Section 01 How much money do you need to get what you want out of retirement?
It’s OK if you don’t know the exact answer to this question today. And it’s OK if it changes in the future. But when planning for retirement, you have to know what to plan for. Just as everyone follows a different career path, your retirement will depend on what makes you happy. Your answer to that question (along with the answer of your partner if you have one) is what you’ll use to set your retirement savings target.
The average amount Americans think they will need to retire comfortably
Visualizing your retirement can feel abstract, especially if you have a long timeline ahead of you. Focusing on some basic action items can help get you in the right mindset for successful planning.
Envision your retirement
Imagining your future is a key part of creating financial security in retirement. Take some time to delve into the following questions. They’re designed to spark your imagination.
- What does retirement mean to you?
Think about how you want retirement to feel. Beyond having financial stability, ask yourself some questions to help you start planning. For instance, are you looking forward to a slower pace of life, or do you crave more time to travel, explore hobbies or spend time with family?
- What does financial security mean to you?
This generally means living comfortably without having to work again — but think about specifics. For example, it may mean having the resources to invest in new opportunities, pay off your mortgage or fund part of your grandchildren’s education.
- What concerns you about retirement?
When you look at your current financial situation, what gives you pause? Perhaps you’re not sure if you’re saving enough to afford the retirement you want. Sharing these concerns with an experienced financial advisor can help you strategize a way forward.
Contemplate your retirement lifestyle
What do you want to do when you retire? You may want to spend time volunteering, traveling, spending time with family, taking up different hobbies or starting a new business. Also consider where you want to live — the cost of living and taxes in your state will play a key role in your retirement planning. This could mean relocating to a beachside condo, staying in your current home or retiring abroad.
Estimating your retirement savings target
Once you feel clear about what you want out of retirement, the next step is estimating how much that lifestyle will cost you over multiple decades. Sketch out your annual expenses, then run the numbers to set a realistic savings target.
The 4 percent rule has long been a go-to model for ensuring that you don’t outlive your savings, but it has its limitations. If you choose to follow this method, you’ll withdraw 4 percent of your total retirement savings during your first year of retirement. After that, you’ll continue withdrawing that amount and a little extra to account for inflation. Just keep in mind that the 4 percent rule assumes that you’re invested 50/50 in stocks and bonds. It was also created at a time when interest rates were much higher.
While the 4 percent rule has its limitations, it essentially means that you could generate about $40,000 a year in retirement (with increases for inflation) for every million dollars you save.
Section 02 Risks that can impact your retirement savings
Even with the most comprehensive planning, there are certain situations that can disrupt your retirement. Fortunately, some of these curveballs are somewhat predictable. With a little bit of forethought today, you can take steps to help position your nest egg in a way that can mitigate some of the common risks that can challenge your financial stability in retirement.
Six major risks can disrupt your retirement savings if you aren’t prepared for them.
The current life expectancy of a 65-year-old in the United States is 19.1 years, according to the CDC. That means that if you retire at 65, you’ll need to plan to live off your savings for at least 19 years. And that’s just the average. What if you live longer? A good retirement plan will include strategies to make your money last in case you live a very long life (let’s hope that’s the case!).
2. Market volatility
Investments are an important part of a retirement plan because they help you keep up with inflation over time. But we all know that while the market has its ups, it also has its downs. That’s why you’ll want more than just investments when you get to retirement. You’ll lean on those funds that aren’t tied to the markets during a downturn, allowing you to avoid selling investments at a time when they have lost value.
3. Inflation and taxes
After years of low inflation, it came roaring back in 2022 and 2023. It’s a reminder that your nest egg can lose purchasing power as the years go on. Keeping a portion of your retirement funds invested can help you keep up with inflation over time.
Meanwhile, your tax liability in retirement can also cut into your savings. If you have tax-deferred accounts, such as a 401(k) or traditional IRA, the distributions you take in retirement will be taxed. Depending on the size of your withdrawals, it could even push you into a higher tax bracket. Fortunately, there are ways to minimize your tax burden to help your retirement savings go further.
4. Health care
Accounting for health care costs is a critical part of your retirement planning, as these expenses increase every year — one major health issue could eat away at your carefully constructed nest egg. The minimum age to enroll in Medicare is 65. (Folks who plan on retiring before then will likely need to prepare for higher health care costs.) Even when you qualify for Medicare, it’s important to remember that you’ll still have deductibles and out-of-pocket costs to consider. For example, dental, vision and hearing are currently excluded. There’s also a premium for Medicare Part B, which covers outpatient care and doctors’ services. This could set you back anywhere from $164.90 to $560.50 per month, depending on your income.
5. Long-term care
Long-term care isn’t typically covered by health insurance. Medicare also has restrictions that may not cover the costs if you or your spouse develop a prolonged illness that requires special care. Proper planning can help you avoid draining your retirement savings or creating a financial burden for your loved ones.
If retirement seems far off, a legacy is probably in the stratosphere. But it’s something a good retirement plan will account for. Why? Because many people eventually decide they want to leave a legacy. Perhaps it will be money for your children, grandchildren or even a favorite charity. Knowing how you’ll leave your legacy can free you to spend the rest of your savings without worrying about what you’ll leave behind.
Section 03 Financial planning options to mitigate retirement risks
Thanks to the power of compound interest, a 401(k) can be a powerful savings tool. But you’ll need more than just a 401(k) for retirement to mitigate the risks above. Based on your priorities, a financial advisor can tailor a financial plan to include a range of financial options that are designed to give you flexibility to reach your goals while minimizing the risks that could get in the way.
