Estimated reading time: 10 minutes
Let’s start with the bad news – most Americans have nowhere near enough saved for retirement.
The median retirement savings at age 65-74 is $200,000. At the often recommended 4% withdrawal rate, this results in an annual income of merely $8,000. In fact, about 28% of Americans have no retirement savings at all. And unless Social Security receives more funding soon, the program’s benefits are likely to dwindle in future years.
Now, onto the good news – it’s never too early (or too late) to plan for a financially stable retirement.
The earlier you start, the better prepared you’ll be for the future. However, the strategies you use to save and invest for retirement evolve as you move through different stages of life. What works in your 20s may look very different from what’s most effective in your 50s.
In this article, we’ll explore how retirement planning strategies adapt over time and what you can do at each stage to stay on track for a financially secure future.
Note: The information provided in this blog post is for informational purposes only and should not be considered financial or tax advice. Consult with a qualified tax advisor or financial planner to address your specific circumstances.
Table of Contents
- Retirement Planning in Your 20s: Laying the Foundation
- Retirement Planning in Your 30s: Building Momentum
- Retirement Planning in Your 40s: Peak Earning Years
- Retirement Planning in Your 50s: Accelerating Savings
- Retirement Planning in Your 60s: Transitioning into Retirement
- Prepare for Retirement Today with The Entrust Group
Retirement Planning in Your 20s: Laying the Foundation
Your 20s may feel too early to worry about retirement, but this decade is actually the perfect time to start. Even modest contributions made in your 20s can grow exponentially by the time you retire. Here’s how to start building a strong foundation for your retirement:
Develop an Emergency Fund
Before focusing on retirement savings, ensure you have an emergency fund. Ideally, set aside three to six months’ worth of living expenses. A healthy emergency fund provides a safety net, granting you the financial cushion required to prevent dipping into your savings when an emergency strikes.
Focus on Paying Off High-Interest Debt
Many in their 20s are burdened with student loans or other forms of debt. If you’re carrying high-interest debt, like credit card debt, focus on paying that off first. High interest rates can accumulate quickly, negating the benefits of saving.
For instance, imagine you have $5,000 in credit card debt. Currently, the average credit card interest rate is 25% while a benchmark return-on-investment is 7%.
If you invest the funds in a retirement account, you earn $350 in your retirement account but lose $1,250 to interest, resulting in a net loss of $900. If you focus on paying off the debt, you gain no return on your investment but save $1,250 in interest payments, allowing you to focus on growing your portfolio in the future.
If you’re prone to racking up high-interest debt, it might be a wise idea to cancel your credit cards and shift exclusively to a debit card. Today, there are a few debit cards that can gradually build up your credit score as long as you demonstrate positive spending habits.
Start Early
The biggest advantage you have in your 20s is time. The earlier you start saving, the more you’ll benefit from compound interest, where your investment earnings generate additional earnings over time.
For example, if you invest $400 a month starting at age 25, assuming an average return of 7%, you could have over $1,050,000 by age 65. If you save for just another five years, you could have over $1,500,000.
Start Contributing to Employer-Sponsored Plans
If your employer offers a 401(k) or similar retirement plan, contribute as much as you can, especially if they match your contributions. This match is essentially free money added to your retirement savings.
Build a Strong Financial Education
Your 20s are also the best time to build a strong foundation in financial education. Learn the basics of personal finance, including budgeting, saving, and investing. Understanding how different types of investments work will help you make informed decisions.
Whether through online articles, webinars, or speaking with a financial advisor, gaining financial knowledge early will benefit you for decades to come.
Retirement Planning in Your 30s: Building Momentum
Your 30s are all about gaining momentum with your retirement planning. You’ve likely established a career, increased your income, and started thinking about bigger life goals. Now is the time to really ramp up your savings efforts and make sure you’re on track for a comfortable retirement.
Write Down Your Long-Term Goals
Your 30s are also a great time to start thinking about your long-term retirement goals. What do you envision for your retirement lifestyle? Where do you want to live, and how much will it cost to support that lifestyle? Establishing these goals now will help guide your savings strategy in the decades to come.
Maximizing Contributions
As your income grows in your 30s, it’s important to increase your retirement contributions. Ideally, you should aim to contribute 15% or more of your income to retirement accounts.
If you can, maximize your 401(k) contributions and consider opening or contributing to an IRA for additional tax advantages. By increasing your contributions as your earnings rise, you’ll be able to take full advantage of compound interest, which can have a huge impact over the next few decades.
