Table of Contents:
- Why save for retirement?
- How much do you need to retire?
- Does when you start saving matter?
- Types of retirement plans
- How to plan for retirement
- Planning for early retirement
- FAQs about retirement planning
- The bottom line
When you’re just getting started, saving for retirement can feel overwhelming. And maybe that’s the reason you’ve been putting it off. But what if it wasn’t as confusing as you think? Yes, it takes some planning, but it’s really not so bad. Actually, it can be pretty empowering, and with the retirement planning tips you’ll learn here, it won’t even be a little scary. So, let’s get started.
The first thing to remember is that it’s never too early to start a retirement savings plan. When you’re in your 20s, you may feel like retirement is so far away, but that’s exactly the right time to start saving.
Key Takeaways:
- Retirement planning offers the opportunity to save, so when you retire, you don’t have to count on Social Security, and you can live the life you enjoy without worrying about how to afford it.
- Financial advisors estimate that we need about 70% of our pre-retirement income to live the same lifestyle as we did while earning an income for work.
- The sooner you open a brokerage account and start saving for retirement, the more time compound interest can work to grow your money.
Why save for retirement?
When you think back to junior high school, you’d probably agree that those years went fast. High school? Yep, that went fast too. Life moves quickly; sometimes we don’t even realize it, but ask anyone in their 50s and beyond, and they’ll tell you that retirement creeps up pretty quickly. When the same happens to you, you want to be ready.
Starting earlier is advantageous for a few reasons. First, you have a lot more time to save, and that’s a good thing. Second, as you get older, you may want to have a family and buy a house. This means you’ll have more expenses than you have as a young single person.
Although you may not earn as much money when starting out, as you learned from our example above, a little money over time adds up and can make a significant difference in how your retirement looks in the future. The more money you have, the more options you’ll have in retirement.
You have to remember that when you retire, you won’t have a job that brings in money, so to maintain your lifestyle, you’ll need to save enough money to do so. It doesn’t matter how old you are; if you haven’t started saving for retirement, now is the time.
How much do you need to retire?
The first question we ask ourselves when deciding to start a personal retirement plan is how much do I need to retire? Although there is no perfect answer, according to financial experts, including Ramsey Solutions and Forbes Advisor, saving 15% of your annual income is an excellent place to start with your retirement savings goals.
But setting up your retirement savings plan can depend on several unknown factors that include:
- Life expectancy
- Retirement lifestyle
- Spending and expenses
So, when planning your retirement, allow yourself to dream of the life you want after you’ve said goodbye to your full-time job. Of course, this may change over time, and you can make adjustments as needed, but this step can help you clarify a savings goal.
- Determine the type of lifestyle you want – We all have monthly expenses, such as housing, utilities, transportation, and food, but if you also love to travel, you’ll need to plan for that and include travel expenses over and above regular expenses in your plan.
- Consider the expert’s typical advice – The typical rule of thumb from financial experts is that generally, we want to aim to replace 70% of our income from working to live on during retirement. Although lifestyle, health, and living expenses should be considered, aiming for 70% is commonly regarded as a safe bet.
- Revise regularly – Life’s circumstances can change over time, and you want your retirement saving goals to align with any changing circumstances, so revisiting and revising your plan is an important step. Of course, it’s always a good idea to discuss your plans with a financial advisor to set goals tailored specifically for you.
Does when you start saving matter?
We all go through different experiences as we age. Taking that into consideration is an integral part of determining the best retirement plans to meet your goals.
Each decade brings new life circumstances and challenges, so knowing what to expect and preparing for them can alleviate the stress of retirement saving and keep you on track. Even if you haven’t started yet, it’s not too late. So let’s cover some things we can do in each decade to save for retirement.
How to save for retirement at 20
- Enroll in your employer’s 401(k) – Plans are funded automatically through your payroll deductions after you sign up and choose your investments and the amount you want to be deducted from every paycheck. Some employers match contributions, so be sure to invest enough to benefit.
- Traditional IRA account – If your employer doesn’t offer a 401(k) plan, a traditional IRA may be a good option. You won’t pay income tax until you take out the money after the age of 59 ½.
- Roth IRA account – Another option is the Roth IRA. Although you’re taxed before the money goes into the account, when you withdraw the money at age 59 ½, no taxes will be deducted.
- SEP IRA – is a Simplified Employee Pension IRA that offers tax breaks geared to small business owners and entrepreneurs to save for retirement.
- Backdoor Roth IRA – which is a legal way to have a Roth IRA account and get around the income rules as a high earner.
Besides having a significant amount of time to save, starting in your 20s gets you in the habit of saving. Automating it will simplify it even more, which will make it easier to stay on track for the long term.
