Master 4 Retirement Planning Basics Before Exploring Advanced Investing Strategies
As your retirement day approaches, you’ll likely hear advice about obscure-sounding terms like “bond ladders,” “backdoor conversions” and “sequence-of returns risk.” Fortunately, you wouldn’t be alone in being a bit overwhelmed.
Across retirement forums, one of the most common questions is, "Can someone explain this in plain English?” If you fall into this camp, this guide is for you. Read on to explore four common retirement concepts you've likely heard about, and just what they entail in a way that won't make you feel like you're in over your head. In fact, you may walk away with a renewed sense of confidence.
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Bonds: Boring, Secure
A bond is simply a loan you make to the issuer, typically a company or the government. In return for your money, you earn interest, and at maturity, you receive your principal back.
There are more layers to this explanation, of course. But in the simplest terms, that’s what investors need to know about bonds, per the SEC.
Most investors use bonds to either generate regular interest payments or to preserve their principal, or both. While there are some types of bonds that are riskier than others, for the most part, they are considered to be more conservative than capital-appreciation investments like stocks.
IRAs: Basic Retirement Plans
An IRA is an individual retirement account, meaning individuals open them on their own, separate from any employer-sponsored plans like a 401(k). The two main types are dubbed “traditional” and “Roth” IRAs, according to the SEC. Investors use them to grow retirement savings while deferring or avoiding taxes on the earnings, depending on the account type.
For 2026, you can contribute up to $7,500 to a traditional or Roth IRA, or up to $8,600 if you’re ages 50 and older, per the IRS. IRAs function essentially the same way as ordinary brokerage accounts when it comes to investments. With a few, limited restrictions, you can own the same type of stocks, bonds and mutual funds in IRAs as you can in regular investment accounts.
Withdrawals: An Important Consideration for Retirees
The IRS requires annual distributions from most retirement plans, including traditional IRAs once you turn 73. If you miss the deadline for these required minimum distributions, you can owe up to 25% of the amount you should have withdrawn in penalty taxes.
These RMDs, as they are called, are required whether or not you need the money, and they are taxable. That’s why it’s important for retirees to plan ahead. Note that RMD rules do not apply to Roth accounts. You can keep your money in a Roth IRA or Roth 401(k) for as long as you wish, according to the IRS.
Withholding: How Does It Really Work?
Withholding refers to money held from a distribution so you can satisfy some or all of your tax obligations. When you take money out of an IRA, for example, many firms default to a 10% automatic withholding rate. You can usually adjust that higher or lower by simply instructing your plan provider, per the IRS.
The catch is that it can be hard to get the withholding amount exactly right. If you withhold too little, you could owe a chunk at tax time. If you withhold too much, you're giving the government an interest-free loan. This is a good time to speak with your tax professional about what your default withholding is and whether or not you should adjust it.
Why Simple Beats Sophisticated Here
Simple trumps sophisticated when it comes to retirement planning because getting the basics wrong can result in significant consequences. Specifically, a 25% penalty on a missed RMD or a withholding rate that leaves you owing money you didn't expect will do far more damage than a suboptimal bond ladder ever could.
Before you can even consider more complex strategies, you should understand how retirement plans work and the characteristics of traditional investments like stocks and bonds. Once you have these in place, more complex topics like tax optimization or advanced investment strategies might make sense. Understanding the rules that apply to you and what happens if you ignore them is the cornerstone of true financial literacy.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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