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How to prepare for retirement: a guide for every stage of life

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Whether your retirement is a few short years away or you’ve still got decades to go, intentionally planning will help you achieve more fulfillment in this important part of your life. 

Retirement planning is a process that requires dedicated time and effort, and it can often feel daunting or overwhelming. From understanding your 401(k) to learning about investment strategies—not to mention handling any debt you might have—it can be tempting to put it off. But the earlier you take action, the more likely you are to avoid financial hardships later on—such as a damaged credit score—that can prevent you from the lifestyle you desire in your later years. 

No matter what stage of life you’re in, any solid retirement plan starts with envisioning how you’d like to spend your golden years—and in turn, how much you should be saving in order to fund it. Take some time to think about the kind of life you want to lead, and get specific about how you see yourself spending your time. 

If you want to take control of your future and increase your chances of reaching your financial goals for retirement, read on to learn what steps you should take at every stage of life and how you can plan for a retirement you’ll look forward to.

How to plan for retirement in your 20s

If you’re in your 20s and still establishing your career, you already have a significant advantage in planning for retirement. That’s because you’re young enough to reap the benefits of compound interest—saving a little now, but earning interest on your savings over time—thus increasing the value of your dollars and reaping a great reward down the line. The more you save and invest now, the more time your money has to grow. If you’re wondering where to start, the simplest option is to start contributing to your employer’s 401(k) plan, if available.

Invest in a 401(k)

Most employers offer a 401(k) or some other type of employer-sponsored retirement account. These accounts are specifically designed to build up retirement funds, and you usually don’t have to pay taxes on the contributions you make until you reach retirement age. Since the amount you choose to contribute is automatically deducted from your paycheck, investing in a 401(k) is one of the easiest ways to start preparing for retirement when you’re young.

In addition to a 401(k) account, some employers also offer an employee matching program where they match your contributions at a certain percentage of your salary. This is essentially free money: For example, your employer may contribute $1 for every $1 you put towards your 401(k) for up to 5 percent of your salary. It’s smart to contribute the full 5 percent of your pay if you can in order to take full advantage of your employer’s matching funds.

Many use the general rule of thumb to put 20 percent of each paycheck towards savings, which includes your 401(k) or retirement savings fund. If your budget is tight and you can’t afford to hit the 20 percent mark each pay period, don’t get discouraged. What matters is that you put something aside, no matter how small it may be.

Consider an IRA

If you aren’t eligible for a 401(k) through your employer or they don’t provide one, another option is to invest in an individual retirement account (IRA). While these accounts don’t have as high of a contribution limit as a 401(k), they don’t have to be obtained through an employer and typically provide more investment options.

It’s also common for people to open an IRA in addition to a 401(k) to invest more on the side of their employer-sponsored plan. This commonly used retirement account comes in two forms: traditional or Roth. Each comes with different benefits and limitations, but the main difference is how your contributions are taxed. 

With a Roth IRA, payments are made with post-tax dollars, meaning taxes are withdrawn from your contributions up front. This means your money grows tax-free and you don’t have to pay any taxes or penalties when you withdraw the funds in retirement. Here’s what you need to know about a Roth IRA:

  • Contributions are made after-tax
  • Contributions grow tax free 
  • Doesn’t include current-year tax benefits, since taxes are paid on contributions up front 
  • Contribution limit for 2021: $6,000 ($7,000 if you’re over age 50 and eligible for catch-up contributions) 
  • Contribution eligibility is based on income level—must be under $140,000 for 2021 tax year ($208,000 if you’re married and file jointly)
  • Withdrawals are made penalty- and tax-free after 5 years of contributions or age 59.5
  • No mandatory distribution requirements

With a Traditional IRA, payments are made with pre-tax dollars, meaning you save on taxes in the years leading up retirement. When you go to make your withdrawals, taxes will be deducted. Here’s what you need to know about a Traditional IRA:

