Retirement planning may feel like a daunting task. How much do you need to save? Whatâs the best way to grow your savings to support yourself once you stop working? Where should you be investing your retirement funds?
Thereâs no one-one-size-fits-all approach, but getting started on retirement planning is easier than you think. Letâs take a look at the basics you need to know.
Retirement planning is the process by which you prioritize your income and assets to support your ideal lifestyle once you stop working. Retirement planning involves devoting a portion of your paycheck to one or more retirement accounts, such as a 401(k) plan or an individual retirement account (IRA), which can be a traditional or a Roth IRA, among other forms.
Investing early helps you reap the benefits of compounding interest over time. You also need to take into account your risks at various stages of life as you decide how and where to save for retirement.
âBe familiar with all the saving tools and strategies available to you,â said Kevin Gaines, chief investment officer at American Financial Management Group. âUsing the âbest toolâ for a specific need may sound right, but you need to have some flexibility in case things change.â
Retirement planning is an ongoing process, and what works for you now may change over time. Plan to reevaluate your cash flow needs every year and make adjustments to your retirement planning strategy.
The right strategy for retirement planning will look different for every person or family, but all retirement planning begins with assessing your resources and setting goals.
You begin the retirement planning process by quantifying your resources, said Charles L. Failla, a certified financial planner at Sovereign Financial Group, Inc. How much is your salary? Do you have valuable assets, such as a house? How much money do you have in savings? Getting a full picture of your net worth is the first step.
The next step to approaching retirement planning is to think about what you want your retirement to look like, and how your savings can make those dreams a reality.
âRetirement is not a goal â what you will do during retirement is the goal,â said Gaines. âYour goals create a savings target while youâre working, and then, as you enter retirement, an income target.â
To live comfortably during retirement, youâll need to save enough to cover at least your basic needs, including housing, transportation, food, medical care, insurance and clothing. Retirement planning can also address what youâd need to do to achieve your ideal retirement lifestyle, whether that includes travel, hobbies or entertainment.
âBeyond goals, other conversations such as long-term care funding and estate planning need to be part of a retirement plan,â said Gaines. âIt is very important to understand what could go wrong and how the plan will adjust.â
Online tools, like this retirement income worksheet and this retirement expenses worksheet, can help you estimate your finances during retirement. Understanding this information can help you develop a strategy to withdraw the money you need from your assets while âminimizing the risk of outliving your savings,â added Gaines.
Retirement planning gives you a road map to determine how youâll save enough for your non-working years. However, figuring out the âmagic numberâ can be tricky. Here are two common principles that can help you estimate the amount youâll need for retirement:
So, based on these rules of thumb, whatâs the best age to retire? A 2018 Gallup poll found that the average American expects to retire at age 66. The earliest people can start collecting Social Security is age 62, with full benefits kicking in between age 65 and 67, depending on what year you were born.
While these statistics can serve as a helpful guideline, calculating the right retirement age for you will depend on your individual financial situation. The longer you delay retirement and continue working, the more time you have to build your savings and the higher your Social Security benefits will be (until age 70). Early in your retirement planning, you can assume youâll retire around age 65 and set your monthly savings goals accordingly. Once youâre in your 50s, reevaluate any potential gaps in your income and set a more specific retirement date to work toward.
How you approach retirement planning may change throughout your life. Here are some retirement planning tips to consider at different stages.
This is the time to start building good habits: âIf you get into the habit of saving now, it will be easier to stick with it in the future,â said Gaines.
Financial advisors encourage young adults to maximize their contributions to retirement accounts to take advantage of compounding interest over the decades ahead. This compound interest calculator will show you how early investing can help your money grow over time.
If your employer offers a match to your 401(k) contributions, make sure you contribute enough to hit the maximum so youâre not leaving money on the table. While young adults who do this will have more time to earn compounding interest on the matching contribution, itâs a smart retirement planning strategy at every stage of life.
If youâre enrolled in a high-deductible health insurance plan, it may be a good idea to open a health savings account (HSA), said Gaines. An HSA can offer tax savings on your contributions, earnings and withdrawals if used for eligible medical expenses. Plus, after age 65, you can spend the money in your HSA on anything you want without paying taxes or incurring any penalties.
Throughout your 30s and 40s, continue to increase the rate at which you save for retirement, Gaines advised. This can be challenging if youâre juggling other major expenses, such as a mortgage, consumer debt and the costs of a growing family.
âBudgeting is critical,â Gaines said. âHopefully your younger self created a savings discipline that youâre now using [when you have] so many other demands on your money.â
If you find that youâre maxing out your 401(k) or IRA contributions, you may need to start exploring other savings vehicles. A certificate of deposit (CD), brokerage account or automated micro-investing app are all potential places to squirrel away extra money for retirement.
The countdown to retirement is on and, as such, you need to manage the risks of your investments. When you have less than 10 years until your anticipated retirement date, adjust your portfolio to no more than 40% to 50% in stocks, the riskier asset class, said Failla. Allocate no more than 20% of your portfolio to stocks when youâve got five or fewer years to retirement, eventually bringing it down to a majority of low-risk investments (such as CDs and money market accounts) when youâre in your final year of work, he advised.
You can also start making more precise estimates on your financial goals and retirement expenses during this stage of your life. Eliminate your debt (if you didnât already do so earlier in your career) and take advantage of catch-up provisions, which allow people to contribute an extra $1,000 to their IRA or an extra $6,500 to their 401(k) each year starting from age 50.
When it comes to retirement planning, you have a few different options. This article explains the different retirement plans, including 401(k) plans, traditional IRAs, Roth IRAs, SEP IRAs, HSAs and Roth 401(k) plans, along with tips on choosing the right option for you.
While some people may manage their portfolios manually, many others choose to work with a financial advisor who can analyze their individual circumstances and offer advice on where to invest their money for retirement.
You can also open a retirement account managed by a robo-advisor, which uses sophisticated algorithms to invest your retirement savings in diversified portfolios that meet your needs. This could be a more cost-effective option than working with a traditional financial advisor.
Regardless of which option you choose, whatâs crucial is to consider what works best for your personal financial situation and to start saving sooner rather than later.