Some of the most common options include the following:
Social Security: If you or your spouse spent a career paying taxes, Social Security — which pays a monthly benefit that’s unaffected by the markets and will continue for as long as you live — can serve as the base of your retirement plan. Your benefit amount will depend on when you begin collecting Social Security. While you’re eligible to start getting distributions at 62, your monthly benefit will be reduced if you claim before your full retirement age (FRA) — age 67 for those born in 1960 or later; and if you wait to take your benefit, it will increase by 8 percent every year from your FRA until you turn 70.
IRAs and 401(k)s: Traditional IRAs and 401(k)s are retirement savings accounts that you fund with pretax dollars, so your contributions are tax-deductible. You’ll benefit from tax-deferred growth until you’re ready to begin taking distributions, which will be taxed. Roth IRAs and Roth 401(k)s are different in that they’re funded with after-tax contributions, and your withdrawals will generally be tax-free. These investments can help you grow your funds over time while also helping you to manage what you owe in taxes.
Taxable investment accounts: You can deposit funds into a taxable investment account. While these accounts don’t offer the same tax advantages as retirement accounts, there’s no limit to the contributions you can make to traditional investment accounts. These can help you grow your money over time.
Pensions and annuities: Pensions are rare but valuable, providing a guaranteed monthly payout (usually for life). If you don’t have a pension but are interested in additional guaranteed income in retirement, you may want to consider an income annuity. With an income annuity, you receive fixed monthly payments throughout retirement — typically for the rest of your life. This can protect your retirement income in the event that you live for a longer than expected time.
Health savings accounts: Available to those with a high-deductible health plan, you fund HSAs with tax-deductible contributions that you can use to cover certain medical expenses. They allow for tax-free growth — and you won’t be taxed on qualified withdrawals. Another upside is that once you turn 65, you can use HSA funds for anything you like (those distributions will be taxed as ordinary income). HSA funds can help you manage taxes and health care expenses in retirement.
Life insurance: Life insurance may not seem like something that would be an option for retirement. But permanent life insurance can help your retirement. Because its death benefit never expires, permanent life insurance can be part of your legacy planning. This type of insurance also accumulates cash value, which typically isn’t affected by the markets. The cash value of permanent life insurance can be a source of funds to help get you through market downturns*.
Ultimately, the goal of having different financial options is to give you flexibility in retirement. If the market drops, you might lean more on drawing income from life insurance cash value until the market recovers. If you have a big expense one year, you might take more money out of a Roth account to avoid paying more in taxes. If you happen to live a long life (let’s hope), you’ll rely on Social Security and an annuity or pension to keep sending you the income you’ll need to live on. Knowing you’re ready financially for life’s turns can help you worry less about money and allow you to focus on enjoying life.
Section 04 Course-correcting along the way
Your retirement plan isn’t meant to be set in stone. On the contrary, it will likely evolve and grow as you move through different phases of your life. You may have to deal with unexpected financial hurdles that could disrupt your retirement vision, or you might develop some new goals that inspire you to revisit your plan.
Effective planning asks us to be adaptable to whatever life throws our way. All of us have our own big life moments, but here are some common ones to keep in mind that may require you to tweak your retirement plan:
Life events that could impact your retirement plan
Experiencing a job loss or changing careers
Experiencing medical challenges
Changing your retirement vision
Receiving an inheritance or other windfall
These scenarios often have different financial implications. For example, getting married, welcoming children or ending a marriage could affect your legacy planning and beneficiaries. Those who experience a loss of income during their working years may need to rethink their retirement timeline if it puts them behind in meeting their savings target.
Of course, not all changes are negative. You may simply develop new long-term goals that require you to adjust accordingly. What matters most is making sure your retirement plan lines up with your financial reality.
Section 05 How to catch up on your retirement savings
Take advantage of 401(k) and IRA catch-up contributions: In 2021, you can kick in up to $19,500 to your 401(k) and $6,000 across all your IRAs — but those who are 50 and over can save even more. Folks in this camp can contribute an extra $6,500 to their 401(k) and an extra $1,000 across all their IRA accounts.
Opt to stay in the workforce longer: Retirement planning is often full of trade-offs. Staying in the workforce a little longer may be all it takes to bring your retirement vision to life. Alternatively, you could continue working part time or assume a temporary consulting role to cushion your savings.
Leverage cash windfalls: Whether it’s a tax refund or a work bonus, putting extra income into your retirement accounts can help grow your nest egg during your working years.
Delay Social Security: As mentioned earlier, the longer you delay Social Security, the larger your monthly benefit. The idea is to wait until at least your full retirement age, which is age 67 for those born in 1960 or later. At that point, your benefit will increase by 8 percent every year until you turn 70.
Section 06 Conversation starters with an advisor
A lot goes into determining how much you need for retirement. The good news is that you don’t have to go it alone. Working with a financial advisor can help you understand the role of the role of financial planning in retirement as well as troubleshoot challenges and tweak your plan as needed. An advisor can also guide you in creating a drawdown plan that minimizes taxes, shields you from market volatility and protects your legacy.
How much do I need for retirement?
I only have a 401(k). What other retirement savings plans are best for me?
How do annuities work?
When should I claim Social Security?
How can I manage taxes to maximize income?
How will I pay for medical costs?