Family Planning and Prioritization
Your 30s are often a time when other major financial goals start to take shape, such as buying a home, starting a family, or saving for your children’s education. Balancing these goals with your retirement savings can be challenging. Prioritize retirement savings as much as possible while also setting up an education savings plan (like a 529 account or education savings account) or making home ownership part of your long-term financial strategy.
Investment Diversification
With a longer time horizon before retirement, your 30s are a great time to focus on investment diversification. If you’ve been primarily invested in stocks, consider expanding your portfolio to include bonds, mutual funds, or even alternative investments. Diversification could help reduce risk while optimizing your portfolio’s growth potential.
If you're looking to expand your retirement portfolio beyond publicly traded securities, consider opening a self-directed IRA (SDIRA).
An SDIRA gives you the unique ability to invest your retirement funds in alternative assets, like real estate, private equity, precious metals, and even cryptocurrency. This can be a powerful strategy for diversification, as alternative investments often have different risk and return profiles compared to stocks and bonds.
Open a Traditional or Roth IRA
If you haven’t already, consider opening a traditional or Roth IRA to further boost your retirement savings. IRAs offer flexibility and tax advantages that can complement your 401(k).
Contributions to a traditional IRA are often tax-deductible in the year they are made, which reduces your taxable income for that year. Earnings also grow tax-deferred. However, withdrawals are taxed as ordinary income when you take distributions during retirement.
On the other hand, contributions to a Roth IRA are made with after-tax dollars, meaning they are not tax-deductible. Withdrawals in retirement are tax-free, as long as you’ve had the account for at least five years and are 59½ or older.
Retirement Planning in Your 40s: Peak Earning Years
Entering your 40s is a crucial period for retirement planning, as you’re likely at your peak earning years. However, balancing significant expenses like your child’s education can make it challenging to build a substantial retirement nest egg. Many individuals in this age group recognize the importance of saving but often lack a well-defined strategy or save insufficiently. Here are key strategies to enhance your retirement readiness during your 40s:
Plan for Healthcare Costs
While healthcare might not seem like a pressing concern when you're young, it’s one of the biggest factors to consider in any retirement savings plan.
As you reach your 40s, it’s an ideal time to start planning for these expenses. For example, assisted living can cost around $54,000 per year, while nursing home care can cost nearly $110,000 annually.
One smart way to prepare is by contributing to a health savings account (HSA), if you are eligible. These retirement accounts offer triple tax benefits: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
Prepare for College Expenses
If you’re planning to send children to college, your 40s are one of the best times to leverage your increased earning potential with increased educational savings.
Utilize tax-advantaged 529 plans and education savings accounts (ESAs) to save for your children’s education without dipping into your retirement funds. Balance contributions between college savings accounts and retirement accounts to ensure neither goal is neglected.
Max Out Your Contribution Limits (If Possible)
By your 40s, you’ve likely established your career and are earning a significantly higher salary. This is the ideal time to maximize your contributions to take full advantage of your increased income.
This doesn’t just apply to your IRA—it also includes other tax-advantaged accounts like employer-sponsored retirement plans, HSAs, and ESAs.
Contributing to these accounts can have a big impact on your retirement savings. For example, consistently contributing $6,500 to a Roth IRA each year instead of a taxable account could provide an additional $51,000 per year in retirement due to the tax-free growth in a Roth IRA.
Consider Your Priorities
As a financial services company, we often focus on the numbers — it’s what we do.
And for most people, focusing on your career, especially once you’ve developed an expertise in your field, can bring significant financial rewards.
However, finances aren’t everything. Your 40s are a perfect time to reassess what matters most to you.
For some, a dream retirement includes multiple international trips each year. Delaying retirement lets you keep earning, save more, and give your investments more time to grow.
For others, the goal is simply to gain the financial freedom to spend more time with loved ones. If your ideal retirement isn’t likely to bring much discretionary spending, your 40s might be the ideal time to leverage your career success to gradually shift toward a slower pace. This allows you to spend more time with family and achieve a healthier work-life balance.
Retirement Planning in Your 50s: Accelerating Savings
As you enter your 50s, retirement planning takes on new urgency. With roughly 15 years until the traditional retirement age, it’s crucial to accelerate your savings and make strategic adjustments to ensure a comfortable and secure retirement. Here are key areas to focus on:
Catch-Up Contributions
One of the significant advantages for those in their 50s is the ability to make catch-up contributions to retirement accounts. These additional contributions can substantially boost your retirement savings.
For 2024, individuals aged 50 and older can contribute an extra $7,500 to their 401(k) on top of the standard $23,000 limit, totaling $30,500 annually. Similarly, those 50 and older can add an additional $1,000 to their IRA contributions, increasing the limit from $7,000 to $8,000 for 2024.