  • Contributions are made pre-tax
  • Contributions grow tax-deferred 
  • Offers immediate tax benefits since you save your tax dollars with every contribution
  • Contribution limit for 2021: $6,000 ($7,000 if you’re over age 50 and eligible for catch-up contributions) 
  • Contribution eligibility is not limited and is open to anyone with earned income 
  • Withdrawals are made penalty-free, but will be taxed based on your current income level and tax bracket after age 59.5  
  • Mandatory distributions are required after age 72

Ultimately, deciding between a Roth IRA versus a Traditional IRA comes down to analyzing your tax situation. You should think about your future income in retirement, which determines your income tax bracket. If you expect to be in a higher income tax bracket come retirement—meaning you’ll pay more in taxes than if you were in a lower income bracket—it makes sense to open a Roth IRA and pay the taxes up front now, while they’re lower. 

On the other hand, if you expect to be in the same or lower tax bracket in retirement, you may as well enjoy the tax benefits of a Traditional IRA leading up to your retirement years and pay taxes on your future withdrawals. 

If you’re trying to decide between a 401(k) and an IRA, first consider whether your employer offers matching contributions for a 401(k). If they do, it’s wise to take advantage of the free funds as a way to significantly grow your retirement savings. While you’re still required to pay taxes on 401(k) withdrawals down the line, utilizing those matching funds isn’t something you want to miss out on.  

On the other hand, IRAs typically offer far more investment options than a 401(k) since they’re managed by a broker instead of your employer. With an IRA, you can look at the investment options with your broker or financial advisor and determine what would yield the most growth for your unique situation. Ultimately, many financial experts suggest investing in both a 401(k) and an IRA in order to maximize your savings and diversify your investments. If you are eligible for both, it’s smart to do so.

Build a healthy credit score

Your credit score is something that follows you for life, and taking the time to establish a strong score early on can pay dividends down the line. A healthy credit score provides benefits like higher limits on credit cards, lower interest rates on car loans or a mortgage, and lower rates overall on things like car and home insurance. 

Preparing for retirement and building your credit score go hand in hand, since achieving a high score comes in part by establishing responsible saving and credit usage habits. By making a point to pay off your credit cards on time and in full each month, plus by keeping your credit utilization low by borrowing less, you’ll establish strong financial management skills that will help you focus on your retirement savings goals early on in your career.

How to plan for retirement in your 30s

If you’re in your 30s and just now starting your retirement savings plan, don’t fret. You’re still young enough to benefit from one of the greatest money-making assets—time—and have the ability to be riskier with any investments you make than if you had just a few years left until retirement. Still, it’s important that you make your savings a priority and become more aggressive with growing your assets. If you do, meeting your retirement goals is absolutely possible in your 30s.

The focus of retirement planning in your 30s should be an aggressive savings plan and getting the highest returns possible from your investments. Diversifying your investments is also important in growing your money as much as possible and ensuring you’re making the most of your contributions.

Increase 401(k) contributions

Your 30s are usually your peak earning years, so it’s important to be intentional with where all of your money goes and how you manage any salary increases during this time. If you’re enrolled in a 401(k) plan with your employer, now would be a good time to increase your contributions. This is especially true if your 401(k) includes an employer match, in which case you should aim to contribute as much as your budget allows to take advantage of those additional funds. 

If you can’t reach the maximum contribution right now (the cut off for 2021 is $19,500) try to plan to get there in two to three years, and consider setting up an automatic contribution increase of 1 percent each year. Even a 1 percent increase can yield significant returns over time, so finding ways to make room in your budget now will pay off in big ways down the line.

Person contributing to their 401(k) fund

Assess and automate your savings

You may have gotten away with not instilling smart budgeting habits in your 20s (it’s normal!) but once you hit your 30s, it’s critical that you track where all your dollars are going—especially when it comes to building out your retirement fund. 

