Retirement Planning at Any Stage
Retirement Planning at Any Stage
Let’s look at some key things to think about at each age and career stage.
For people on a traditional retirement path that intend to work until between 60 and 65, different stages of life present different opportunities for retirement planning. Making a concrete plan that predicts how much you’ll spend in retirement when you’re in your twenties can be so overwhelming (and unrealistic) that many abandon the idea of retirement planning at all. On the other hand, increasing your retirement savings just a few years before your retirement and believing that’s enough of a plan, could leave you in an untenable financial position as you age.
What we’re doing to prepare and plan for retirement shouldn’t look the same when we’re in our early working years as it does in our middle and later working years.
So, what should retirement planning look like at each stage? The answer to this question can depend on several factors, like when you begin your career and when you hope to be done working. But in general, there are some key things to think about at each age and career stage.
Early Career (Ages 20 – 35)
Save as much as possible
Ideally, from the very first day you start working as an adult, you’d funnel 10-15% of your income into retirement accounts. In almost all cases, without much other planning, when I work with clients who are nearing retirement who have done nothing more than this, they are typically in reasonable shape to retire between 60 and 65. If you have a workplace retirement plan like a 401(k), an easy way to do this is to simply specify a certain percentage of your income you’d like to contribute when you first sign up for the plan. If your contributions are tied to a percentage of your salary, they’ll automatically adjust upward as your salary does.
If your workplace doesn’t offer a retirement plan, consider opening an IRA or Roth IRA and having contributions automatically moved from your checking account into this type of a retirement account each month. At some point in your career, due to the smaller contribution limit on accounts like these, this will likely not give you enough savings capacity, but it’s a good place to start.
The important point at this stage is not that you know when you want to retire or even what your life will look like in retirement, it’s simply that you put your retirement savings and investments on auto-pilot and let them accumulate.
Find Job Satisfaction and Sustainability
If you’re already envisioning the daily details of your retired life and asking how soon you can retire, it may be time to consider an accelerated retirement savings strategy or finding a job that’s more sustainable and satisfying. This is not the time in life to decide you’ll stick it out for thirty years at a job you hate. Ultimately one of the most important things to do at this stage is to find the type of work and employment that will allow you to have a sustainable, satisfying career. Looking forward to retirement can be a good motivator to save, but convincing yourself to stay in a job that makes you miserable for thirty years will likely backfire at some point down the line – possibly when it feels too late to make a change.
Mid Career (Ages 35 – 50)
It’s important to note here that the ages specified at each stage are not a perfect representation of when you’ll hit these stages and need to do these items. The mid-career stage may come earlier or later depending on your specific situation. For many, this stage coincides with raising families, finally getting out from under certain financial burdens like student loan debt, and having a little more disposable income. This is an easy stage to let slip by, because it is often one of the busiest times of our lives. At this stage, it’s still hard to think too concretely about the day to day living and spending of retirement, but it’s a bit easier to start thinking about certain big picture goals.
Check on your automated savings
Because this stage is often associated with higher wages and salary levels, it’s important to ensure that your automated retirement savings is still on track to achieve your 10-15% savings goal. For middle to high income earners, this is the age where you may start maxing out your contribution limits on retirement accounts, but in doing so still falling short of the 10-15% retirement savings goal. If that’s the case, you likely need to consider an additional investment strategy beyond your workplace plan to save for retirement.
Identify a desired retirement date range
At this point, it’s often helpful to start thinking about when you’d like to retire—not in the “August 15, 2045” sort of way, but more in the “around the age of 60” sort of way. This type of general goal post will give you something to bounce your savings goals and progress up against. More importantly, it will give you an opportunity to identify leverage points while you’re still young enough to influence your retirement trajectory.
Run Broad Retirement Projections to Identify Leverage Points
Once you’ve got a date in mind, it’s appropriate to start doing some broad retirement projections to identify leverage points that will help you achieve your retirement goals. Try not to get pulled down into the minutiae of the details of retirement or the certainty that everything over the next 15-20 years will go exactly as planned. The goal of this type of projection is to allow you to see where you can make changes now that will impact your ability to retire down the road. Is it increasing retirement savings? Paying off your mortgage early? Adding a long-term care insurance policy? A good retirement projection at this stage should help you pinpoint the most impactful things you can do to increase the likelihood of retiring when you want to. And the earlier you develop this type of projection, the more options and leverage points you’ll have.
Consider Hiring a Financial Planner
Though I think people could benefit from good financial planning at all stages in their adult life, mid-career is often a pivotal time to work with an experienced financial planner, especially if the tasks specified at this stage feel overwhelming to you. Hiring a financial planner to help you navigate the complexities of mid-career and help you think forward to retirement can help you take advantage of opportunities to impact your retirement while there’s still time to do so.
End Career (Ages 50 – 65)
It’s often easy to spot the living costs that will decrease in retirement, but it’s also important to get a good sense of what costs may be added. Will you be paying for health insurance out of pocket until Medicare kicks in? How will your spending change now that you have more free time? Will you need a bigger budget for travel or recreation? Now is the time to start to develop a realistic spending plan for retirement.
Think About and Plan for Added Costs
As you approach the ten years or so leading up to retirement, it starts to become appropriate to think about retiring with more specificity. You likely have a better sense of what your life and spending will look like after you’ve retired and a clearer picture of the resources that will be in place to fund your retirement. Now is an appropriate time for many to start identifying that actual date or year of retirement.
Develop a Plan for Cash Flow
What are your sources of income in retirement? One of the most crucial pieces of information to figure out at this stage is where your money comes from at each phase of the rest of your life. Will you be taking distributions from retirement accounts? How much will you take and how long will the accounts last? Which accounts will you take from first? When will you take social security? If there are pensions in play, will you take them right away, or wait a few years? Make sure you have a clear plan for where your funds come from over the duration of your retirement, not just for the first few years of it.
Shore up Potential Risks
I was a very young (non-financial) professional in the early days of the 2008 stock market crash, but one thing I remember clearly is the number of people whose retirement plans were very suddenly and quickly derailed. It wasn’t so much that they couldn’t ever retire, but they were going to have to wait a few years longer than they had planned.
Particularly if you are planning to fund your retirement with retirement accounts, it’s important to think about the impacts of a major market crash and work to make sure your investments are either protected against this type of a downturn, or if they’re not, understand the impacts a big market crash right before or at the beginning of retirement could have on your plan. Are you willing to work a few more years? If not, it’s vital that you have your money invested appropriately for what are both your short and long-term goals in retirement.
Take Care of Big Expenses and Debt
Though not all of life’s big expenses can be planned for, it’s a good idea to plan for the ones you know are coming, and to take care of them in your working years when you have a plentiful and replenishing source of income to do so. Though a retirement plan should incorporate this type of expense, if you know you need need a new car, are planning on a major renovation to your home, or have any other big expenses in mind, the years before your retirement are a good time to get those taken care of so they are not creating an immediate strain on your finances as soon as you retire.
It’s also a good time to focus on paying down debt. Not only does debt put a strain on monthly cash flow, but if you’re having a hard time staying out of and paying down your debt, it may be an indicator that you need to revisit your retirement plan and get a more realistic picture of what your actual spending will be like. If your retirement plan has you spending less than you currently make, but at your current income you’re over-utilizing debt to make ends meet, it may be an indicator that you need to be more realistic about what you are going to spend in retirement and adjust the plan accordingly.
As you get closer to retirement, the biggest leverage factor impacting whether you’ll have enough money in retirement is typically your retirement date, so it’s extremely important to understand income sources and realistically plan for expenses before making the transition from your working years into retirement.