Retirement planning, like any other long-term goal, requires some forethought and intention. Slow and steady wins the race when it comes to padding your nest egg, but many Americans are struggling to adequately prepare for their golden years.
Almost 50% of families in the U.S. have nothing at all set aside for retirement, according to research from the Economic Policy Institute. It’s little wonder that three in 10 workers say the topic stresses them out.
The truth is that it’s never too late to up your savings game. Whether you’re right on track or way behind schedule, retirement planning can make saving for the future a little easier. Here’s what you need to know.
What is a retirement plan?
A retirement plan is exactly what it sounds like — a strategy for shoring up your financial security when you’re no longer in the workforce. This begins with figuring out how much money you’ll actually need in retirement. (We’ll dive into this shortly.) From there, it’s about earmarking a reasonable amount of monthly income for your future self.
It would be wonderful if our income divided itself evenly between all our financial goals, but that’s rarely the case. Throughout your life, it’s normal to alternate between hitting your retirement savings goals and pulling back in order to fund other financial priorities, like paying down debt or building your emergency fund. Effective retirement planning usually requires some trade-offs, a little bit of effort and the ability to tweak and course-correct along the way as life happens. In other words, retirement planning is dynamic.
“The plan that gets you to retirement is more than likely not going to be the plan that gets you through retirement,” Jim Brogan, a Knoxville-based certified retirement financial adviser, told MagnifyMoney. “Until you retire, you’re in a saving phase of life; after you retire, you’re in a spending phase.”
Retirement plans take many forms. If you don’t know your 401(k)s from your IRAs, rest easy. Let’s unpack the details.
Types of retirement plans
This employer-sponsored retirement account automatically takes a percentage of each paycheck and earmarks it for retirement. The beauty of a traditional 401(k) is that your contributions are tax-deductible, which is a nice perk come tax time. The lower your taxable income is, the lower your tax liability will be. On top of that, because your retirement savings aren’t taxed when you contribute them, that means your money can grow tax-free. When it comes time to pull that money out for retirement, it’ll then be taxed as ordinary income.
401(k)s come with a number of perks, the biggest being if your employer offers any sort of match — that’s free money. Every company is different, so you’ll want to contact your HR rep to clarify the details. Some employers, for example, will match 100% of your contributions up to 3% of your salary. Others might match half of your contributions up to 3% to 5% of your earnings. That means you’ll cash in on your employer making regular deposits into your account, which is the most effective way to leverage all that 401(k)s have to offer.
Just keep in mind that the IRS does put a cap on how much you, as an individual, can kick into your 401(k). For 2018, you can contribute up to $18,500, unless you’re 50 or over, in which case you can contribute up to $24,500.
Side note: 403(b)s are similar to a 401(k). They’re essentially the same, except that instead of being sponsored by private companies, they’re available to certain employees at public schools, nonprofits and churches.
Individual Retirement Account (IRA)
This kind of retirement account has nothing to do with your employer. You open it independently and can load it up with a maximum of $5,500 every year. (If you’re 50 or over, that number jumps to $6,500.) There are two main types of IRAs: traditional and Roth.
You can open an IRA at many major banks, investment firms or any of the new robo-advisory services that have cropped up over the years.
Like 401(k) contributions, what you put in counts as a tax deduction. Your money also grows tax-free, but it is taxed as ordinary income when you make withdrawals during retirement.
Just keep in mind that if you tap into it prior to age 59½, you'll typically have to pay taxes on it, plus a 10% penalty.
The Roth IRA works a little differently. You won't enjoy that tax break when putting money in, but your cash does grow tax-free and you won't get hit with taxes when you withdraw during retirement.
In fact, you can pull from it whenever you want, even prior to retirement, without any penalties. The only time you'll be penalized is if you tap into the appreciation (i.e. your investment returns) before age 59½.
One other thing worth mentioning is that Roth IRAs also come with income limits. If you’re single, your annual earnings have to be under $135,000; it’s under $199,000 for married folks filing their taxes jointly.
If your employer offers a pension, they’ll kick money into your plan during the years you’re still working. Then when you retire, that money comes your way either in a lump sum or as a monthly payment — think of it as a retirement paycheck of sorts that’ll likely be considered regular taxable income.
How much you’ll get depends on a number of factors, like your salary and how long you worked for the company. A pension provides peace of mind because the money is guaranteed to be waiting for you in retirement, which makes retirement planning a little easier.
Health Savings Accounts (HSAs)
Don’t let the name fool you. Health savings accounts (HSAs) can double as retirement-saving vehicles that go beyond medical expenses and are offered by certain employers.
