Tips You’ll Need To Remember When Planning For Retirement

Retirement might feel like a distant reality for some of us, but the financial decisions we make today significantly influence our level of comfort when we decide to take a step back from the 9-to-5 grind. Planning for retirement can either be exciting or stressful depending on how prepared you are, but financial stability is possible. All you have to do is create a plan and get started with acting on it.

Part 1: The Basics of Retirement Planning

Retirement planning starts with understanding the basic principles. It's the process of defining your retirement income goals and making decisions on the actions and investment choices necessary to achieve the lifestyle you want when you’re older. If big investment goals seem intimidating, remember that these numbers represent what you want in the future. 

Why's Retirement Planning Important?

Retirement planning is important as it provides a plan you can follow so that you have enough funds when you’re older. With life expectancy on the rise, your retirement years could potentially span decades, making financial planning for this phase of your life something you can’t ignore.

And The Good News Is—It’s Never Too Late (or Early) to Start Saving for Retirement

Regardless of your current age, saving for retirement should be a priority. The power of compounding means that even small, regular contributions to your retirement fund can grow significantly over time. If you're starting late, don't worry. There are still strategies and catch-up contributions that can help boost your retirement savings.

The number one rule to remember is… start contributing a part of your current paycheck automatically to a retirement account. Even if it is just 5% to start‌ with.

Part 2: The Right Target For Your Retirement Savings

Okay. You’re ready to start saving for retirement. Now what?

Knowing how much to save for retirement can be complex. It involves understanding your projected retirement expenses, assessing the impact of inflation, and estimating the return on your investments.

What is the Average Retirement Savings?

According to a report by The Hill, the average retirement savings for families currently sits above $100,000. This isn't enough for someone to live 1–2 years after their retirement age. So if you don’t want to end up in this situation in your 60s, you want to start working on building your retirement fund as soon as possible.

How Much Money is Needed for a Comfortable Retirement?

The amount needed for a comfortable retirement can be subjective, as it largely depends on your lifestyle, location, health, and other personal factors. However, many financial experts recommend aiming to replace about 70% - 80% of your pre-retirement income each year during retirement. So if your household makes $120,000 a year in income (before taxes), you’ll want to be able to withdraw around $96,000 from your retirement account each year ($8,000 a month). The total amount your fund will need so you can achieve this will be around $2,400,000 when you retire. We’ll explain why below.

Planning for Potential Retirement Expenses

When planning for retirement, it's crucial to consider the potential expenses you might face. These could include healthcare costs, housing maintenance, taxes, food, transportation, and leisure activities, among others.

Healthcare, in particular, can become a significant expense, especially as you age and potentially need more medical services. The costs of Medicare premiums, supplemental insurance, and out-of-pocket expenses can add up. Additionally, long-term care, such as a nursing home or home health care, is a significant expense that many people will face and need to plan for.

Housing is another big cost. Whether you own your home outright, still have mortgage payments, or rent, housing costs can consume a large part of your retirement savings.

Inflation is another overlooked factor to consider, as the cost of goods and services tends to rise over time, eroding the purchasing power of your retirement savings. It's a good idea to build a cushion into your retirement savings plan to account for the unknowns.

Your retirement savings should reflect these factors to guarantee you can maintain the lifestyle you want in the future. It's never too early or too late to start planning for these expenses and incorporating them into your retirement savings strategy.

Part 3: Key Investment Vehicles for Retirement

Investment accounts such as a 401k or Roth IRA play a big role in your retirement savings. They offer tax advantages that can significantly boost your retirement fund.

The 401k: Free Money from Your Employer

A 401k is an employer-sponsored retirement plan that lets you save and invest a part of your paycheck before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account.

Many employers offer a 401k match, where they contribute an equal amount to your 401k as you do, up to a certain percentage of your income. This match is essentially "free money" that can significantly enhance your retirement savings.

What is the Maximum 401k Contribution Amount?

For 2023, the maximum amount of funds that you can contribute to a 401(k) is $22,500. These limits are occasionally adjusted for inflation. It's worth maximizing your contributions if you can, especially if your employer matches contributions (more on 401k contributions).

What is an IRA?

An Individual Retirement Account (IRA) is a type of retirement account with tax benefits that people create because of the tax benefits. The two primary forms of IRAs are Traditional and Roth.

Traditional IRA: Tax-Deferred Savings

With a Traditional IRA, anything you contribute to this account may be tax-deductible, depending on your income and whether you or your spouse have a workplace retirement plan. The growth in your investments is tax-deferred, meaning you won't pay taxes until you withdraw the funds later in your life (during retirement). This can allow your savings to grow more efficiently over time (if you assume taxes will be lower in the future).

Roth IRA: Tax-Free Growth and Withdrawals

Unlike a Traditional IRA, Roth IRA contributions are made with after-tax dollars. This means you won't get a tax deduction for your contributions. However, the money grows tax-free, and qualified withdrawals in retirement are also tax-free.

Each of these investment vehicles has its benefits and considerations, and the best choice for you depends on your unique situation. A financial advisor can help you understand these options and make the right decisions for your retirement goals.

Part 4: How To Use These Accounts

Having a clear understanding of where your money goes is ‌also an important aspect of financial planning. It guarantees you can save for retirement (and emergencies without sacrificing your current lifestyle.

“Where's My Money Going?”

Track your income and expenses to understand your spending habits. This practice not only helps you identify areas where you can cut back, but also makes you aware of potential saving opportunities.

