Retirement Planning: Your New Roadmap

Have you started thinking about retirement planning? A retirement fund starting to grow? Maybe just a plan to make a plan? Well, if not, at least you’re not alone. Only half of Americans have even calculated how much they’ll need to save to retire comfortably. And yet, the average American spends nearly 20 years in retirement. The good news is it’s never too early or too late to start planning for retirement. 

20 years is a huge portion of your life, even if retirement seems so far away. Retirement planning shouldn’t be an afterthought, especially as it should be as enjoyable and relaxing as possible. The key to achieving the kind of retirement goals you deserve lies in planning and saving, and the sooner you start, the better. But, like investing, many Americans get stuck on the question of where to start.

Five Important Factors When Retirement Planning

Before discussing where to start, the most important factor in planning your retirement is WHEN to start. The answer is simple – if you’re working full time, TODAY! The sooner you start saving for retirement, the more time that money has to grow.

As you begin your retirement planning, these are five important factors to consider to make sure your plan fits your goals:

Lifestyle

Retirement looks different for everyone. Some may envision a lavish sunset era, traveling the world, enjoying the best of what’s around, and celebrating a successful career to the fullest. For others, a dream retirement may mean a modest, simple, and relaxing lifestyle that may not require quite as robust a retirement savings account. Retirement age also differs quite a bit depending on your desired retirement income and occupation. Wherever your retirement dreams fall on that spectrum, it’s essential to identify it early so your plan can be on track to fulfill those dreams.

Income

Where is your money going to come from in retirement? Your retirement income strategy may revolve around social security, a maxed-out 401k plan, investment dividends, deferred salary, a large savings account, or, ideally, all of the above! As you begin retirement planning, your first realization will be that the money is going to need to come from somewhere, and the sooner you start contributing to those income sources, the more comfortable your retirement will be. Consider what you’re making now, estimate how it will change over the next few decades, then decide how much you can put aside in savings and start creating a budget for your retirement accounts.

Setting

Next, think about where you want to retire. Maybe you want to find a small condo for you and your partner in the town you’re already living in. On the other hand, many retirees go the snowbird route, with multiple homes in different climates that they can alternate to make the most of each climate. If your plans include an apartment in a major city and a beachfront condo in Palm Beach, your costs will be far higher on upkeep and travel alone. So start planning early!

Timeline

You should also think about when you want to retire. The minimum retirement age is generally 62 (when you can start collecting Social Security benefits), but the best option is different for everybody. If you genuinely love your work, it’s never a job. Some people want to stay in their profession until it becomes physically impossible. That’s a beautiful thing, but it’s not for everybody!

Many people can’t wait for retirement, and as soon as it’s financially feasible, they’ll jump on it. You should consider the implications of early retirement on tax rates for withdrawals on savings, Medicare benefits, and Social Security payouts. Either way, having a general sense of what age you want to settle into retirement is crucial in making your plan.

Savings

The average 20 years Americans spend in retirement probably won’t be all golf and walks on the beach. New expenses and financial surprises can come anytime, and it’s good to be as prepared as possible. For example, if you have two homes, that’s twice as much upkeep and surprise maintenance projects to deal with. Not to mention healthcare can be more expensive in older age. Whatever your retirement plan ends up looking like, saving is the key. So start your investments early, even if it’s small, and incrementally increase your savings contributions as your income grows in your early career.

There are some great tools out there, like retirement calculators, to help you understand what your retirement accounts will require for your plans. 

Realistically, How Much Money Do You Need to Retire?

This is a highly personal question, depending on your answers to some of the questions we’ve already posed and your overall retirement lifestyle goals. In general, AARP estimates that the average retirement will require about 80% of your previous income. You should also consider who you’ll need to support in retirement. If you want to retire early, you may still support your children and their growing families.

How Has Retirement Planning Changed?

One concerning factor when it comes to retirement is the trend amongst younger generations to place less value on planning early and saving less along the way. A recent report from TransAmerica Center for Retirement shows that Gen Z has much lower median retirement savings than the generations before, continuing a trend that goes back to Baby Boomers.

Below are the findings for average retirement savings by generational group:

• Gen Z (born 1997-2012) have a median retirement savings of $33,000
• Millennials (born 1981-1996) have a median retirement savings of $50,000
• Gen X (born 1965-1980) has a median retirement savings of $87,000
• Baby Boomers (born 1946-1964) have a median retirement savings of $162,000

Of course, older generations have had more time to plan for retirement, but they also started earlier. At the same time, Millennials and Gen Z are doing themselves a disservice by representing the biggest portion of luxury purchases, despite rising interest rates, according to CNBC. These two youngest generations account for all of the growth in the luxury market in 2022 and are now the “wealthiest shoppers” on paper.

At this rate, Millennials and Gen Z will find themselves in a more difficult position than any generation in US history when it comes time to think about retirement accounts seriously. Inflation, rising interest rates, and a slowing economy won’t help matters. In fact, these factors will make retirement planning increasingly difficult at any career stage.

What is the 25x Rule for Retirement Planning?

The 25x Rule is a great way to gauge the general amount of money you’ll need to have saved for a comfortable retirement. Essentially, this asks you to decide on a yearly retirement budget, then factor in how some of the standard retirement benefits (discussed in detail below) will contribute to this budget. From there, you take the difference you’re left to provide on your own and multiply it by 25 (for each year you plan to spend in retirement, which differs for everybody). This number is the total amount of money you’ll need to have saved to live your retirement according to the lifestyle and standard of living you’re aiming for.

