Retirement planning is often likened to nutrition and exercise. You know it's important, yet it's so much easier to focus on the here and now instead of distant future goals -- whether that's a healthy, active life in your later years or a robust retirement nest egg.
But just as you require specific health screenings at certain life stages, you should evaluate your retirement strategy at different stages in your career to ensure you're doing all you can to achieve a comfortable retirement. Let's take a look at what you need to do -- and when.
Early to mid-career: Maximize your employer-sponsored plan
Scenario: You're just starting out in your career, or you might have a couple of positions under your belt. Either way, you have time on your side. This doesn't mean you can afford to wait to start saving and investing for retirement, but this does mean you can slowly ease your way into the habit of consistent contributions.
- Contribute to your employer-sponsored retirement plan, such as a 401(k), even if it's just a small percentage of your income. Let's say you earn $50,000 annually and start by contributing 1%. That's $500, which translates to saving around $41.67 per month in pre-tax income. You likely won't miss this money in your paycheck, but that $500 annual investment could grow to more than $61,000 in 30 years, reasonably assuming an average annual return of 8%.
- Ramp up your contributions regularly until you reach the recommended savings rate of 10% to 15% of your income, or even up to the IRS annual limit if possible (which is $17,500 in 2014 for those under 50). At the very least, contribute to the full extent of your employer match (if one is offered) so as to not leave free money on the table.
- Take advantage of in-plan advice. If your plan doesn't offer this feature, then check out an out-of-plan option like Smart401k. Advisory services can help you pick the right funds and the right percentage to invest in each to best support your retirement goals. An investing strategy tailored to you is a much better idea than throwing your money into a one-size-fits-all target-date fund.
Mid to late career: Look beyond your 401(k)
Scenario: You're well-established in your career and are likely earning a higher salary than when you first started out. Retirement might still be 20 years away, but it's time to get serious about your retirement planning.
Here's what to do:
- If you haven't already reached the annual IRS maximum, continue increasing your 401(k) contributions until you do. Investors aged 50 and older can contribute an additional $5,500 to their 401(k) in 2014 in the form of "catch-up" contributions. This is especially important if you got a late start on saving.
- Consider adding an individual retirement account (IRA) to the mix. An IRA offers you access to thousands of mutual funds -- many more than are offered in a typical 401(k) plan. Further, chances are your 401(k) won't fully fund your retirement: The average 401(k) balance reached just $89,300 at the end of 2013. While this was an increase over 2012, it's hardly enough for a comfortable retirement.
- Get a plan if you don't have one already. Getting in the habit of saving and building up your contribution level over time is only part of a healthy financial plan. Your strategy should include an estimate of your retirement income needs and take into consideration your risk tolerance (i.e., how market volatility affects your peace of mind) and your appropriate asset-allocation (i.e., the breakdown by percentage of major investing classes in your portfolio). An investment advisor can help you sort through these complicated issues.
Late career to retirement: Prepare to transition
Scenario: You're getting closer to retirement and are wondering what to do next. How will your savings and other retirement benefits work together to pay you an appropriate retirement salary?
At this point, you need to:
- Develop a plan for taking withdrawals from your retirement accounts. There's a lot to consider, including required minimum distributions and the impact of inflation on your spending power. Withdrawing 4% of your nest egg annually is a common starting point, but your withdrawal rate should really be customized to your retirement income needs and other individual factors. You don't want to risk outliving your money!
- Determine a strategy to maximize your Social Security benefits. Collecting too early can cost you thousands over your lifetime, and you don't want to get shocked by the "tax torpedo," which is when IRA withdrawals trigger the taxation of Social Security benefits or even push you into a higher tax bracket. There are literally thousands of claiming options, so consult an investment advisor who can help you to determine the best strategy for your Social Security and retirement account distributions.
- Take your retirement salary for a test drive. A year or two before you retire, try living on your estimated retirement income, at least temporarily. This is the only way to know for sure whether you'll be able to afford the retirement lifestyle you want -- or if you'll need to make adjustments to your budget or even work a little longer to add more to your nest egg.
Everyone knows they need to plan for retirement, but oftentimes it's easier said than done. The good news is that breaking it down into smaller tasks can help make it easier for you to ensure a healthy nest egg. This checklist isn't necessarily all-inclusive, but it's a good start toward figuring out what you need to do to reach your financial goals and enjoy the retirement you've always envisioned.