No matter what stage you are in life, there are tweaks available to improve your path to retirement. Whether you are just starting out or about to hit retirement, we have tips on retirement planning by age for you. This comprehensive guide will share the top three actions you should be doing for your retirement planning by the decade of your life.
What is the right number to have in retirement savings?
Unfortunately, there is no right answer to this question. It all depends upon how and where you want to live in retirement. People are living longer while healthcare costs are rising, while the uncertainty of pensions and Social Security continues to increase.
A recent study from Fidelity found that Americans are the most prepared they’ve ever been for retirement (source). However, with these best-ever results, Americans can only expect to replace 80% of their pre-retirement income. In fact, only 32% of American are on target to cover 95% of their pre-retirement expenses.
The bottom line — It is more important than ever to save for your retirement.
Here are the retirement savings milestones you should achieve for every age group and three tips to boost your retirement savings.
Retirement planning by age: in your 20s
As you begin your career, planning for retirement may be the least of your concerns. However, time is your biggest asset. Retirement contributions made today have 30 to 40 years to compound and grow.
If you maxed out your IRA with $5,500 in contributions earning 8% for 10 years starting at age 25, you would have a million dollars at age 67. Waiting to start until you turned 35 years old and contributing $5,500 each year until you turned 67, would cost you over $200,000 in lost growth.
In other words, the 25-year-old who invested $55,000 would have $1 million at age 67. By comparison, the 35-year-old who invested $181,500 would only have $800,000.
This is why it is critical for young people to use time and the power of compounding to their advantage.
Here are three tips to jumpstart your retirement savings:
- Take full advantage of your employer’s match in the company retirement plan. Many employers will give you 3% of your salary when you contribute 6%. This is free money that provides a 50% bump on your saving’s rate.
- Build your emergency fund. Ideally, you’ll have three to six months worth of expenses in a rainy day fund. Having this emergency fund will enable you to keep saving for retirement when bad luck strikes. Accidents and emergencies will happen. It’s not a matter of “if” but a matter of “when.”
- It’s ok to be aggressive. You have 30 to 40 years to ride the ups and downs of the stock market before retirement. A diversified portfolio of aggressive mutual funds will kickstart the foundation of your nest egg.
Retirement planning by age: in your 30s
Many young parents want to establish 529 accounts for their child’s college funds. This is an admirable goal, but the best gift you can give your children is the peace of mind that you are taken care in retirement. There are always student loans for college, but there are no loans for retirement.
Here are three tips to keep the momentum going:
- Bump up your retirement contributions each year. We started out by maxing out your employer’s matching in the company account. Now it is time to build on that momentum. Each year when you receive your annual review, bump up your retirement contributions 1% to 2%. By the end of this decade, you will be maxing out your company’s retirement account. Best of all, the increased savings were funded by your annual raises so your net paycheck never went down!
- Pay off your student loans. It’s ok if you had to borrow to obtain your degree. Most of us were in the same position. By focusing on paying off these student loans within 10 years of graduating, you’ll eliminate that debt and have extra money each month to save for a brighter tomorrow.
- Open a Roth IRA. The tax-free gains of a Roth account will give you added flexibility in retirement and a hedge against future tax rate increases.
Retirement planning by age: in your 40s
During your 40s, your career should be in full swing. And so should your retirement accounts. You started saving in your 20s and have been bumping up your company retirement plan contributions each year during your 30s. Now that you’re maxing out your company plan, its time to explore additional investment accounts and focus on paying off debts.
These strategies will help you grow your nest egg and eliminate debt:
- Invest in career growth. As you grow your career, you’ll grow your income. With that increased income, you’ll have more money to invest for retirement. Are there certifications or degrees that you can earn that will boost your career? Are you networking with peers inside and outside your company? This networking can open doors to new opportunities you wouldn’t otherwise know about.