What is the 4% Rule for Retirement Planning?

The 4% Rule is an investing principle that suggests a retiree can withdraw 4% of their portfolio each year over the course of their retirement without running out of money. Used in combination with the 25 Rule, you can create a very detailed plan and devise a yearly retirement budget, as well as identify where this money will come from, even if you’re looking decades down the road. Of course, markets and inflation are volatile, but this is a very conservative and safe approach to retirement spending.

Where Your Retirement Planning Starts

These factors all make planning for retirement more urgent than ever, especially for young people. The good news for Millennials and Gen Z is – there’s still plenty of time! You have a few decades to build up retirement savings, and the sooner you start, the smaller your periodic contributions will need to be, reducing the immediate lifestyle impact.

So… where to start? There are lots of different options for retirement planning, and the best course for you depends on what you want your retirement to look like. Whether you anticipate your retirement will be extravagant and luxurious, or conservative and comfortable, there are two major keys to get there: start early and start small.

Starting a retirement fund early, whatever route you choose to take, will give your money more time to grow on its own. And starting small is better than putting it off for years. It’s ok if your early contributions are small – you have time to slowly increase those contributions as your lifestyle allows, especially with more time before you expect to retire.

With this in mind, these are some of the most common and rewarding ways to start your retirement planning:

Just Save

This is the obvious, but most important, part of retirement planning. Start setting aside money young. First try to get a handle on any debt you may have. Then start to think about the long-term investments you can begin early. Where and how you save are important, but as long as you start the process now, that money will grow over time, through interest or dividends. Just don’t touch it until you’re ready to retire – you could lose principal and interest, as well as any potential tax benefits. Instead, roll them over to an Individual Retirement Account (IRA) or, if changing employer, a new retirement plan.

Individual Retirement Account (IRA)

You can put up to $6,000 a year into Individual Retirement Accounts (IRAs), and even more if you’re above the age of 50. But, it’s perfectly normal (and still rewarding) if you have to start smaller than that cap. You can decide between a traditional IRA or a Roth IRA. Both offer great, but differing, tax benefits and are some of the best investments you can make for your future. The easiest way to set this up is to have a certain amount deducted from your paycheck, ensuring you get the most tax benefits from your contributions, and reducing the temptation to skip a month. 

401k Plans

For many, retirement savings start with their first salaried income and allocating some of that income to a 401k plan. Everyone should take advantage of this as much as possible, if only to reduce your taxes each year! Ideally, you want to make the maximum contribution to your 401k plan, so it’s robust and rewarding by the time you’re ready to retire. The cap on 401k contributions rose in 2023 to a maximum of $22,500, up from $20,500 in 2022. 

Furthermore, if your employer has any kind of matching structure, absolutely make sure you’re putting in at least the amount they will match. This way, not only will your money grow over time from compound interest and tax deferrals, but you’re instantly doubling the amount you contribute in the present.

Pension Plans

Check with your employer about the kind of pension plans they offer. If it’s a traditional pension plan, find out if you’re covered and learn how their plan works. Ask for an individual benefit statement to see what your benefit is worth. This is particularly valuable if you plan to stick with your current employer for the long haul. Also, consider your spouse’s pension benefits and any benefits you may have from a previous employer.

Social Security

Chances are, you’ve been contributing to Social Security your entire working life. While it may feel like money you’ll never see again now, it will be a crucial part of your retirement plan when the time comes. In general, Social Security retirement benefits replace around 40% of your income (you can start calculating your Social Security benefit here). As we’ve mentioned already, the average American needs 80% of their pre-retirement income to live comfortably. So, with the right Social Security benefits, you’re halfway there. 

Medicare

Once you reach the age of 65, you’ll be able to get healthcare through Medicare. This is a major cost that will now be covered by the contributions you’ve been making in each paycheck. Just be sure to check with your employer to see if they offer a more rewarding Medicare program than the standard federal Medicare program to maximize your benefits.

Retirement Planning by Investing

If, after a few years, you’ve built up some money in your savings account, it’s probably time to start making that money work for you. There are a variety of ways to start investing that money, but finding good advice can be challenging, especially if your savings account isn’t in the six figures already.

Like retirement savings, the key to maximizing your investment returns is to start early, even if you’re starting small. The returns on investing are exponential, meaning the longer your money is invested, the larger the total value will be when you’re ready to start living off that money

While there are many free tools that let you make individual trades on your own, unless you’re an expert in the stock market, you’re going to need good financial guidance.

Wizest offers the kind of financial expertise used by the 1% for a small monthly subscription (less than the cost of 1 coffee per week). You don’t need to know anything about the stock market to start, simply browse their curated selection of financial Experts, and “follow” the ones you relate to just like on social media. You can replicate their portfolios in one click and be well on your way to a robust retirement fund to supplement all the above steps you’ve already likely taken.

Wizest is the best option to start building a retirement count with investments for first-time investors.

Don’t Get Deterred by the Unknown

Admittedly, a lot of retirement planning falls under the “estimation” category. None of us know exactly what the future will bring, especially with our finances. What we do know, however, is that there will come a time when we want to rely on the financial decisions we have made over the last years. That's where your retirement savings accounts come into play.

Fortunately, we can now venture out on that journey using a plethora of tools, like calculators and platforms like Wizest that take the reluctance and obstacles out of the way of planning.

Yes, it is true that we don’t know what the future holds. The key is to get solid information, make a plan, start saving early, and don’t touch it until retirement. With a good retirement plan in place, you can have the peace of mind that it will be there when you need it, and that’s priceless.