Accumulation
Accumulation happens when you actively save and grow your money through IRAs, 401(k)s, savings accounts and more. This phase of retirement planning happens while you’re still working and earning a paycheck.
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Retirement planning
Start planning now and your golden years will be truly golden.
This article was reviewed by Marguerita Cheng, a member of the Finder Editorial Review Board and award-winning advocate for ethical financial planning for over 20 years.
With today’s long life expectancies, your retirement could end up lasting 20 to 30 years — roughly the same length of time you spend in the workforce. Make those years truly golden with a solid retirement plan.
What is retirement planning?
Retirement planning is the process of identifying your retirement goals and then deciding which actions to identify and prioritize. There are two ways to get there: accumulation and cash flow.
Cash flow
Depending on your investments, you could generate cash flow in retirement through real estate, bonds or CDs.
How to start planning for retirement
There are four simple steps you can take to start planning for retirement:
1. Set your retirement goal
Think about what your dream retirement looks like. Will you travel the world? Start a passion project? Spend more time with family?
Having a clear picture of your life during retirement will help you figure out how much money you’ll need to fund it.
Start by calculating how much money you’ll need for retirement. Then decide if you can realistically save that much given your age and potential retirement date.
If it’s out of reach, consider adjusting your expected lifestyle until you find a happy medium. This could include pushing back your retirement date so you have more time to save, downsizing your home, or relocating to an area with a lower cost of living.
How much money will I need in retirement?
Follow these two steps to calculate how much money you need for retirement:
- Decide what you want your annual retirement income to be
- Divide that number by 4%
This number tells you how much you need in savings to comfortably withdraw 4% a year.
Use the chart below to quickly spot how much you need to save based on various incomes:
| If you want your annual income to be this much in retirement… | … then you need to save this much*… |
|---|---|
| $40,000 | $1 million |
| $50,000 | $1.25 million |
| $60,000 | $1.5 million |
| $70,000 | $1.75 million |
| $80,000 | $2 million |
*Based on a 4% withdrawal rate
2. Choose your retirement assets
There are many types of assets you can use to fund your retirement. But you’ll maximize your cash flow if you use a mix:
- Social Security. Start collecting Social Security as early as age 62, but your monthly payout increases the longer you wait until age 70.
- Retirement accounts. Save for retirement using tax-deferred plans like 401(k)s, 403(b)s, 457s and traditional IRAs. Or open a tax-exempt account, such as a Roth IRA.
- Investment accounts. Invest in stocks, bonds, mutual funds and more through a taxable investment account and use the money to fund your retirement.
- HSAs. These are for more than medical expenses. Once you reach age 65, you can use this account for anything — from everyday living expenses to vacations.
- Annuities. These are a type of insurance that turns a lump sum of money into a consistent stream of income for a set period.
- Pensions. These retirement plans offer guaranteed income, but they’re quickly being replaced with 401(k)s and other employer-sponsored plans.
- Home equities. Take out a home equity line of credit and borrow the funds all at once or over time.
- Reverse mortgages. Retirees over age 62 can pull equity out of their current homes and use it for cash flow.
3. Protect your retirement assets
There are many unexpected risks that threaten your retirement savings. Put a plan in place to protect your assets from any curveballs life may throw your way:
- Inflation. With a retirement that could last 20 to 30 years, inflation remains a major threat to your nest egg. Make sure your investment strategy balances protection and growth.
- Unexpected medical bills. Consider buying long-term care insurance to help cover the rising costs of assisted living facilities, home health aides, nursing homes and more.
- Creditors. Protect your savings from creditors by maximizing out 401(k) and pension plans, which are often protected from general creditors.
- Lawsuits. If you lose a lawsuit, a creditor can’t go after any employer-sponsored retirement plans because they’re protected by the Employee Retirement Income Security Act (ERISA).
- Taxes. You’ll minimize your tax burden by creating a tax-efficient withdrawal strategy that balances a mix of tax-deferred and tax-exempt accounts each year.
4. Plan your retirement distributions
A tax-efficient withdrawal strategy will keep more money in your pocket as you move through retirement. Ideally, you want to use a mix of Social Security, tax-deferred and tax-exempt accounts each year. This keeps your taxable income low, which will save you money when you file taxes.
