The basic mechanics of retirement don’t seem to have changed much over the years: you work, you save, and you retire once you reach that faithful retirement age. What is gradually changing, however, is the set of challenges that younger generations face when it comes to retirement savings, debt, and rising living expenses.
As a general rule of thumb, the question “how do I start planning for my retirement?” is best asked sooner rather than later, so you can have plenty of time to figure out the logistics of a good retirement plan and avoid unnecessary last-minute stress — not to mention, explore the possibility of retiring early!
In this article, we’ll go over the brand-new challenges that workers and retirees may face along the way, answer the most frequently asked questions about retirement planning, and break down how to retire with complete peace of mind.
The biggest challenges for retirement planners
Planning for a stress-free retirement is becoming an increasingly demanding effort in today’s economic environment. The traditional prospect of frequent travel to faraway destinations, of picking up endless new hobbies, and spending more quality time with family and loved ones may seem like an almost impossible future when the cost of living continues to climb (and salaries don’t!).
Fortunately, the key to tackling these new challenges is simply to allow more time to prepare your budget, go over your projected costs thoroughly, and become a little savvier on the topic of retirement investing.
Longer life expectancy
One of the biggest challenges facing future retirees is that even though longevity continues to climb, the average retirement age has changed but little. This means that with an average life expectancy of 79 years and rising, a person starting their planning today would need to save and possibly invest much more money than someone of an older generation to fund longer retirement plans.
Increase of full retirement age
At the same time, the full retirement age will continue to be raised over time. Citing improvements in the health and fitness of older people and increased life expectancy, Congress has already increased the retirement age for full social security benefit from 65 to 66 years old for those born between 1953 and 1954, a limit that will gradually increase every two months, with people born in 1960 and later having to reach 67 before claiming full retirement.
The end of retirement benefits
Finally, the classic retirement funding formula is shifting considerably. Many employers have stopped providing the guaranteed defined benefit pensions older generations have been relying on for decades in favor of 401(k) and other similar forms of contribution accounts. Social Security benefits are also becoming an ever-growing question mark when discussing retirement benefits, with reports of a depleted Retirement Trust Fund as early as 2023.
Our tips on how to retire stress-free
Even with challenges and obstacles understood and out of the way, figuring out where exactly to start when drawing up retirement plans can be a major source of worry and stress.
According to a 2019 survey by the Aegon Center for Longevity, in fact, almost half of Americans worry they won’t have enough money to support them through their retirement, mostly due to insufficient savings and the growing uncertainty of Social Security services.
The overall picture for future retirees may be looking quite bleak for the moment, but by following a series of foolproof steps focused on maximizing savings and retirement income, you’ll soon be on your way to achieving financial freedom without the many headaches that more unprepared people may experience along the way!
Figure out your long-term retirement budget
The first step for planning your retirement right is the easiest on paper but one of the most daunting to start tackling. Figuring out your long-term budget, meaning the balance of the expenses you’ll encounter once you stop making active income and the lifestyle you’ll want to lead, requires extensive considerations beyond the money in/money out rule. For example, you’ll have to consider how inflation will affect your costs many years in the future, or plan changes in your health insurance as you age.
So, what should be included in your budget? Housing expenses will probably be a major cost (even when your mortgage is paid off in full) as property taxes, insurance, bills, and general maintenance will still be hefty monthly expenses. If applicable, you will need to pay income tax on each withdrawal from your 401(k)s and IRAs, as well as higher healthcare costs. Besides paying for your monthly grocery, holidays, entertainment, and shopping, you’ll have to make sure you have an emergency fund in place to cover the unexpected. When writing down your estimates, you’ll want to lean more on the conservative side: many retirees end up underestimating their expenses once they’re out of work, contributing to a less-than-ideal retirement portfolio.
Putting all these costs down on paper, in black and white, will give you a clear picture of how much money you are going to need to achieve your goals and figure out when you’ll be able to retire comfortably. Depending on your personal financial outlook, you may even be able to get an early retirement or retire much earlier than expected!
Sign up for a 401(k) or equivalent
If you have an employer-sponsored retirement plan, you’ll want to waste no time getting everything set up with HR to start making your contributions.
Many workers are puzzled by the logistics of this qualified retirement plan, though the basics of it are quite simple: a portion of your salary (before tax) will be diverted into long-term investments, while your employer may match some of it up to a set limit. The investment earnings will not be taxed until the employee withdraws that money after retiring, taking full charge of the account.
At a minimum, you’ll want to contribute enough money to get all the matching funds offered by your employer: on average, the employer match is 50% of contributions and up to 6% of salary, meaning that you could be able to claim free money worth 3% of your salary every year. Unlike most investment ventures, it’s a guaranteed return of your money, so if you’re lucky enough to have access to an employer-sponsored pension plan, you should take advantage of it!
Pay off high-interest debt
High-interest debt can come back to haunt you in later years, so it’s essential to keep track of credit cards, loans, and any other outstanding debt before retiring — it all comes down to simple math!
As a general rule of thumb, if you keep a balance on your credit cards and pay an interest rate at or above the high single digits, you’ll save more in interest by paying that off as soon as you can, rather than use investment returns.
Open a retirement account
If an employer-sponsored plan is not available for your circumstances (or if your employer doesn’t match your contributions), you’ll want to look into different ways of setting up a retirement account.
