The reality of retirement planning

Start saving early, make a plan and determine how you’ll use your funds.

Saving for retirement should start early and continue throughout your career.

When planning for retirement, it’s helpful to think of reaching your goals within each of the following categories:

  • Saving for retirement
  • Planning for retirement
  • Using retirement accounts

Start Saving for Retirement Early

In your late teens and early twenties, retirement is probably the last thing on your mind. If you’re lucky, you’ll get advice from your parents or an older colleague to start retirement accounts and put the maximum allowed amount in them – that’s good advice.

Father and son making dinner in the family kitchen

If your employer offers a 401(k), put money into it and request matching funds from the company if offered. You can also invest in an IRA account. These come in many forms. Some are tax-deferred, allowing you to pay taxes at a later date when your taxable income may be lower than today. Others are not tax-deferred, allowing you to avoid paying taxes on these funds when you withdraw them during your retirement.

The earlier you start saving, the more your retirement savings will grow. You might want to teach your children to save for retirement as a financial life lesson. If they have any earned income from babysitting or after-school jobs, help them open Roth IRAs. Explain to them that the money they have saved will grow, earning interest that will be available for them when they retire. This can help to establish good retirement savings habits that will benefit them as they mature.

Starting to save early is ideal. If you haven’t started yet, don’t put it off any longer.

Young professionals meeting over coffee

Plan for Retirement

When considering how much to save for retirement, common advice is to “save as much as you can.” Although this is great advice, it’s not terribly useful. It’s far more helpful to take a practical approach and base the goals for your retirement savings on your future needs.

Establish a retirement budget with expected expenses and income in mind. Do your best to account for the effects of inflation and changes in your spending needs. Analysts suggest that retirees have expenses averaging 75% to 80% of those during their working years. However, don’t rely exclusively on this rule of thumb; use your personal expectations.

Although your expenses will likely decline in retirement, it’s probable that your income will also be reduced. Your total retirement income, including estimated withdrawals from savings sources, will need to meet or exceed your expected expenses for as long as you are retired. If you anticipate that other sources of retirement income won’t cover your needs, you will need to increase your current retirement savings.

One important retirement consideration involves comparing your current taxable income and your expected retirement income to estimate your tax rate now vs. later. This will help you make decisions on whether to use taxed or tax-deferred investments to reduce your lifetime tax burden.

Newly retired couple enjoying an afternoon

It’s also important to consider the question: “When is the best time for me to retire?” The longer you wait to retire, generally the more value you’ll receive annually from retirement accounts, social security payments and other retirement income sources. If you plan to retire early, you may receive lower benefits and you’ll need to have more money in your retirement accounts to ensure you don’t run out of savings during retirement. Check with the Social Security Administration for retirement estimators and other guidance.

A financial planner or online retirement calculator can help you input assumptions to create multiple “what-if” scenarios. Any gap you have in expenses minus annual income is your target annual retirement savings need. Multiply this by the number of years you expect to be retired to calculate how much to save for retirement.

Use Retirement Funds

As the big day approaches, plan for using your retirement accounts for expenses.

  • Notify the Social Security Administration of your plans.
  • Prepare to withdraw required minimum distributions from each retirement account. This should happen by age 7012 for IRA owners that were 7012 prior to 12/31/2019 and by age 72 for IRA owners that would have been 7012 in 2020 and beyond to avoid stiff penalties.
  • Decide whether to withdraw first from taxable or tax-deferred accounts.
  • Apply for Medicare.
  • Consider additional funding plans for health care and long-term care.

Remember: You can’t take it with you…but you don’t want to fall short.