For most retirement assets, you can delay withdrawing funds as long as you’d like. But some tax-deferred accounts require you to take minimum distributions once you hit 72.
These accounts include:
- IRAs
- 401(k)s
- 457 plans
- 403(b)s
- SEP IRA’s
- SIMPLE plans
Note: Roth IRAs aren’t subject to required minimum distributions (RMDs) because you fund them with after-tax dollars.
Retirement planning for each stage of life
Your retirement planning needs to shift as you get older. This should be your main focus at three different stages of life:
Young adulthood
When you’re starting out in your career, money is tight and retirement seems ages away. But time is on your side. Every little bit you save has decades to compound and earn interest. That’s why saving should be your number one priority — even if you can’t save much.
Take advantage of any employer-sponsored retirement plans, including 401(k)s and 403(b)s. Many employers match contributions to these accounts, which puts even more money in your pocket.
You should invest at least enough to get 100% of your employer’s match each year. But you could contribute up to $19,500 in 2020.
You could also contribute up to $6,000 to a Roth IRA. You fund this account with after-tax dollars, but your earnings grow tax-free.
How long does it take to double your money with compound interest?
The Rule of 72 is a little trick you can use to quickly calculate how long it’ll take you to double your money. Simply divide your interest rate by 72 and you’ll roughly have the number of years it’ll take you to double your money.
To put this in perspective, let’s look at an example.
If you invest $10,000 in an account earning 7% interest and never added a single penny more, you’d have this much money at age 65:
| If you invest $10,000 at this age… | …you’ll have this much money at age 65… |
|---|---|
| 25 | $149,744.58 |
| 35 | $76,122.55 |
| 45 | $38,696.84 |
| 55 | $19,671.51 |
Middle adulthood
Middle adulthood presents its own unique challenges. You’re making more money, but you also have more financial responsibilities. You may have kids, a mortgage, student loan debt and more.
Your main focus should be on:
- Maxing out your retirement accounts each year
- Making sure you have adequate home, life and disability insurance coverage
- Taking advantage of an HSA if you have a high-deductible healthcare plan
Late adulthood
Once you hit late adulthood, you want to laser in on your retirement goals and identify any holes in your plan. If you’re off track, now is the time to figure out what actions you need to take to catch up.
Keep in mind that your investment accounts should be more conservative than they were early on. Here are a few tips to help supercharge your retirement account:
- Fully fund your retirement accounts each year. Contribute the maximum amount as soon as possible.
- Consider a Roth IRA. Deferring your income with a Roth IRA may be advantageous because you’re likely in a higher tax bracket now than when you retire.
- Take advantage of catch-up contributions. If you’re at least 50, you can contribute $1,000 more to HSAs and IRAs and $6,500 more to employer-sponsored plans.
- Aggressively pay down debt. Eliminate debts with high interest rates so you can focus on building your nest egg.
- Slim down your monthly budget. Look for ways to find extra money to put towards retirement, including canceling subscriptions or memberships you don’t use, refinancing your mortgage or lowering your insurance premiums.
This is also the best time to look into long-term care insurance and calculate how much your Social Security payout will be.
Do I need a financial adviser?
There are many moving pieces to the retirement planning puzzle. During your working years, there’s a focus on calculating how much money you’ll need in retirement and how to save it. Once you enter into retirement, it shifts as you begin to focus on tax-efficient withdrawal strategies to ensure you don’t run out of money.
In complex situations like these, it may be best to hire a financial adviser who can provide professional retirement planning advice. Studies show that people who work with an adviser see an average 1% to 3% increase in their portfolio’s value than those who don’t.
The cost of a financial adviser varies. Some charge flat fees ranging from $1,000 to $5,000 a year. Others charge a 1.25% to 1.75% fee based on your total assets under management.
Robo-advisors are a cheaper alternative to human advisers. Some don’t charge any fees at all while others charge 0.30% and beyond.
Before you decide to hire someone, weigh the complexities of doing it yourself against the fees and expertise of an adviser or robo-advisor.
Compare retirement accounts
Bottom line
Proper planning is key to a happy retirement. Whether you’ve recently started your career or are a seasoned pro, it’s never too late to put a plan in place.
If you’re looking for expert guidance on how to prepare for your ideal retirement lifestyle, consider hiring a reputable financial adviser.
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