If offered by your employer, you can make contributions before taxes are taken out, typically via automatic withdrawals from your paychecks. (If you open an HSA yourself, any contributions you make can be claimed as a tax deduction, which lowers your taxable income.)
You can tap into this fund tax-free to cover qualified medical costs at any time, but the reason it’s great for retirement is that once you hit 65, that money is yours for whatever you like — free and clear, tax-free, whether it’s for medical expenses or not.
HSA rules: The main catch is that you have to be enrolled in a high-deductible health plan to qualify. This translates to a deductible that’s at least $1,350 for individuals; $2,700 for families. Contribution limits apply. For 2018, they cap out at $3,450 for single individuals; $6,850 for families. There’s also a catch-up contribution for 55+ folks, which allows you to kick in an extra $1,000. Check to see if your employer offers an HSA; if they don’t, anyone can open one if they meet the eligibility requirements.
Taxable investment accounts
Tax-advantaged accounts, like 401(k)s and Roth IRAs, are by far the best way to maximize your retirement planning efforts over the long haul. If you have some extra income leftover, directing it toward a taxable investment account is another way to build up your nest egg.
Brokerage firms offer these accounts as an additional way to save for retirement. Sure, they don’t come with tax benefits, but they also offer more freedom since you aren’t handcuffed to contribution limits, salary restrictions or early withdrawal penalties.
That said, you’ll have to ask yourself if it makes better financial sense to max out your 401(k) and/or IRA before looking to an investment account. Either way, you’ll definitely want to at least contribute enough to recoup any 401(k) employer match. Every case is different, but don’t be so quick to dismiss investment accounts because of the tax factor.
How to plan for retirement at every age
No matter what stage of life you’re in, you can always be working toward your retirement goals. Here’s what our experts have to say.
Retirement planning in your 20s:
“Your 20s is the best time to get into the habit of paying yourself first by automatically saving a portion of every paycheck,” Mark Wilson, an Irvine, Calif.-based certified financial planner, tells MagnifyMoney.
Time is on your side. Thanks to the magic of compounding interest, your early saving years are most powerful. Because you have more time to recover from any market setbacks, most experts recommend investing aggressively in stocks vs. safer, low-yield investments like bonds. A simple way to do that without getting too in the weeds is to sign up for a target-date fund.
Let’s say you open a Roth IRA and add just $50 a month starting at age 25. Assuming an average of 7% annual returns, you’ll have accumulated over $128,000 by the time you turn 65.
But how do you manage retirement savings if you have debt or can barely cobble together an emergency fund?
“For most 20-somethings, the number one goal isn’t saving for retirement,” Douglas Boneparth, a New York City-based certified financial planner, told MagnifyMoney. “Your 20s is really the time where you need to focus on equipping yourself with a strong foundation in personal finance.”
You may need excess income to help fund your financial goals, whether that be building a three- to six-month emergency fund, paying down high-interest debt or whatever matters most to you. That said, if your employer will match your 401(k) contributions in some way, passing on it means leaving free money on the table.
“Taking that match is a no-brainer; you could immediately get maybe a 25% or even 100% return on those first dollars,” said Wilson.
This certainly isn’t to say you shouldn’t get a jump on retirement planning — it just means that getting yourself on solid financial ground should be top of mind. Begin by getting a firm grasp on your income and expenses, then creating a realistic budget that feels doable for your lifestyle. After all your monthly bills are paid, how much is left over? This is what Boneparth refers to as “mastering your cash flow.”
How much should you save? He says earmarking 10% to 15% of your income for retirement is the ideal scenario, but if this isn’t feasible, the idea is to squirrel away at least enough to get an employer match. The most important thing is getting into the routine of saving. You can always dial up your efforts as you start earning more.
The main takeaways for your 20s:
- Establish a strong financial foundation — track your income and expenses, and create a realistic budget.
- Identify your financial goals, then use excess monthly income to fund them little by little.
- If your employer offers a 401(k) match, try to contribute enough to lock down this free money.
- Get into the habit of setting aside some portion of every paycheck for retirement. A little can go a long way when it comes to compounding interest.
Retirement planning in your 30s:
By this point, most people are earning more than they did the decade before, of course many also have new expenses — a mortgage, kids, child care bills etc.
Having competing money goals never really goes away, but padding your retirement fund should be a priority at this point. Brogan says that if you’re just starting to save for retirement now, you should aim to sock away 10% to 15% of each paycheck.
“This can feel overwhelming for someone who’s already established in their work life and used to spending that money, so I suggest starting small,” he said.
For example, begin by saving just 2% of your income, then increase it gradually every year. You can also direct, say, 50% of every work bonus or a percentage of every tax refund or raise to your retirement accounts. Using cash windfalls feels less painful since they’re separate from your monthly budget.