If you haven’t already, take the time to create a detailed budget so you know where you stand financially. If you haven’t built an emergency fund, now is the time to start that as well. Most financial experts recommend saving enough to cover six months’ worth of living expenses. You can dedicate a portion of your paycheck to this fund, along with whatever you’re putting away for retirement. 

A simple way to ensure you hit your goals consistently is to set up automatic payments for your savings and retirement accounts. This “set it and forget it” method prevents you from missing any savings payments, and removes the friction of having to manually make a transfer each month.

Diversify your investments

There are countless options for retirement investing, and choosing where to invest can feel daunting. A good rule of thumb in your 30s is prioritizing accounts that provide tax advantages and employer benefits before branching out with other investments. As previously mentioned, maxing out your 401(k) should be first on the list in order to harness your full employer match (if provided.) 

If your employer doesn’t offer a 401(k) program, you might have already opened up a Roth IRA or other IRA account. But if you are enrolled in an employer-sponsored 401(k) and are contributing the maximum amount, the next step is to expand your investments and open up an IRA to supplement your retirement savings. 

The beauty of a Roth IRA is that it’s a tax-free source of income that you can bank on to build your retirement fund. There’s no time restriction for when you can dip into the account, so you can make a withdrawal penalty-free at any time (instead of having to reach a certain age before you’re allowed to use the funds.) If planning for retirement is your goal with a Roth IRA, however, it’s not recommended that you use those funds until retirement. That said, it does provide a level of flexibility that can be helpful in a pinch.

Pay off debt

While maximizing your retirement savings and diversifying your investments should be priorities in your 30s, another crucial component to pay attention to is tackling any debt you may carry. Look at paying down your debt as another investment—while it might not feel that way, in reality, it’s one of the most critical investments you can make. And since your 30s are typically your highest-earning years, you’re likely in the best position you’ll ever be in to pay it off.

The right strategy for paying down your debt depends on the type of debt you carry. In the financial world, there’s a common distinction between what’s considered “good debt” and “bad debt. Good debt—like a mortgage—is attached to assets that are expected to increase in value, in which case the debt you owe will ideally lead to financial advantages down the line. Alternatively, bad debt—like a car loan—is attached to depreciating assets that lose their value over time. Credit card debt also falls into this category, given its high interest rates and lack of tax advantages. 

How to plan for retirement in your 40s

In general, it can be beneficial to prioritize high-interest debt that isn’t tax deductible—namely, credit card debt. To begin, make a list of your credit cards in order of the highest-interest card to the lowest, noting the balance you owe on each. Then list all other debts such as medical bills, car loans and student loans. Review your budget to determine how much you can put towards payments each month, allocating as much as you can afford to the highest-interest credit card. Aim to make at least the minimum payments on the rest of the debts, gradually increasing those payments when possible. Continue until you’ve paid them all off.

Your 40s represent the halfway point between your career and reaching retirement age. If you didn’t create a retirement savings plan in your earlier years, it’s not too late to successfully do so now. While it’s true that your time horizon is smaller than what it was in your 20s and 30s, there’s still plenty of time to make up for it with the right habits and strategies. 

A good place to start is to determine the amount you want to have saved by the time you retire. Understanding how much you’ll need to have stashed away once you stop working full time is necessary for creating a workable plan to get you there. It doesn’t have to be an exact amount, but a ballpark estimate can help you figure out how much you’ll need to save to achieve it.

Pay off debt as soon as possible

It can be tempting to prioritize funding your retirement savings over paying down debt as your retirement age now looms closer. While this seems like a smart move on the surface—after all, you aren’t getting any younger—it’s not always the right choice.

If the debt you owe has a high interest rate, you may end up spending more in interest fees than you end up earning on any retirement investments. Having to manage credit card balances and interest rates can severely impact your ability to save, and putting it off now means having to allocate your retirement earnings on it later. By this stage of life, you should have a solid plan for how you plan to pay off any debt.

