A Decade by Decade Approach to a Healthy Retirement
December 16, 2020 Author: Tess Downing, MBA, CFP®, Complete View Financial
January is when we make and break our resolutions. And 2020 has been a shaky year because of the pandemic. So, this year, what about spot-checking where you are on your retirement planning – whatever your age – and committing to getting yourself on solid ground?
Here are some milestones you might want to follow, realizing that generalized targets are always arbitrary. A financial planner can fine-tune them to align with your best life.
Twenties: Time to start early saving and investing
In your twenties, retirement is about the furthest thing from your mind. But if you have the discipline to look into it, you will likely be ensured a comfortable retirement, no matter what your income level throughout your career.
The main reason is compound growth: the snowball effect of interest accumulating on your initial investment or savings, plus on all the interest that has been added in earlier years. It’s not growing in a straight line but has a multiplier effect. So, the earlier you start, the better.
Start with a minimum savings of 10% of your gross salary, maybe up to 15% if you can afford to do so. Your plan will be in overdrive.
Think about saving in Roth retirement accounts. Both IRAs and 401(k)s can be traditional or Roths. Traditional accounts let you postpone the tax payment until you withdraw the money from them. But it makes sense to pay the taxes while your income isn’t that high and your tax bracket is low. Then you’ll have tax-free money available when it’s critical: at retirement.
See if your employer offers a 401(k) or 403(b). Contribute 10% of your income, just being sure your contribution at least matches what the employer contributes. That’s free money.
Set up an IRA through a discount broker if your employer has no plan – or if you’re self-employed or a 1099 worker. The maximum you can contribute to a traditional or Roth IRA in 2021 is $6,000 if you’re single, with some income caps. If you’re self-employed, you can save more towards retirement. Look into a SEP-IRA.
If you have a choice where to invest your funds, consider a target-date fund. The fund selects a mix of stocks and bonds it feels is suitable for someone your age, with a target retirement date of ‘x.’ You can check the performance of target-date funds, as well as their fees.
Your goal by the end of your twenties: to have the equivalent of one time your annual salary saved.
Thirties: Time to get focused
If you haven’t started saving, you’ll want to play catch-up and save between 15% and 20% of your gross salary. If it seems impossible to do, build a spending plan to identify your ‘needs’ versus your ‘wants.’ Then reevaluate what to spend and what to save.
Lots of significant life changes happen in your thirties: maybe marriage, buying houses and having babies. As tempting as it might be, this is not the time to tap into any of your retirement accounts. If you change jobs, avoid the urge to take the cash out of your employer retirement account, even if only for the allotted 60-day window. Do an account-to-account direct transfer instead. (You’re far too likely to miss the re-investment deadline into a new retirement account, get hit with taxes and penalties, and backslide on your savings goals.)
Don’t do that to yourself.
If you have children, start college funds early to lessen the chances of disrupting future savings plans.
Your goal by the end of your thirties: to have the equivalent of three times your annual salary saved.
Forties: Time to control your spending
Any cash-intensive events not yet faced may happen this decade. Again, stay away from your retirement accounts. Taking out loans would be better (if needed) because the lender will hold you accountable for repayment. If you ‘borrow’ from a retirement account, you may not repay.
These will likely be your prime earning years. Each salary raise or bump in income brings thoughts of bigger houses, better cars and more exotic vacations. Do you deserve them? Of course, you do. But you also deserve to know that the last 30 years spent by you (and your spouse, if that’s the case) will be financially comfortable and stress-free.
Happiness doesn’t always require you to spend money. Build a ‘funny-money’ fund with a certain percentage of any salary increase or one-off cash infusion (like tax refunds, inheritances or bonuses). Use that for any luxuries or lifestyle upgrades. And put the rest in your retirement account.
If your children are college-bound, hopefully, you have a college fund set up. Talk to them about taking out student loans, which you can help them repay if you can, rather than risk burdening them for financial help later on when they’re starting their own families.
Learn how Social Security works. It may seem early, but many decisions in these high-earning years can affect your Social Security contributions. For example, you could negotiate a higher salary (which contributes to Social Security) instead of a perk. The key is to maximize your contribution. Most people wait until their late fifties to look at Social Security, and by then, it may be too late to push it as far as you can.
Your goal by the end of your forties: to have the equivalent of four times your annual salary saved.
Fifties: Time to visualize your retirement
You now have enough elements to estimate the income your savings will generate over the 30-plus years of retirement. And Social Security’s Retirement Estimator can estimate what you’ll collect – for the rest of your life – by filing at age 62, 67 or 70.
Start thinking in rough terms of what retirement might look like. What will no longer be in your life that’s triggering expenses today? What will be new in your life that will trigger spending? Come up with a rough monthly cost.
Use your collected data in a retirement calculator to see what your potential income will be. If it doesn’t appear to support your retirement needs, think about what life decisions you can make now that will let you save more aggressively.
As small as they are, start making ‘catch-up’ contributions to 401(k)s and IRAs once they’re allowed, at age 50. And you can always make extra investments elsewhere.
If putting all the numbers together seems confusing, ask for help. Reach out to a recommended fee-only financial advisor who works on an hourly or project basis.
Your goal by the end of your fifties: to have the equivalent of eight times your annual salary saved.
Sixties: Time to plan out the next 30 years
Social Security estimates that a 65-year-old man has a 20% chance of living to age 90, and a woman, more than a 33% chance. A 65-year-old couple has a 45% chance that one will survive to age 90. An app called Longevity Illustrator can help you estimate how long you might live.
Such longevity calls for the highest possible amount of guaranteed sources of income. Waiting to file Social Security at age 70 maximizes your payout by growing by 8% per year after your Full Retirement Age (between age 66 and 67). It also means the largest possible survivor benefit for the spouse who lives the longest.
The closer you are to retirement, the better you can estimate what your retirement expenses will be. Update your estimates every few years.
Ideally, you’ll want to cover all your ‘base’ or essential expenses with guaranteed income, so you are not at risk for market fluctuations. A fee-only financial advisor can arrange your retirement plan to do that.
Your goal by the end of your sixties: to have the equivalent of ten times your annual salary saved.
The details for each decade are considerable. If Complete View Financial can help you with the process – whatever your age – contact us for an initial consultation.