The state of retirement planning in the United States is grim. More than a third of Americans surveyed believe they’ll never have the ability to retire, 59 percent plan to work longer and 41 percent said financial security in retirement would “take a miracle.” The good news is that saving for retirement doesn’t need to be overly complicated. Here are the top things to know about retirement planning strategies that even the least financially savvy can implement.
Ages 22 to 40: Start Saving
At this age you may find yourself living paycheck to paycheck. If you do have major financial goals, they likely consist of paying off student loans, saving for a down payment on a home, or covering the cost of raising children. In short, retirement is probably the furthest thing from your mind, but the sooner you start saving, the better.
At this stage, thanks to the power of compounding, even small amounts invested wisely can lead to massive gains. If your employer offers a retirement savings plan this is a great way to get started, especially if they offer matching contributions. Matching contributions are essentially free money, so you’ll ideally want to contribute enough to get the maximum match. If you’re not in a position to contribute enough to earn the maximum match, contribute what you can and build up over time.
One of the top things to know about retirement planning at this stage is that it’s most important to simply get started.
Ages 40 to 50: Create a Savings Goal and Cut Expenses
If you haven’t already, now is a great time to figure out how much you’ll need in retirement and create a retirement savings goal based on that number. If your savings goal doesn’t feel realistic, consider ways you can cut costs to increase your savings.
Cutting costs doesn’t need to be painful. By this age, lifestyle creep is common, which is when expenses you previously considered luxuries you now perceive as necessities. This doesn’t mean you need to return to living like you did in your 20s, but it does mean considering which expenses improve your quality of life and which have simply become habits.
Ages 50 to 64: Catch Up Contributions and Budgeting
Retirement is hopefully right around the corner and you may feel the pressure mounting to make sure you’re prepared. One benefit of retirement saving at this age is that you may be eligible for catch-up contributions. Catch-up contributions allow you to contribute more than the typical amount to an eligible retirement plan. In 2021 and 2022, you could contribute an extra $1,000 to an IRA and an extra $6,500 to a 401(k), 403(b), or 457(b).
Now is also the time to get serious about budgeting if you haven’t already. If you’re struggling to cut down on expenses, shift your perspective from one of deprivation, to one of prioritization. For example, instead of depriving yourself of eating out all the time, you’re prioritizing saving enough to retire when you want.
65 and Up: Withdraw and Manage Funds Strategically
A financially savvy retirement isn’t only about saving a certain amount; it’s also about withdrawing and managing money strategically once you retire. A general rule of thumb is to take no more than 4 percent out of your total retirement savings each year. If you transfer too much to cash, you may lose the opportunity for that money to continue growing.
You’ll also want to consider which accounts you take money from. Due to the various tax implications of different retirement savings accounts, not all accounts or withdrawals are treated equally. Depending on your income, state of residence, RMD status and other taxation variables, it may be best to withdraw your taxable savings before your tax-advantaged retirement accounts. Consulting with a professional is a good idea when deciding the order of withdrawal from your various account types.
The Takeaway
Retirement planning takes effort, but it is possible, even if you’re not financially savvy. If you’re in need of more personalized advice or additional accountability, consider working with a financial advisor to help you meet all your financial goals, including retirement. Contact us.
References for Retirement Planning:
CNBC.com, "The New Road to Retirement"
Department of Labor booklet: “Savings Fitness”
IRS.gov, "Retirement Topics - Catch-Up Contributions"
Thebalance.com, "How to Start Reducing Your Expenses Before You Retire"
Investopedia.com, "The 4% Rule"
Investopedia.com, "How to Manage Income During Retirement"
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