Getting a traditional IRA or Roth IRA are both popular plans if you cannot get a 401(k): these individual retirement accounts allow you to save on taxes while saving for your retirement, by allowing you to make individual contributions while you’re working. The main difference between the two options is that a Roth IRA will allow you to make after-tax contributions (with no tax benefits), while a traditional IRA may allow you to make before-tax contributions (giving you tax benefits). The former is best suited for families expected to be in a higher tax bracket once they start making withdrawals, while the latter is best suited for lower tax brackets.
With budgets and accounts out of the way, you’ll need to start saving a portion of your paycheck as soon as you can, so that you’ll be able to cover your projected expenses.
The basic rule for saving efficiently is to aim to save at least 10 to 15% of your pre-tax income (remembering to save for an emergency fund as well on top of it). If retiring early is your goal, or if you’ve started your saving efforts later than most, consider applying for catch-up contributions to boost your portfolio, which will be available to you as you turn 50 years of age. During this time, you’ll also want to consider reducing your spending, whether it’s setting a budget for groceries, eating out, shopping, or negotiating lower rates for your life insurance, health insurance, or car payments.
At the end of the day, you’ll want to replace 70% of your pre-retirement income, as some expenses will be dramatically lower, such as savings, contributions, commuting costs, and mortgage payments.
Investing right and early will do wonders for your portfolio, as simply just saving won’t make your money grow. You won’t need crazy amounts of capital to start investing in stocks that will deliver long-term returns, all you may need is a good understanding of how mutual funds work, as they are considered the best type of investment for diversifying your portfolio as a retiree.
When evaluating options, consider your personal risk tolerance and the goals for your personal finance plan: you may choose to not use your liquidity for investing in stocks after considering the risks involved, though at the same time, you’ll need to consider how the inflation rate will affect your hard-earned savings by heavily decreasing their value over time. Investing in the stock market is the best way to make sure that your savings don’t lose their value as decades go by and, instead, make sure they can multiply.
You may already own a mutual fund if you have a 401(k), but if you wish to have more control of your investments and can’t stomach buying individual stocks, you might want to consider making your savings grow by purchasing an index fund, fully automated and a whole lot cheaper for first-time investors.
Sign up for Medicare as soon as you turn 65
It’s estimated that the average couple over 65 will need $295,000 for medical expenses in retirement, excluding long-term care.
Getting on top of your health insurance plan early is fundamental to ensure a smooth retirement. If you have retiree coverage from your employer or union (don’t forget to set up a meeting with HR to get familiar with the policies!) you will have to sign up for Medicare Part A or Medicare Part B to get full benefits from your coverage, when you’re eligible. In most cases you should apply for Medicare at 65, as the enrollment period starts 3 months before the month you turn 65 and extends 3 months past, giving you a 7-month window to apply. Your Part B coverage will likely be delayed if you enroll after you turn 65, so it’s best to apply early to avoid a gap in your coverage, or worse, a hefty penalty!
Once enrolled, Medicare will pay first for your health care bills and your group health plan coverage will pay second, saving you thousands and thousands of dollars in the process.
Make an estate plan
Finally, you’ll want to consider how you can support your children and grandchildren during your later years: make sure that you have a will written up, that your accounts up to date when it comes to beneficiaries, and that medical directives are already in place for the peace of mind for your loved ones. An estate plan will ensure that the assets you leave behind are distributed to the right people, and if you’re looking to lower taxes in the meantime, you may also want to look into setting up a trust or converting your assets to a Roth IRA.
How to retire FAQs
Still uncertain about some of the process logistics? Let us answer a few questions you may be asking as you are getting your retirement savings and future investments sorted.
How much should I save for retirement?
The answer to this question will largely depend on your personal circumstances, but as a general rule of thumb, you should aim to have one times your income saved by age 30, twice your income by 35, three times by 40, four times by 50, and so on.
Stick to the 15% rule or start with a percentage that’s more manageable for your budget first, and increase by 1% each year.
When can I start claiming Social Security benefits?
You can start receiving Social Security benefits once you reach the age of 62, but the amount will increase if you delay taking them before you reach 70.
Note that if you start receiving benefits early, they will be reduced to a small percentage for each month before your full retirement age, so it’s best to plan accordingly!
How do I know if I can retire early?
Early retirement may seem like the ideal scenario for most people. You’ll get to quit your job earlier and possibly pick up some part-time or freelance work along the way to make your later years much more comfortable and exciting. But how can you tell if you are truly ready?
Generally speaking, you’ll want to be virtually debt-free, have plenty of savings you can withdraw without penalty, and make sure you can cover your own health insurance before Social Security and Medicare comes in.
How do I invest for retirement?
A sound investment strategy will involve early contributions to your 401(k) or IRA, plus any other carefully considered investment in index funds, mutual funds, or individual stocks. You may also consider investing in hard assets like real estate, though this might not be the best option if you don’t have the right set of knowledge on the market (don’t worry, we can help you with that!).
Why not reach out to a financial advisor?
With Social Security on the line and employer-sponsored plans losing their popularity, the burden of retirement planning is falling on individuals now more than ever.
If you are feeling overwhelmed by the big decisions ahead, consider reaching out to an advisor or financial planner to start keeping better track of your money and learn how you can maximize investment returns, safely and efficiently to lead the kind of post-work lifestyle you deserve.
Now, you’re almost ready to invest the right way to generate consistent passive income. For a limited time, you can access our Investor Portal with courses and resources that will give you our tips and tricks to become a successful investor.