Make your money work for you

If you’re just now starting to save for retirement in your 40s, you want to put your money where you’ll get the most bang for your buck. The simplest way to do this is through an employer retirement plan, which for most will be a 401(k). If you have the advantage of a 401(k) that includes matching contributions from your employer, even better. Make a point to invest enough to earn a full match in order to maximize your savings. 

Prioritizing a retirement account like a 401(k) is wise because you get the benefit of compound interest, and the same goes for a Roth IRA. Certainly contribute to a Roth IRA if you don’t have access to an employee-sponsored 401(k), but consider opening one in addition to your 401(k) if you can. You won’t pay taxes on your future earnings with this type of account, and it’s another opportunity to take advantage of compound interest and get the most out of your future retirement dollars.

Build your portfolio with index funds

If you’re planning for retirement in your 40s, it’s a good idea to focus on building out your portfolio of assets. While you’ll need to get serious about your savings and investments to make up for some lost time, the opportunity to benefit from compound interest still stands. 

Many people in their 40s believe they’re too close to retirement age to take on any risky investments. While it makes sense to focus on having a stable plan that won’t result in monetary loss, investing too conservatively at this age is unlikely to yield the results you’ll need to reach your retirement goal in time. Investing more aggressively in stocks or index funds will help you earn a higher rate of return. It’s still important to limit your risk to a certain degree, but choosing the least risky investments won’t do you many favors in the long run. 

To mitigate your risk, a good move is to start investing in index funds. They’re less risky than individual stocks—which depend on the success of a single company—and can be great for your portfolio because they provide exposure to stocks in a variety of industries in one single fund. This results in a low-cost, diversified investment that will yield greater total returns over time, unlike more conservative investments such as bonds.

How to plan for retirement in your 50s

By the time you’re in your 50s, retirement is much closer on the horizon. It’s essential to take stock of where you stand financially, reassess your long term goals and get laser-focused on making a plan to get you there. 

While calculating your needs seems basic, it’s best to get specific. Dig into your current budget across all spending categories, and try to estimate what your financial needs might look like in your non-working years. Remember that by nature of not working anymore, you’ll have far more time on your hands—it’s important to think about how you see yourself spending it and, in turn, how you’ll spend your money. Factor in things like travel, visiting family, hobbies, and any other non-income-producing activities.

If you’ve already paid off your mortgage and other types of debt, it’s not unlikely that your income needs will decrease in retirement. However, if you still have a mortgage to pay or other financial responsibilities on your shoulders, it’s crucial to factor in just how much you’ll need to take care of those things as well as how much you’ll need to live on. Additionally, increased healthcare costs catch many people in this age group by surprise, and planning ahead will save you from depleting your savings down the line.

Take advantage of 401(k) catch-up contributions

Your 401(k) is a powerful retirement tool no matter what stage of life you’re in, and hopefully at this point you’re contributing the maximum amount into this fund. But once you hit your 50s, there’s an additional advantage at your disposal: catch-up contributions. This is a special provision that allows individuals of a certain age to contribute an extra amount to their 401(k) beyond the typical limit, in order to help them “catch up” in their retirement fund. If you’re at least 50 by the end of the year, you qualify. 

The maximum contribution amount in 2021 is $19,500 for those under the age of 50. But for those 50 and older, you can put in an extra yearly catch-up contribution of $6,500, amounting to $26,000 total. This is a smart move in making your money work for you, especially when retirement looms closer in this stage of life. 

Catch-up contributions also apply to IRA accounts, amounting to an additional $1,000 on top of the typical limit of $6,000 once you turn 50. That’s a total of $7,000. If you’re married, both you and your spouse are eligible to take advantage of the catch-up contribution.

