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Practical Planning Tip: Basics of Financial Planning - The Long-Term Bucket

March 01, 2024

Today we will continue our discussion on the basics of financial planning by using the bucket approach. We already discussed the short-term bucket, so we will now jump to discuss the LONG-TERM Bucket: Afterall, In terms of importance, the long-term bucket is the next focal point. These are funds earmarked for decades in the future. They are being saved and invested to give you the option to retire at some point down the road. Most people don’t want to work forever and many people do not have the luxury of continuing to work as their health deteriorates with age. That’s why saving for retirement in this long-term bucket is important.

There are many wonderful, tax advantaged accounts to help investors save for retirement. This includes an Individual Retirement Account (or an IRA), a 401(k) through a for profit company, a 403(b) for a nonprofit organization, government plans, SEP, SIMPLE IRAs, and more. Some employers may even contribute to their employee’s retirement account, which makes saving for retirement more manageable.

There are rules of thumb for retirement savings. Someone starting to save in their mid-20s or early 30s, should allocate 10% to 15% of their income for retirement, including any employer match. If someone starts saving later in their career, this amount will necessarily need to be greater to meet retirement goals.

From a tax perspective, many investors have both a traditional and Roth option. Traditional accounts invest pre-tax funds, the money grows tax deferred, and then the investor pays tax when the funds are withdrawn. In Roth funds, on the other hand, the investor contributes after tax dollars, the money grows tax deferred, and when the money is withdrawn there is no tax paid, if all conditions are met. Determining the optimal strategy for you depends on your personal tax situation and retirement plans, so it’s worth speaking to your financial advisor. However, the most important aspect of all is making sure that you are socking away enough money towards retirement and investing it prudently. The tax benefits are secondary.

You can WATCH the full video here.