- Max out your retirement accounts. If you haven’t already, max out your Roth IRA and company retirement account every year. This 1-2 punch of maxed out retirement accounts will create a knockout punch to any retirement worries you may have.
- Switch to a Health Savings Account. For people who are healthy and don’t go to the doctor very often, consider this. A health savings account is a way to set aside tax-free money for future health expenses in retirement.
Retirement planning by age: in your 50s
For most people, the 50s are the peak earning years. You have a solid career by now and have hopefully been promoted several times throughout your career. Retirement is just around the corner, so the goal is to continue maxing out retirement accounts and paying off all of your debts. Being able to retire without a monthly loan payment is a wonderful retirement gift for yourself.
As you close in on the goal, here are three tips to focus on:
- Use Catch-up Provisions. Federal law allows people age 50 and over to contribute extra amounts to their company retirement plans and IRAs. These additional contributions allow you to reduce your tax bill (for pre-tax contributions) and set aside even more in tax-deferred and tax-free accounts.
- Pay off all debts. Focus on paying off debts. Credit cards, car notes, mortgage loans, or any other loans you may have. And once they are paid off, resist the urge to buy the next shiny object that crosses your path.
- Purchase Long Term Care insurance. Long term care insurance is so expensive because insurance companies actually pay out on claims. The only thing more expensive than long term care insurance is not having long term care insurance. You’ve worked all your life to build a good nest egg, you don’t want those dreams crushed because you didn’t have this insurance when it was needed.
Retirement planning by age: in your 60s
You’re at the 5-yard line and are about to score. Retirement is just a few short years away.
- Consider working longer. For every year you hold off retiring, that’s another year of growth and retirement contributions you’ll make. And, more importantly, it’s one less year that you’re withdrawing from your retirement accounts.
- Keep a big chunk of your savings invested. Yes, you will need money in retirement, but you won’t need all of your money right away. People are living longer and you need to make sure your money lasts throughout the rest of your life. Keep a good portion of your portfolio in stocks and bonds as a hedge against inflation.
- Hold off on collecting Social Security until 70 1/2. The longer you wait to collect Social Security, the bigger your monthly Social Security check will be. And the more money you get from the government, the less you’ll need to pull from your accounts.
Where will income come from in retirement?
Income needs in retirement will vary based on your health, where you want to live, and what activities you have planned in retirement. A common rule of thumb is that you’ll need to replace 70% to 90% of your pre-retirement income.
For the younger generations, pensions are about as common as unicorns. And there are regular reminders that the Social Security Trust Fund will only be able to pay full benefits until 2034 (source).
Your retirement success depends on your ability to save and invest throughout your lifetime. The 4% Rule says that you can safely withdraw no more than 4% of your retirement account each year to fund your retirement expenses. In years with positive returns, the excess will be reinvested to grow your balances. In down years, limiting your withdrawals will keep you from depleting your accounts.
Once you’ve established your 4% Rule withdrawal amount, you can increase it each year based on inflation. If you don’t keep track of inflation results, assume a conservative 2% increase each year.
Where should you start?
Where to start in retirement planning can be a paralyzing decision. Many people choose to put off taking action because they don’t know where to start or what to do. We’ve created a valuable resource of the best investment advisors, complete with reviews and comparisons. If you are unsure how to invest your retirement savings this guide will help.
The most important first step is taking a small action towards a larger goal. First thing tomorrow morning, go into work and increase your retirement contributions by 1%. Most readers won’t even notice the difference in their paycheck. If you haven’t already enrolled in your employer’s retirement plan, sign up and contribute enough to max out the employer’s match.
Once you’ve done this, review the three tips for your age group and start with the one that is easiest for you. Then continue through all three tips until you’ve complete them all. Now you’re three steps closer to meeting your retirement goals. Your future self says “thank you.”
Lee Huffman is a former financial planner and corporate finance manager who now writes about early retirement, credit cards, travel, insurance, and other personal finance topics. He enjoys showing people how to travel more, spend less, and live better.