Automate Your Finances

Setting up automatic contributions to your retirement account ensures consistent savings. It also reduces the temptation to spend the money elsewhere. Over time, these regular investments can accumulate into significant retirement savings.

Part 5: How to Increase Your Salary

Increasing your salary can significantly boost your retirement savings. It provides you with additional income to contribute towards your retirement plan, thereby accelerating the growth of your retirement fund.

Start Earning More for a Better Financial Future

Improving your skills and education can lead to higher-paying job opportunities. Consider professional development or seeking promotions in your current job. You can also use our salary calculator to understand how much you could potentially earn in different roles or industries.

Basic Negotiation Tactics for Asking for a Raise

Asking for a raise can be an intimidating prospect, but with the right preparation and strategy, you can improve your chances of success. Here are some basic negotiating tactics to consider:

• Do Your Research: Before approaching your employer for a raise, arm yourself with data. Use online tools to understand what others in your role and industry are making. This will give you a baseline for negotiations.
• Show Your Value: Be ready to present a clear case of the value you bring to your organization. This includes significant accomplishments, responsibilities you’ve taken on, and any quantifiable results related to your work. Your manager needs to be able to justify the increase in your pay to the rest of the leaders in your organization.
• Practice Your Pitch: Negotiating a raise isn’t the time to wing it. Write out what you plan to say and practice it. Be concise, confident, and positive in your approach.
• Be Prepared for Different Outcomes: Understand that a raise may not always be possible at the given time. If this is the case, explore other possibilities such as a bonus, additional vacation days, or the promise of a future raise.

Remember, negotiating a raise is a professional discussion. Maintain professionalism and open-mindedness throughout the process to help secure a positive outcome. Your ability to effectively negotiate can't only lead to a higher income now, but can also positively impact your retirement savings in the long run.

Part 6: What to Do If You Come Up Short in Your Retirement Savings

While saving for retirement, it's important to consider potential hiccups you might face. These could include big changes in the market, unexpected expenses like medical bills, or changes in your employment status.

If you find yourself falling short in your retirement savings, don't panic. You can adjust your retirement plans, such as delaying retirement or reducing your retirement lifestyle expectations. You can also look for additional sources of income, like part-time work during retirement.

Creating Additional Income Streams

There are several ways to supplement your income as you approach or even after you enter your retirement years. These strategies could help you create a financial cushion, reduce your reliance on your retirement savings, and enhance your lifestyle:

• Leverage Your Skills: Use your years of experience and skills to create an income source. This could be as a consultant in your former industry, or by turning a hobby into a business. Online platforms have made it easier than ever to reach potential clients and customers.
• Part-time Employment: Consider taking a part-time job that aligns with your interests or hobbies. This can provide additional income, keep you active, and provide social opportunities.
• Rent Out Property: If you have a spare room, second property, or even a vacation home, consider renting it out. This can be a consistent source of passive income. Websites like Airbnb have made it convenient to connect with potential renters.
• Invest in Dividend-Paying Stocks: Though this involves some risk, investing a portion of your savings in dividend-paying stocks can provide you with a regular income stream. Make sure to seek professional advice before making any significant investment decisions.

Remember, it's essential to balance your efforts between generating extra income and enjoying your retirement. The goal is to make your retirement years fulfilling and worry-free.

Part 7: Navigating De-Accumulation in Retirement

As you transition into retirement, your financial focus shifts from saving and investing to spending wisely. This period, often referred to as the de-accumulation phase, involves strategically withdrawing from your retirement funds to ensure they last throughout your retirement years.

Understanding De-Accumulation

De-accumulation is the process of gradually spending down the retirement savings you have built up over your working years. It involves a delicate balance between maintaining a lifestyle you enjoy and ensuring you don't outlive your resources.

Developing a De-Accumulation Strategy

Your de-accumulation strategy will depend on various factors, including the amount of savings you have, your life expectancy, and your living expenses. Here are some things you should consider:

• Start with a conservative withdrawal rate: Financial experts often recommend starting with a withdrawal rate of around 4% per year of your total savings, adjusting this figure annually for inflation. However, your individual circumstances may require you to consider a different withdrawal rate.
• Consider the sequence of returns risk: Withdrawals during down markets can significantly reduce your portfolio's longevity. To mitigate this risk, you may want to consider having a cash reserve or less volatile investments that can provide income during these times.
• Plan for required minimum distributions (RMDs): After a certain age, typically 70 ½, the IRS requires you to begin withdrawing from certain types of retirement accounts. Plan for these distributions to avoid tax penalties.
• Adjust your strategy as needed: Regularly review your withdrawal strategy to accommodate changes in your health, market conditions, and personal needs.

Remember, developing an effective de-accumulation strategy can be complex and it may be beneficial to work with a financial advisor. The goal is to ensure you have a comfortable and sustainable income throughout your retirement.

Part 8: Next Steps and Tools

Planning for retirement is an ongoing process that requires regular check-ins and adjustments as your life circumstances change.

Use Our Handy Tools

Leverage online tools such as our retirement planner calculator (see above) to estimate how much you need to save. Online resources can help you understand the complexities of retirement planning and help you make informed decisions.

Retirement Planning: What to Do

When planning for retirement, remember to assess your financial situation, set retirement goals, and understand your investment options.

Remember, it's never too late to start planning for retirement. The important thing is to start now, regardless of your age or financial situation.

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