While it's never too soon to begin preparing for retirement, your retirement strategies should evolve as you move from one stage of life to the next. Steps like budgeting, prioritizing financial goals, and balancing investment risk with growth opportunity will look different at the start of your career from how they will when you're ready to start retirement.
Here's a list of tips by age group to help you make the most of each phase of your retirement planning.
Your 20s and 30s: Early in Your Career
1. Opt In and Max Out on Your Workplace Retirement Plan
If your job provides a retirement plan, such as a 401(k), make sure you're enrolled and that your contribution level is set high enough for you to get the maximum employer match available.
When you're early in your career, the most important move you can make to secure your future retirement is simply to start saving. Financial advisors say you should try to save at least 10% of your gross salary in your 20s and bump it up to 15% in your 30s.
Whatever the amount you can set aside is, you'll benefit from the power of compounding interest and the fact that your retirement date is such a long way off. The longer you wait to start saving money for retirement, the more you'll need to save each year to achieve the same retirement income goal.
2. No Employer-Sponsored Plan? Start Your Own
If you don't have a workplace retirement plan, you can open an individual retirement account (IRA). A Roth IRA may be a better choice than a traditional IRA at this age, as the money you contribute is taxed now instead of when you start withdrawing it in retirement. By the time you reach retirement, your increased earnings over the years will likely have pushed you into a higher tax bracket.
If you're self-employed, you may want to look into a Simplified Employee Pension (SEP) IRA. Available only in the traditional, tax-deferred version, an SEP IRA lets qualified self-employed people and small business owners fund their retirement and contribute to the retirement savings of their employees, if they have any.
3. Go Heavy on Stocks Early On
Another advantage of youth in retirement planning is that, in your 20s and 30s, you can afford to invest a large portion of your portfolio in stocks and get high long-term gains. With your retirement several decades away, the volatility of the market poses less of a risk to you because you have lots of time to recover from any dips along the way. Go stock-heavy now, with an eye toward favoring less risky investments in later years when you're closer to retirement.
Your 40s and 50s: Thinking About Retirement
4. Size Up Your Future Nest Egg
When you reach your 40s, take a moment to assess what you've saved so far and do a rough estimate of how much you'll have when your retirement date arrives. You can look for online retirement savings calculators to make this task easier. You'll want to do another retirement savings checkup in your 50s, too.
If you seem to be tracking toward falling short of your savings goal, you may want to find ways to increase the amount you're saving, which brings us to the next tip.
5. Consider Paring Down Your Spending
Could you keep your car a little longer, take more affordable vacations or send your kids to a less expensive college? If so, applying the money you save to your retirement plan could help you build your nest egg faster.
If those spending cuts still aren't enough, a more significant step like downsizing to a less expensive home or moving to an area with a lower cost of living might be in order.
6. Take Advantage of Higher Contribution Limits
Starting at age 50, IRS rules allow you to save more tax-favored money in 401(k) plans and IRAs. The maximum annual contribution limit goes up an additional $6,000 for 401(k)s and an extra $1,000 for IRAs.
If you're thinking it would be hard to squeeze anything close to that out of your budget, remember that your tax savings will offset the short-term financial impact. What's more, these catch-up contributions will pay off through a much healthier retirement fund in the long run.
Your 60s: Approaching Retirement
7. Avoid Taking Social Security Too Soon
If you just turned 60 within the last year, that means your full retirement age under the Social Security system is 67. That's the age at which workers born in 1960 or later can collect their full Social Security benefits.
You're eligible to collect reduced benefits at age 62, but if you start then, you'll be taking in 30% less than your full benefits each month. Not only would your Social Security income be significantly higher if you were to wait until your full retirement age, but the benefit level would keep going up for each month you delay until it maxes out at age 70.
8. Create a Post-Retirement Income and Spending Plan
With your retirement date coming soon, work on getting a clearer view of what your retirement income and expenses will be. Add up your guaranteed income sources, such as Social Security or pension benefits, to see whether they will cover your basic expenses. If not, consider the option of purchasing an annuity to ensure that you have a regular income stream to meet those needs.
Another possible approach to filling a retirement income gap is to plan on picking up some occasional work through the gig economy, or perhaps even starting a part-time, post-retirement business.
Your 70s and Beyond: Firmly in Retirement
9. Get Ready to Take Your RMDs
If you have a 401(k) or a traditional IRA, you must begin making withdrawals from those plans by April 1 of the year after you turn 72. After the first withdrawal, the deadline is December 31 of each year. If you don't take the required minimum distribution (RMD), you'll face a tax penalty equal to 50% of the amount you should have withdrawn.
You can put off the RMD if you're still working beyond 72, as long as you don't own the company where you work, but the requirement kicks in once you retire.
RMDs don't apply to Roth IRAs, so you can choose when to withdraw money from those plans without having to worry about tax consequences.
10. Clear the Deck of Debt
If you haven't already eliminated most of your debt by the time you're in your 70s, make a hard push now to reach that goal. You especially don't need a lot of high-interest credit card debt hanging around when you're facing the higher health care expenses that often come with getting older.
Once you make it to your 70s, the chances that your life — and thus, your retirement years — will extend a couple decades longer go up significantly. You'll need your retirement income to stretch as far as possible, and getting rid of your debt can free up money that could cover your living expenses and be put toward living your retirement dream.
To sum up our retirement strategies by age group, as you work through your retirement planning timeline, remember to:
- Start preparing for retirement early to maximize your time to build up savings.
- Participate in a workplace or individual retirement plan.
- Regularly reassess your retirement savings growth.
- Boost your savings at age 50 and beyond with catch-up contributions.
- Wait until at least your full Social Security retirement age to collect benefits.
- Avoid tax penalties for missing required plan distributions.
- Free up more retirement income by cutting spending and debt.