Set up an emergency fund – So many Americans live paycheck to paycheck and don’t have the money if an emergency arises, so having a separate savings account for an emergency fund is like having a safety net if you lose your job. The general rule is to have 3 to 6 months of expenses set aside to cover rent, food, debt payments, car payments, gas, and any other recurring monthly expenses.
How to save for retirement at 30
By the time we reach our 30s, we likely feel settled in our careers and more financially secure. However, we may also be starting families and moving into larger homes, adding to expenses. It can be challenging to stay on track during this time due to rising debts, but it’s also important to remember how important it is to do so. Increasing retirement savings is so important and can be as easily as ditching weekly dinners out or skipping on items you don’t really need to continue to fund your retirement account and savings.
If you need to catch up, here’s what you can do:
- Write a budget and stick to it.
- Say no to that coffee habit.
- Skip eating out.
- Stop buying nonessential items.
- Start a side hustle.
- Pay off debt.
- Get a higher-paying job.
How to save for retirement at 40
By the time you’re in your 40s, your career is in full swing, and you may be getting promotions and raises. The benchmark for retirement saving in your 40s is 3 times your annual income saved.
Here are steps to take:
- Reduce spending. Add additional money saved to an emergency fund.
- Review your retirement plan and make adjustments as needed. These can include increasing retirement contributions and evaluating investments.
How to save for retirement at 50
By this time in your life, the benchmark for retirement savings is 6 times your annual salary, so if you need to make adjustments, now is a good time.
- Catch up on contributions – Although limits can vary, contributing the maximum is an essential step for collecting additional interest and growing your money even more.
- Evaluate and prepare – Health care costs and increasing inflation can affect savings, so it’s a good idea to plan for these in advance.
Understanding how to save is essential for every phase of life. Continuing to evaluate and adjust your retirement plan can help you stay on track, so retirement looks the way you’ve planned. It can be helpful to contact a financial advisor to help navigate the way, offer information you may not have thought about, and keep your goals on track.
Types of retirement plans
One reason so many people put off retirement planning is simply that we become overwhelmed with all the options. Of course, we want to choose the best retirement plans so we do it right, but with all the different types of retirement plans available, it can be confusing which to choose. For many of us, there may not be one best option, but maybe a combination that will work.
401k retirement plans
A 401(k) is an employer-sponsored plan that offers employees a tax break on their contributions. Once eligible, you choose from a selection of investments and how much to contribute. It will be automatically deducted from your paycheck each pay period. The best part is that some employers offer to match contributions up to a certain percentage, so in essence, it’s free money to you. For beginning investors, this can be a good place to start.
Traditional & Roth IRAs
When you don’t have access to workplace retirement accounts, you may wonder how to save for retirement without a 401 (k) plan? Traditional and Roth IRAs are 2 types of qualified retirement plans that offer great options.
Traditional IRA
An individual retirement account (IRA) that allows investors to make pre-tax contributions is called a traditional IRA. Taxes are paid upon retirement when withdrawals are made.
Roth IRA
A Roth IRA is an individual retirement account where taxes are paid before the money is deposited into the account, so the investor won’t pay any taxes when they retire and begin to make withdrawals.
Other common retirement plans
Although not as popular, there are a variety of different retirement plans that also provide opportunities for retirement savings.
- SEP IRA – is a Simplified Employee Pension IRA for business owners with tax-deductible investments. Taxes are paid when distributions are made during retirement.
- SIMPLE IRA – A savings incentive match plan for employees is for small companies that don’t offer a 401(k) plan but is similar to IRAs. Eligible employees can make pre-tax deposits and receive mandatory contributions from the employer.
- 403(b) retirement plans – are designed for tax-exempt companies and employees of public schools. They resemble 401(k) plans, allowing employees to save for retirement through automatic deductions from their paycheck and employer matching contributions.
- 457(b) retirement plans – are designed for state and local government employees such as law enforcement officers and hospital executives and offer tax-deferred savings.
Each plan is geared to different life and work situations and should be thoroughly investigated to be sure they meet your individual investment goals.
How to plan for retirement
When putting together your retirement plan, remember it’s a process. Having a retirement planning checklist can help you to get and stay organized.
As you go through life, you’ll evaluate your plan and make changes as necessary. This will ensure that when you’re ready to say goodbye to your job, you’ll be able to have enough savings to do all the things you planned for. That’s why a retirement plan is so important.
Here’s how to do it:
Step 1: Pay yourself first
You may have heard the term “pay yourself first” and wondered exactly what it meant. It’s a phrase used in the financial world that means you have a percentage of your paycheck automatically deposited into a retirement account, so you don’t even see it. This mindset allows you to save before using the money to pay bills and living expenses.
Step 2: Set a savings goal
Many financial experts agree that a savings goal of 15% of your gross income each year is a great place to start. But if it feels like it’s more than you can save and still pay the bills, it’s okay to start with what you can. For most, even 5% can get you started.