Reassess your portfolio

Evaluating your retirement savings and investments is necessary the closer you get to retiring. You’ll want to determine what you expect to spend from your portfolio each year and if you’re currently on track to be able to do so. While it’s commonly believed that the older you get, the more conservative your investments should be, this isn’t always the case. If you’ve calculated your income needs in retirement and find that your investments so far aren’t enough to cover them, it’s time to invest more in order to grow and diversify your streams of income. 

While being strategic is important, there’s no reason to focus solely on less risky investments like bonds. If you intend to retire in your mid-60s or later, you still have plenty of time to bulk up your savings through investments like stocks, which might be around 50 to 60 percent of your portfolio at this point. 

While the exact makeup of your portfolio will vary depending on your risk tolerance, you want to make sure it’s diverse enough to be able to withstand market fluctuations. Look for quality stocks that provide long-term value and choose a mix of stocks and bonds from a variety of market sectors. Low-cost index funds can be a great move for acquiring a group of stocks or bonds across several industries in a single investment.

Consider healthcare costs

Planning for medical care in your retirement years is an important step in avoiding large medical bills that can quickly deplete your savings. While many people assume that Medicare will sufficiently cover all their medical expenses throughout retirement, this isn’t the case. A Fidelity Investments estimate reported a couple in their mid-60s would need $285,000 to cover healthcare costs in retirement in 2020.

A couple in retirement assessing an expensive healthcare bill

The amount you’ll need for healthcare costs depends on how healthy you are, how long you expect to live, and which accounts you plan to fund healthcare costs with. If your employer offers a Health Savings Account (HSA) eligible health plan, contributing to this account will allow you to reduce your taxable income and grow your savings tax-free. An HSA can cover certain medical premiums, and they’re also eligible for catch-up contributions if you’re older than 55. If you aren’t eligible for an HSA account, there are other ways to fund your healthcare costs in retirement.  

Another option is long-term care insurance, a form of private insurance that covers nursing-home care and home-healthcare for individuals over 65 or who have a chronic condition that requires around the clock care. It’s available to anyone who can afford it, and the premiums can be costly: The average annual premium for a healthy 55-year-old couple was $3,050 in 2020. 

There are other healthcare planning options to consider, and it’s important to weigh your options carefully depending on your income and overall health needs. Take stock of your general health, genetic history, and the possibility of needing to pay for a nursing home or live-in assistance down the road. These expenses can take a big share of your retirement budget, and planning ahead can help you preserve your funds for other needs.

Assess likely income and tax expenses

At this stage, understanding your sources of income and what expenses you’ll still need to budget for once you enter retirement is key. One source of income you’ll want to determine is your Social Security benefits, and an expense that can’t be forgotten is the taxes you’ll pay. Different tax rules apply to different types of income, so understanding how different sources of income will impact your tax rates is an important step to take. 

You can use an online calculator to get an estimate of what your Social Security benefits will be based on your projected age and future income. The Social Security Administration offers one on their website. The earliest eligible age to begin receiving Social Security payments is 62, but your benefit amount will vary depending on how early you choose to receive them. If you postpone taking your benefits, your overall benefit amount will be higher than if you elect to take them at age 62. 

When it comes to your 401(k) and IRA withdrawals, expect to be taxed in some way (with the exception of Roth IRA withdrawals, which are paid for upfront with your contributions). Once you’re 72, you’re required to start withdrawing from these types of accounts each year, and must take the Required Minimum Distribution (RMD) in order for the government to collect taxes on this income. The amount of taxes you’ll pay depends on your taxable income, deductions and what tax bracket you’re in for the year. 

In the end, setting yourself up for retirement takes dedicated effort and planning no matter what stage of life you’re in. Your expenses will depend on how you plan on spending your time, how healthy you are, your savings and your credit score. Retirement planning is an ongoing process that should be revisited periodically as your budget and different life scenarios change throughout the years. 

For more guidance on how your credit score can impact your expenses throughout retirement, speak with our credit repair team to further protect your financial health down the road. With a little thought and effort, you can have a significant impact on your retirement years and enjoy your later years in life.

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