Retirement Planning By Decade
Written By: Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®
Getting ready financially for retirement is a life-long process. While saving in your 50s and 60s becomes top-of-mind, it is also important in your 20s and 30s but can be challenging with many other competing priorities.
Everyone hits different milestones in their lives at different times. It is important to get an early start on retirement savings, even if it doesn’t bring immediate gratification. Conversely, it’s never too late to make progress towards retirement.
If you break this multi-decade goal down into manageable pieces, it becomes more doable. Let’s look at some things to focus on at various stages in your life:
In Your 20s: Take Advantage of Compounding!
Retirement is a long way off, but at this stage you have one of the biggest allies on your side—compound growth! Having so many years until you’ll need your retirement savings can allow for tremendous growth.
- Try to save 10% of your gross salary. Paying yourself first is a key step to accumulating wealth. If you can stretch to saving 15%, you’ll give yourself a serious advantage. If you can’t start at 10%, save as much as you can. Getting started is the most important thing.
- Focus on Roth options. Most retirement accounts allow you to save with either pre-tax dollars (traditional) or after-tax dollars (Roth). Saving with pre-tax dollars gives you a tax deduction now, but the funds will be taxable when they are withdrawn later. Saving to a Roth account does not provide a tax deduction now, but the money grows tax-free if you use it for retirement. Because your income is probably relatively low at this point in your life, it’s likely that the long-term, tax-free growth provides a better tax benefit than the deduction you might receive today.
- Enroll in your employer plan. If your employer offers a retirement savings plan, that’s oftentimes a great place to start. Many employers will make contributions on your behalf, either through an employer match or profit sharing (or both!). Be proactive, as many plans will automatically enroll you at a low savings rate. Try to start at 10% of your salary.
- Use an IRA if you don’t have an employer plan. IRAs can also be a great way to start saving for retirement, especially if you don’t have an employer plan available. While you won’t receive employer contributions, you are able to save to either a Traditional or Roth IRA and get the same tax benefits.
- Start with a Target Date fund. Deciding what to invest in can be a daunting task, especially when you’re starting out. Don’t let that delay you. Target date retirement funds make your initial investment decision easy. Choose the fund that closely matches your expected retirement year and let it do all the work for you. The fund manager will invest in a diversified portfolio of stocks and bonds. In your 20s, the fund will invest mostly in high-growth assets like stocks and will slowly reduce the risk as you get closer to retirement.
In Your 30s: Fine Tune Your Savings Strategy.
- Save at least 15% of your gross salary. As you get older, hopefully your income is increasing. Be sure to also increase the percentage you are saving for retirement. Try to save at least 15% with a stretch goal of 20%. If you’re just starting out, you’ll want to try to set the target as high as you can to try to make up for some lost time. If you’re having trouble hitting these targets, it may be time to take a close look at your budget to find the cash to save.
- Don’t touch what you’ve already saved. If you’ve been able to save to a retirement plan up, don’t make the mistake of cashing it out when you change jobs. It’s perhaps the number one mistake people at this age make and can cause a serious setback. Withdrawals at this stage are taxable and most likely subject to a 10% early withdrawal penalty. Plus, you’ve robbed your future self of money in retirement. Instead, transfer the funds either to an IRA or your new employer’s retirement plan to maintain your progress.
In Your 40s: Keep Your Spending in Check.
- Check your progress. After a decade or two of saving, it’s a good time to check and see how you’re doing. You can use an online retirement calculator to get a quick idea. Now might be a good time to consider hiring a professional financial advisor. A good advisor will not only help you check your progress, but will help you stay on track, while helping you navigate through the critical stages that are yet to come.
- Watch out for lifestyle creep. As you move into your prime earning years, avoid the tendency to spend more as you make more. Lifestyle creep can derail an otherwise sound retirement plan. While it’s ok to increase spending to some extent, be sure to increase your savings rate, as well. Proper balance is important. Committing to a strategy to save a certain percentage of every raise, bonus or other windfall, like an inheritance, will help you stay the course.
- Prioritize your goals. The temptation to prioritize goals based on when they occur is ever present, but this may not always be the best way to look at things. There is often a temptation to pay for what’s coming up next—like college expenses for your children. While it’s an admirable goal and can get them started out on a good path, be sure you don’t do so to your own long-term detriment. If you divert too much to education savings, you may not be able to afford retirement. Ultimately, what your kids really need from you is to be able to take care of yourself in retirement, so they don’t need to chip in at a time when they’re likely trying to raise their own family. You can always finance education, but you cannot finance retirement.
In Your 50s: Start to Visualize Your Income Plan.
- Estimate your retirement income. Now is a good time to have a formal financial plan in place. A financial plan will help project what retirement might look like from a cash flow, tax and investment perspective. It will also start to help you figure out how much income you will live off of during retirement. Getting a plan in place early also allows ample time to make adjustments to hit your goals. It’s also a good time to start annually tracking your estimated Social Security benefit.
- Save even more. You’re likely in your peak earnings years. You should also be in your peak savings years!
- Consider downsizing. Once the kids are grown and out of the house, consider downsizing. Doing so could both increase the size of your nest egg by investing the proceeds, but also reduce future expenses allowing you to save more now and spend less in retirement. Also consider things like your future health and mobility when selecting a new home. Is a single-story ranch home more appropriate? Does it have a walk-in shower? Are the doors and hallways wide enough for a wheelchair, should you need one in the future?
In Your 60s: Complete Your Income Plan
- Plan for a long retirement. There is a greater than 50% chance that at least one member of a 60-year-old married couple will reach age 95. Now is the time to stress test your portfolio against longevity and make sure you will have enough money to live a long, healthy retirement.
- Consider inflation. While inflation has averaged around 2% for the past 20 years, recent readings have been in the 5-7% range. While it’s unlikely that long term rates will remain that high, it’s important to remember that inflation will likely push your expenses higher over time. Being too conservative with your investments might mean you are losing purchasing power over time.
- Start thinking about when to claim Social Security. Delaying Social Security can be a great way to increase retirement income over time. While you can start benefits as early as 62, benefits increase annually if you wait to file for benefits. They increase at a guaranteed 8% from full retirement age (age 67 for most people) until age 70. Stress test different claiming strategies in your financial plan, to ensure you factor in all the variables before making a decision.
- Take a close look at expenses. Identify core, necessary expenses and those that are nice-to-haves or discretionary. Having a plan in case adjustments need to be made down the road can help avoid any unexpected surprises. A solid financial plan with options to change course greatly increase your ability to sleep at night!
Having a plan for retirement is important at any age. It’s never too early to start, and it’s never too late to make an impact on your current plan. Having a financial professional like Shakespeare can help you navigate through these challenging topics and help increase your likelihood of success.