Also, if you don’t have life insurance, it’s time to seriously consider it. This is doubly important if you are a primary breadwinner or you have children who depend on you. Check out our guide to life insurance here.
The main takeaways for your 30s:
- Shoot to set aside 10% of your income for retirement. If this feels overwhelming, start small and gradually work your way up.
- If you’re short of your goal, boost your efforts by leveraging cash windfalls like work bonuses, raises and tax refunds.
Retirement planning in your 40s:
Our financial priorities are always evolving, but many people in this phase of life feel particularly torn between two biggies: college savings versus retirement. Parental instincts often nudge us to take care of our children before ourselves, but our experts actually say that your retirement should come before financing your kids’ education.
“Unlike college, there are no scholarships or loans you can get for retirement,” warned Wilson. “If you’re behind on retirement savings, this is the time to kick it up because by the time you get into your 50s, it’s only going to get harder.”
On that note, Wilson says those just getting started should strive to save no less than 15% of their income for retirement at this point. This obviously may require some budgeting overhauls. Tracking your expenses may help you reveal areas of wasteful spending. Can you negotiate down any bills or go without cable, for example? Can you pick up a side gig or consolidate high-interest debt to free up more money for retirement? Every little bit helps.
The main takeaways for your 40s:
- If you haven’t started saving at this point, strive to earmark 15% of your income for retirement. This may require reworking your budget. Remember: Something’s always better than nothing, even if it’s short of that 15% mark.
- Retirement savings on track? If possible, up your account contributions.
Retirement planning in your 50s
Now you’re really on the home stretch. Once you get five to 12 years out from retirement, Brogan suggests really sitting down and asking yourself what your income needs will be like once the time comes. This is important as fewer than 50% of Americans have actually calculated their retirement number, according to the U.S. Department of Labor.
Begin by clarifying how much guaranteed income will be provided. Social Security benefits and pensions, for example, fall into this category. To ballpark your Social Security benefits, check out this handy guide. According to the Department of Labor, these benefits, on average, are equal to roughly 40% of your pre-retirement earnings.
If, for instance, you’ll be getting $40,000 in Social Security between you and your spouse, and you’ve decided you need about $65,000 a year to live comfortably, that means you’re going to have to draw $25,000 from savings each year to maintain that lifestyle. (Just be sure to adjust for inflation.)
Those who aren’t quite hitting their savings goals can contribute more to 401(k)s and IRAs once they turn 50, at which point the IRS allows for higher contribution limits. The same goes for Health Savings Accounts once you turn 55.
The main takeaways for your 50s:
- Think about what your income needs will actually be like in retirement. Then pinpoint any guaranteed income like Social Security benefits, pensions and so on. How much will you actually need to draw from your retirement accounts each year?
- Continue kicking into your retirement accounts.
- If you’re behind, consider leveraging catch-up contributions.
Retirement planning in your 60s
The average retirement age in the U.S. is 63, according to the Statistic Brain Research Institute. The good news is that those who are behind still have some time to shore up their finances before leaving the workforce. One of the best strategies is having a practical retirement date.
“Working an extra two years is the easiest way to make a big impact on your nest egg,” said Wilson.
Another workaround is to delay when you start taking your Social Security benefits. According to the Social Security Administration, you can begin cashing in on them at age 62, but how much you get increases every year that you get closer to what’s considered full retirement age (67). Here’s how the SSA breaks it down:
Age you start collecting Social Security
How much of your monthly benefit you'll get
One other tidbit: About five years before you retire, Brogan recommends beginning to set aside whatever money you’ll need during your early years of retirement — say, the first five years or so — into stable investments. If you find yourself in the middle of a market downturn right after you step away from your job, having some money in a traditional savings account, for instance, means you won’t have to liquidate money in the market while it’s down.
The main takeaways for your 60s:
- Be reasonable about your retirement date. Staying in the workforce could majorly boost your nest egg.
- Consider delaying your Social Security benefits, if necessary.
- About five years before you retire, start setting a few years’ of retirement income into an account that’s separate from the stock market.
Final thoughts on retirement planning
Retirement planning is far from a one-size-fits-all approach, but some general rules of thumb do apply. Read up on which type of retirement account feel right to you. Then set yourself up for long-term success (and reap the benefits of compound interest), by beginning to save as early as possible. If your employer offers free money by way of a 401(k) match, all the better.
Once you get into your 60s, you can ratchet up your savings even more by settling on a reasonable retirement date and delaying your Social Security benefits, if possible. Of course, you’ll have to tweak and adjust along the way as life happens, but accommodating other financial goals doesn’t have to be an either/or situation.
The most important thing is to nurture the habit of routinely earmarking some portion of your earnings for your nest egg — in good times and bad.