Retirement planning is usually the most significant financial goal people will work toward. No matter where you are in your career, considering how to plan for retirement is essential so you can spend your golden years on your terms. As you think about retirement, creating a road map to follow through the decades can help you confirm you’re on track. It can also save you some uncertainty about the future.
To ensure you retire the way you want to, start thinking about how much you’ll need and what you want your retirement to look like. Keep reading for some tips to help spark the planning process.
1. Determine how much income you’ll need to plan for retirement.
Many factors determine how much income you’ll need to plan for in retirement. Where you live, the kind of car you drive, health care costs and travel plans, among other things, will drastically affect what you spend during retirement and, therefore, how much you’ll need to save.
Many experts estimate that you’ll need to replace 70% to 90% of your pre-retirement income to maintain your current standard of living. While you don’t need to calculate an exact amount down to the last penny, having a rough estimate of how much you’ll need to live the way you want can give you a goal to pursue.
Use your current expenses and lifestyle to help you get a feel for what you might spend when you retire. If you think you’ll downsize your home or move to a lower-cost area, factor that into your planning. Develop a rough budget of expenses to help determine the income you’ll need. And refine it as you get closer to retiring.
As you work on your retirement income planning, it’s essential to recognize that many factors are outside your control. Predicting things like future inflation and how long you’ll live is difficult, so add a healthy cushion to your goal number to ensure you’re prepared for the future.
2. Schedule periodic check-ins to stay on track.
One of the most complex parts of retirement planning is maintaining a long-term focus. To help you better prepare, set up benchmarks to hit as you age to stay on track. It also helps to schedule periodic check-ins to confirm you’re on the right path.
For example, here are some general milestones to consider:
Planning for retirement in your 20s
When you get your first job, start contributing to your employer’s 401(k) if available, and consider opening a Roth IRA. Aim to save around 15% of your gross salary across all your retirement accounts. Many companies offer matching contributions as a benefit for employees, up to a specific dollar amount or percentage. If your company offers a match, contribute at least enough of your own dollars to get the full match amount. If you don’t, you’re leaving free money on the table.
Planning for retirement in your 30s
As your income increases, increase your retirement savings to ideally between 15% to 20% of your gross income. Whatever you set aside for retirement during this decade, don’t touch it. Leave your money to grow as much as possible. You will you avoid paying penalties and taxes on any early withdrawals. Plus, the longer you save, the more time compound interest has to work in your favor.
Planning for retirement in your 40s
Work to reduce debt and avoid lifestyle creep. This is likely one of the most expensive decades for people, especially if you have a family. But now is a great time to look for ways to reduce significant expenses. Your 40s are also a great time to start honing in on big-picture retirement expenses and developing a plan for what you want to maintain or reduce.
Planning for retirement in your 50s
Start seriously thinking about your retirement and how your day-to-day living will look. Consider medical costs, taxes, where you want to live and if you plan to travel extensively after retirement. Increase your retirement savings to include catch-up contributions once you become eligible at age 50. It’s also a good idea to speak with a financial planner to help you ensure you’re on the right track.
Planning for retirement in your 60s
Research Social Security and Medicare and determine how each program will fit into your retirement life. Consider inflation and the required minimum distributions (RMDs) you’ll need to take starting at age 73 to help you determine how long your savings will likely last.
If you aren’t happy with your savings, it may be a good idea to consider delaying retirement. While that might not be your ideal plan, working for a few extra years can help you get ahead. Plus, the longer you wait to take Social Security benefits (but only up to age 70), the bigger your benefit will likely be.
3. Start planning for retirement as early as possible.
Saving for retirement as soon as possible ensures you’ll have enough money in your golden years. Opening a retirement account isn’t usually your first thought after landing your first job. But the sooner you start saving, the better off you’ll be.
You may have heard of the magic of compound interest, which allows you to earn money on your principal contributions and the interest you previously earned. The longer your money is invested, the more your account will likely increase, as long as you leave it alone to continue compounding.
While you might have many competing savings goals worthy of your time, prioritize retirement savings whenever possible. The more consistent you are with making contributions, the better chance you’ll have at making your retirement savings last.
4. Choose the right retirement plans for you.
There isn’t one mix of retirement plans that will fit everyone, but it’s generally recommended to have both pre-tax and after-tax plans. A combination of different retirement plans can be an effective savings strategy and help you take advantage of different tax benefits, both now and when you retire.
Many people are familiar with a 401(k) as a tax-deferred option. These plans, also called pre-tax accounts, lower your taxable income for the year in which you make the contributions. However, you’ll have to pay taxes when you withdraw the savings in retirement. If you don’t have access to a 401(k) through your employer, consider other pre-tax plans like a Traditional individual retirement account (IRA), SEP IRA or SIMPLE IRA.
After-tax retirement plans, like Roth 401(k)s or Roth IRAs, take the money you’ve already paid taxes on and let it grow tax-free. When you’re ready to withdraw, you likely won’t have to pay taxes on your contributions or the interest you earn, as long as you meet specific requirements, like being older than age 59½ and owning the account for more than five years.
5. Diversify your portfolio.
It’s standard advice to reduce your risk exposure in the stock market as you get older. You might think that aggressively investing your money for as long as possible will earn you the biggest rewards. Just remember that what goes up must come down.
To combat this, diversify your portfolio based on your risk tolerance and how close you are to retirement. Many retirement professionals advocate taking less risk as you get older since you want to focus on keeping what you have, especially when you’re within a decade or so of retirement. Use an online tool to help you determine your diversification allocations, or work with a financial professional to help you get the right mix of risk and safety.
6. Don’t forget retirement tax planning.
As you dive deeper into retirement planning, don’t forget about taxes. You may think your taxes will automatically go down when you stop working, but that may not be true.
Depending on the type of income you have, like Social Security, pensions, retirement accounts, non-retirement investments and other sources, you may see your tax bracket rise, especially as you start to withdraw from pre-tax accounts like a 401(k).
Retirement tax planning can get complicated. It’s a good idea to work with a financial or tax adviser to help you develop the best retirement tax plan for your situation.
7. Consider how Social Security will fit into your plans.
Deciding when to take Social Security can considerably impact your retirement plans. For people born in 1960 or later, the full retirement age is 67. At that age, you’ll be eligible to receive 100% of your benefits. If you claim benefits before your full retirement age (starting at age 62), your benefits may be reduced by up to 30%.
On the other hand, if you delay taking Social Security, you’ll receive an 8% increase for each year (up until you turn 70) that you delay taking benefits after your full retirement age.
Deciding when to take Social Security benefits is a personal choice, but it can impact your retirement income plans significantly. In general, waiting to take your benefits as long as possible is usually the best choice, but circumstances may not allow you to do so. You may want to work with a financial planner to help maximize your Social Security benefits based on your situation.
Planning for retirement can get complicated. Don’t let fear of the future keep you from setting goals for your retirement. Even if you can’t save as much as you’d like to right now, focus on saving what you can so you develop the habit and slowly increase the amount over time. Take advantage of employer matches and catch-up contributions. As you approach retirement, consider working with a financial planner to help you maximize your retirement income planning.
While you can’t predict the future, figuring out where you’re aiming can help ensure you’re on track to make your retirement dreams a reality.