Many people do not seriously consider planning for retirement until later in their careers, but it really is a topic everyone should begin tackling as early as possible. Everyone’s situation is unique, and for many, retirement will last 30 years or more and will make up a significant portion of their life. Below, we review some things to consider in each decade of your working life to help improve your chances of a successful retirement.
20s – Start Early
When you are first starting out in your career, you probably have several financial goals you are focused on. This may include saving for a wedding, a down payment for a home, or planning to start a family. Whatever your financial goals are in your 20s, saving for retirement should be a top priority.
A major component of saving for retirement is delaying instant gratification for a better chance of financial security later, so you may have to forgo some short-term wants to meet your long-term goals. Saving for retirement in your 20s not only helps you put that much more away, but it also helps you take advantage of compound interest, a powerful tool that allows investors to earn interest on interest and can multiply wealth at an accelerating rate.
For example, a 25-year-old wants to have at least $1 million for retirement at age 65. Assuming a 7 percent annual return on his or her investment, that individual would have to save around $400 per month to reach that goal. If that same person waited until 35 years old to begin saving, he or she would need to save around $825 per month. At 45, the savings needed would be around $2,000 per month, and at 55, the amount needed would grow to around $6,000 per month.
If you have the option to save into a 401(k) plan at work, aim to put away 15 percent of your income. If you cannot save much at first, start with what you can, and increase your savings 1 percent per year until you get where you need to be. If your company offers a 401(k) match, you should always try to at least contribute enough to get the matching contribution, because that is “free money”. If your employer does not offer a 401(k) plan, you can save into an account like an IRA or Roth IRA. Remember, time is on your side.
30s – Stay Focused
If you were serious about saving for retirement in your 20s, great job. Keep it up. If not, it is time to get serious. Remember, the money you have put away for retirement should be earmarked as such and should not be used for other expenses. Pulling money from retirement accounts not only reduces your ability to fully utilize compound interest, but it also exposes you to taxes and early withdrawal penalties.
Focus on paying off any outstanding debt like student loans and credit cards and avoid taking on additional unnecessary debt. Stick to a budget, understand your expenses, and live within your means. This can ultimately enable you to put more money toward your retirement goals.
Carefully planning and budgeting for your other financial goals can help you reach your retirement goal. If you have children and want to help them pay for college down the road, start college planning early and save for that goal now. A 529 plan is a great way to save for and fund college expenses.
40s – Evaluate Your Progress
At this point in your career, you will be entering your prime earning years. Take stock of your financial situation and what you need to do going forward to reach your retirement goals. If you are not where you want to be, you still have time to course correct. Confirm you are putting enough money away to meet your goals and make the appropriate adjustments.
Understand the impact of purchases of “big ticket” items like nicer vehicles and expensive vacations. People tend to spend more as they make more, so be aware of that pitfall, and understand the difference between what you may want and what you really need. Remember, a key to successful retirement planning is forgoing instant gratification for a future benefit.
You may have children who are entering college. If you plan on helping them with college expenses, hopefully you have already started putting money away. If not, helping your kids pay for college is important, but making sure you are able to fund your retirement should take precedence.
50s – Stay the Course
Continue to save, save, save. If possible, your goal should be to max out the contributions to your retirement accounts each year. The IRS allows catch-up contributions for individuals aged 50 and older. For 2021, the IRS allows individuals to contribute $19,500 annually into a 401(k) plan and an additional $6,500 for the catch-up provision. For IRAs and Roth IRAs, the IRS allows for contributions of $6,000 annually and an additional $1,000 for individuals aged 50 and older.
Think about when you plan to retire and what your exit strategy will be. Remember, retirement can last for 30+ years. Are you on track to retire when you want, and how does your current lifestyle translate to retirement? Understand what your expenses will be in retirement. This will include health-care costs and potentially long-term care costs later in life. You may be in good health now, but that may not always be the case. Preparing for the worst case scenario can help you avoid an unplanned expense that can be financially devastating later. Identify your other sources of income in retirement. This can include Social Security income, a pension, and other taxable and tax-deferred accounts.
If you find you are not on track, consider the viable steps you can take to get where you need to be. Does that include saving more, spending less, working longer or maybe a combination of the three? You may need to lower your expectations for your lifestyle in retirement.
This is also a good time to review and understand how your assets are allocated and ensure your investment strategy is still in line with your risk tolerance, risk capacity and time horizon. A financial planner is a great resource to help you sift through the noise and put your retirement goals and investment strategy into focus.
60s – Implement Your Plan
At this stage in the game, retirement is likely just around the corner. You should continue to max out your retirement contributions including the catch-up provisions allowed by the IRS. Once you hit age 59½, you can start taking income from your retirement accounts sans the early withdrawal penalty. If you contributed to the accounts on a pre-tax basis, keep in mind the distributions will be taxed.
Think about what role you want Social Security income to play in your retirement. You can begin taking monthly Social Security benefits as early as age 62, but it will be at a reduced amount for the rest of your life. You will get the full benefit amount at your full retirement age, and you will receive an increased amount if you wait until age 70 to activate the benefits. You can expect your Social Security income to increase 8 percent for each year you wait to activate benefits after age 62. The amount you receive will not increase past age 70. Remember, Social Security benefits are only meant to supplement a portion of your retirement income needs. If you plan to receive a pension, that could also play a factor when determining your retirement timeframe.
You probably have grand plans for your post-retirement years that may include some new hobbies, traveling, purchasing a new vacation home, or even helping your grandkids pay for college. As you get ready to call it a career, you should have a clear understanding of how you are going to fund these activities. One rule of thumb is to aim to withdraw no more than 4 to 5 percent per year from your retirement accounts early on.
It might be worth considering covering your essential expenses with investment vehicles that provide a source of income. You will also need to be cognizant of the effect inflation will have on your spending power over time. While you may be taking less risk with your investments at this stage, it will be important to balance the risk in your portfolio with meeting your funding needs throughout retirement.
When you turn 65, you will be eligible for Medicare, so review the relevant enrollment requirements for your situation. Healthcare costs in retirement can be significant, so you will want to have a plan in place to ensure you can meet any medical needs that may arise.
Authored by Dennis Culver, Insight Wealth Strategies
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Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.