Of course, depending on when you start, you may need to increase the percentage over time. The most important thing is to have a personal retirement plan so you know what your goals are and have a clear path to get you there. Using a retirement planning calculator or consulting with a financial advisor can help clarify goals and set up a plan that will keep you on track.
Many of us don’t even realize what we can afford to save because we don’t keep track of detailed spending. But, when you know where your money goes, you can make adjustments and save even more.
Step 3: Enroll in a retirement plan
Enrolling in a retirement plan is one of the best things you can do for your future, and as discussed, the earlier you start, the better. An employer-sponsored 401(k) is a great option for many employees. If you haven’t done it before, it may feel a little overwhelming, but taking a few simple steps will get you started.
- Sign up through your employer – When signing up for your 401(k) plan, you’ll want to get the information needed from the HR department.
- Choose how much to contribute – The optimal amount is 15%, but if that’s more than you can afford to contribute at the start, aim for 5% to 6% and make your contributions automatic, which means they will come out of your paycheck before you even see the funds. Anytime you get a pay raise, add another percent or two, and pretty soon, you’ll be on track with a 15% contribution. Investing any amount allows compound interest to work for you.
- Choose diversified investments – When you sign up for your 401(k), you’ll be given a selection of investments. Diversify with stocks and bonds that fit your risk tolerance and personal situation. Index funds are made up of a diverse selection of investments chosen by professionals and can make diversification easy for investors.
- Get assistance – Although your plan administrator and HR department can help with most of the process, the investment decisions are up to you. You can utilize a retirement calculator or look for the best retirement planning software to help. If you want professional assistance, a financial advisor can be helpful in not only choosing investments but mapping out a long-term plan based on your personal goals and investing style.
Step 4: Set up automatic contributions
When you choose to fund your retirement account through auto-pay, your employer will deduct the amount specified and put it right into your investment account. It’s one of the easiest investment planning tools available and allows you to save consistently to grow your investments. It also takes the stress out of investing because you set it and forget it.
Step 5: Take all the free money
One of the benefits of investing in your company’s 401(k) plan is employer matching. This is where your employer will match up to 100% of your contributions as long as you’re investing enough to qualify. It’s actually free money for you and can boost your investments significantly. For example, let’s say your company matched 50% of your contributions up to 3%. If you earn $50,000 a year and contribute 6%, your employer match can add $1500 to your retirement each year.
Step 6: Forget about it
Once you’ve set up your retirement plan and set automatic deductions from your paycheck, it’s a good idea to forget about it, as withdrawing from it before age 59 ½ carries a penalty of 10%. Then, of course, you will want to do an annual review and update your plan, but otherwise, a hands-off approach will allow compound interest to do its job.
Planning for early retirement
Not everyone wants to wait until they reach full retirement age and are eligible to receive Social Security benefits to leave their work life behind. If you’ve ever thought about early retirement, you’re not alone. The good news is that there are retirement strategies that can get you there.
- FIRE retirement – FIRE means Financial Independence Retire Early and focuses on investing and saving 50% to 70% of your income by cutting living expenses drastically.
- Target-date retirement – Also known as life-cycle funds, this savings plan is targeted to a specific year for retirement and continually balances risks to build wealth and safer funds to protect it that are made up of stocks, bonds, and money market accounts that constantly rebalance your portfolio as you age.
Although the strategies may differ, each one of these focuses on an early retirement plan, so you don’t have to wait until you’re in your mid- to late 60s to retire.
FAQs about retirement planning
Q: What percentage of my income should I save for retirement?
How much you need for retirement can depend on many factors. Still, most financial experts agree that a savings goal between 10% and 15% of your pre-taxed annual income is a good goal.
Q: Are 401(k)s the best way to save for retirement?
Having an employer-sponsored 401(k) has many benefits, including employer matching, making it a good option.
Q: What happens to my 401(k) if I change jobs?
You have a few options. You can roll it over to your new employer, roll it over into an IRA if your new employer doesn’t offer a 401(k) plan, and if your balance isn’t too small, you may be able to leave it with your former employer.
Q: Should I adjust my retirement plan? How often?
The rule of thumb is to evaluate your retirement plan on an annual basis and make any necessary adjustments when you have significant life changes.
The bottom line
Financial planning for retirement can seem complicated when investing as a beginner. Still, once you get started, it’s an empowering experience that can ensure you have a comfortable and happy retirement that allows you to do all the things you enjoy without worrying about money.
Diversifying your retirement means investing in stocks, bonds, and index funds geared toward your personal retirement goals. Although a 401(k) is a great option, it’s not the only way to save.
Learn more about early retirement planning by reading further. Our How Much do I Need to Retire and FIRE Movement articles can offer additional options for retirement. You can also download the Public app. to get started!