributions to get the full benefit of your companies “contributions. The primary advantage of early retirement planning is that the portfolio grows organically and ensures a realistic return.

Many defined benefit plans tend to be expensive and complex for employers to run, so many companies opt for alternative retirement plans such as 401 (k) s. Many DC plans also offer Roth versions such as the Roth 401 (k ), where you use tax dollars to contribute and can take the money in retirement tax-free. Many workers have a 401 (k) or an IRA that give them two tax-exempt ways to save for retirement and they can make the most of it.

Workers pay money into the plan before tax, but contributions are not considered taxable income, so the money grows tax-free in retirement. If you don’t have an employer-sponsored plan, saving 6% of your income (the average pension contribution rate) is a good starting point to work your way up. Saving and Investing for Retirement As mentioned above, Social Security will probably not be enough to fund your entire retirement income if necessary, but if it does, it should replace about 40% of the average American income.

Your longevity needs to be taken into account when planning your pension so that you do not outlive your savings. Traditional IRAs and tax-exempt plans allow you to get significant tax relief on what you save for retirement. Under a 457 (b) plan, contributions would rise tax-free until retirement, after which workers would be able to withdraw the money before it becomes taxable.

Use this explanation to clarify whether retirement is right for you. For example, you can start paying premiums until age 65, but after that you should plan to retire early. When you retire at 65, this means you will need your money for at least 30 years.

The information contained herein is of a general and educational nature and should not be considered as legal or tax advice. Tax laws and regulations are complex and subject to changes that may affect investment performance. Fidelity makes no representation with respect to this information or the results derived from its use and disclaims any liability arising from the use or tax position in which you rely on this information.

For more detailed information about taxes, please consult IRS Publication 590 or a tax professional with respect to personal circumstances. Although not every company or financial product is available on our website, we are proud of the guidelines and information we provide and the tools we create that are objective, independent, straightforward and free of charge.