Even if you truly love your work, the day will come when it’s time to punch out for the last time and start your retirement. And when that day comes, you’ll want to have a robust financial plan in place.
Your primary financial goal throughout your work years is to amass enough in savings to support that plan — to sock away enough money to support your lifestyle without a steady paycheck. But saving as much money as possible is just the beginning: You’ll also need to account for taxes, determine which investments will best grow your money, account for other sources of retirement income, and plan for retirement expenses.
Here are the basics of planning for retirement.
Saving a lot of money is a must. Most experts agree that you should save at least 10 percent of your income every year, and many suggest pushing that to 20 percent, if possible. But it’s not just about how much you save — it’s also about where you save it.
Over the last few decades, congress has attempted to incentivize retirement saving by allowing for the creation of special tax-advantaged retirement account. The most popular is the 401(k), which is offered by most employers, and allows you to contribute pre-tax dollars toward your retirement with every paycheck. Many employers also offer to match a certain percentage of your contributions, which essentially amounts to free money.
Other retirement accounts can be opened independent of your employer. The most popular is the Individual Retirement Account, or IRA. The “Traditional” variety of these accounts is similar to the 401(k), in that money can be contributed pre-tax; donate a few thousand dollars to an IRA, and the money can be deducted on your taxes.
The other variety of IRA is the Roth IRA, in which money is contributed post-tax — that is, you can’t take a tax deduction on it — but then grows and can be withdrawn tax-free in retirement.
Investing Your Savings
It’s not enough to just save a bunch of money in a tax-advantaged retirement account. To make sure that your money grows and multiplies, you need to invest it.
In fact, if you fail to invest your money, it will essentially shrink in value, because it won’t keep pace with inflation.
So what should you invest in? Stocks, mostly — especially when you’re younger. Investing in the stock market is the best, most consistent way to grow your money, and money invested in the stock market has grown, on average, between 7 and 10 percent a year (depending on how you do the math). Of course, the stock market is not without its risks, and sometimes it goes down. That’s why a mostly-stock portfolio is best when you’re younger, and you’ve got time to make up any losses you might incur in the market. As you grow older, you should allocate more of your savings toward safer investments like bonds, so you don’t risk losing a bunch of money in the market just before you retire.
Rather than directly play the stock market with your retirement savings, you’ll likely want to put most of your money in mutual funds and/or ETFs. While some of these are actively managed by fund managers who try to “beat the market,” others are more passive in their approach. Whatever you choose, you can select investments through your 401(k) provider or the brokerage in which you set up your IRA.
Your Retirement Income and Expenses
The money that amasses in your retirement accounts will eventually form the basis of your retirement income; once you reach retirement age, you can begin withdrawing money from those accounts as income.
But 401(k)s and IRAs aren’t the only sources of retirement income. Some people — mainly those working in the public sector — will have a pension instead of a 401(k), providing them with a guaranteed income stream determined by their previous income and years of employment.
But pensions are increasingly rare. What’s not rare is Social Security, which provides a regular check from the government; the longer you wait to start claiming it, the larger your check will be. Even though it comes from the government, be aware that it’s still subject to taxation.
Beyond that, there are other ways to set yourself up for retirement income.
One such way is an annuity, a type of life insurance product that provides for guaranteed income over a given period of time.
A good financial plan will account for these various sources of retirement income, and consider how they meet your income needs. That last bit is important, as your expenses will likely look very different than they did in your working years! For instance, by the time you reach retirement your home mortgage may be paid off, significantly decreasing your housing expenses. But the amount you spend on medical bills will likely go up as you get older. Your retirement plan should anticipate your income needs, and make sure your various sources of income cover them.
To recap, here are the basics of planning for retirement:
- Save a bunch of money
- Put it in tax-advantaged retirement accounts
- Invest that money in the stock market, adjusting asset allocation as you get older
- Consider your retirement income needs
- Use your savings and other income sources to meet those needs
Those are the basics of saving for retirement, but there are plenty of crucial decisions to be made along the way — when to take Social Security, what types of investments to buy, which retirement accounts to use, and more. Use the links at the left and below to guide you through these decisions — and toward your dream retirement.