Meet with a Financial Advisor
Meeting with a financial advisor is valuable at any stage of your planning, but it becomes especially important as you approach retirement.
Professional guidance can provide personalized strategies to optimize your retirement plan. A financial advisor can help you evaluate your current savings, investment strategies, and retirement goals. Advisors can recommend adjustments to your portfolio, tax strategies, and debt management plans to maximize your retirement readiness.
Reassess Your Retirement Savings Target
Use retirement calculators to estimate the amount needed based on your desired lifestyle, anticipated expenses, and life expectancy. If your current savings fall short, increase your contributions or extend your working years to bridge the gap.
For example, if you aim for a retirement income of $60,000 annually and expect to need it for 30 years, you’ll need approximately $1.8 million, assuming a 4% withdrawal rate.
Estate Planning
Establishing a comprehensive estate plan can prevent legal complications and ensure your assets are distributed according to your wishes.
Ensuring your estate is in order is a crucial component of retirement planning in your 50s.
- Update Your Will: Make sure your will reflects your current wishes and circumstances.
- Review Beneficiaries: Regularly update beneficiary designations on retirement accounts, life insurance policies, and other financial instruments.
- Consider Life Insurance: Evaluate whether additional life insurance coverage is needed to protect your family and estate.
Retirement Planning in Your 60s: Transitioning into Retirement
Transitioning into retirement during your 60s is a pivotal moment that marks the shift from your professional career to a life of leisure, family, and personal pursuits. Proper planning during this stage is essential to ensure a smooth and financially secure retirement. Here’s how to navigate this transition effectively:
Decide When to Take Social Security
Deciding when to start receiving Social Security benefits is a critical decision that can significantly impact your retirement income.
You can begin taking benefits as early as age 62, but your monthly payments will be permanently reduced. For most individuals, the full retirement age (FRA) is between 66 and 67, depending on your birth year. Claiming benefits at FRA ensures you receive your full entitled amount.
Delaying benefits beyond your FRA, up to age 70, increases your monthly payments by approximately 8% per year. For example, delaying from age 66 to 70 may boost your monthly benefit by about 32%.
Prepare for Any Required Minimum Distributions
Starting at age 73, the IRS mandates that you begin withdrawing a minimum amount from your traditional IRAs, 401(k)s, and tax-deferred qualified retirement accounts. These withdrawals are known as RMDs and are subject to ordinary income tax.
Since RMDs are taxed as ordinary income, it’s crucial to plan withdrawals to manage your tax bracket effectively. Diversify your investments to ensure that you can meet RMDs without having to liquidate assets at inopportune times.
For instance, if you have a traditional IRA balance of $500,000 at age 73, your RMD for the year could be around $19,000 based on IRS life expectancy tables. Planning these withdrawals can help minimize tax liabilities and optimize your retirement income.
Test Out a Retirement Budget
Most experts estimate that the typical retiree may need about 70-90% of their pre-retirement income to maintain their standard of living. Before fully retiring, create a detailed retirement budget to simulate your financial situation. This helps identify any gaps and allows you to make necessary adjustments.
Include Social Security, pensions, retirement accounts, and any other income streams. Identify areas where you can reduce expenses to better align with your retirement income.
Plan for a Fulfilling Retirement
Retirement isn’t just about finances; it’s also about creating a fulfilling and enjoyable lifestyle.
Engage in activities you’re passionate about, whether it’s gardening, painting, or hiking. Sometimes the most fulfilling time spent in retirement is engaging in volunteer activity that you didn’t have the time for when working a full-time job and raising children.
Plan trips and experiences that you’ve always wanted to enjoy without the constraints of a work schedule. Spend quality time with family and friends to foster social connections that enhance your well-being.
Prepare for Retirement Today with The Entrust Group
No matter your stage in life, taking proactive steps toward retirement planning is key to securing your financial future.
Whether you’re in your 20s, 40s, 60s, or beyond, understanding the different strategies available at each phase helps you make informed decisions and maximize your retirement savings. By diversifying your portfolio with options like SDIRAs, you can take greater control of your investments and expand your potential for long-term growth.
To dive deeper into how SDIRAs can enhance your retirement strategy, we encourage you to download our Self-Directed IRA Basics Guide. It’s a great resource for learning how to achieve portfolio diversification with alternative investments.
Also, don’t miss the replay of our 2024 IRA Essentials webinar, where we cover crucial deadlines and updates that IRA holders need to know for the year ahead.
Have questions or need guidance? Our SDIRA experts are here to help. Feel free to reach out for any information about SDIRAs that could support in navigating your retirement planning journey.
0 Comment