Monday, March 18

3. Retirement Planning by the Decade


Retirement Planning in Your 20s

If you're a typical twenty-something, planning for retirement isn't even on your radar screen. Launching your career and establishing your own household are more serious priorities. Exploring independence and spending on yourself are fun, too. And credit card debt and education loans may also put demands on your income. But none of this should be an excuse for you to ignore saving for your retirement. In fact, a retirement plan should be on your priority list.

Why? Time, not money, is your greatest asset when you're in your twenties. With compounding, just a few dollars saved have a chance to grow into BIG money. Financial planning experts recommend taking these steps.

  • Make a start. Although saving 10% of your income is recommended, it may not be possible. Save what you can. Even $25 a paycheck will mount up.
  • Sign up for your employer's 401(k) or 403(b) plan. Contributions are tax-free. Contribute enough to qualify for total matching amounts from your employer. Consider a more aggressive growth strategy for choosing investment options because you have years to recover from market downswings.
  • Set up an individual IRA. If your employer has no 401(k)/403(b) plan, set up your own IRA. Deposit as much as you can up to annual limits.
  • Limit debt. Pay down existing credit card debt. Make a budget that helps you live within your means. Save toward purchases you want; don't just charge them and rack up high interest charges. Shop wisely for big purchases. For instance, shop for a vehicle that meets your needs rather than expensive "wants."
  • Build an emergency fund. If you need funds for emergencies such as repairing your vehicle or bridging time between jobs, you don't want to tap into your retirement funds and incur penalties. Save up a three to six months emergency fund. Keep that fund in a savings, money market, or other easily accessible account.

Retirement Planning in Your 30s

Americans in their thirties have the highest levels of debt of any decade group—even though median income for households in their thirties falls between about $52,000 (ages 25-35) to over $67,000 (ages 35-45). Raising children and purchasing homes tend to contribute to higher debt. Thirty-somethings also have the highest rates of being late on bills. It's no surprise that saving for retirement takes a back seat to these issues. However, your 30s is prime time for getting high returns on retirement savings.

  • Pay yourself first. Set a goal for savings from each pay period and have that deposited directly to your retirement account. Because earnings are typically much higher than in your 20s, experts recommend aiming for 8 to 10% of your income. Then make a family budget for all other expenses based on your net income.
  • Pay down credit card debt. Then use cards wisely. Using credit cards to live beyond one's income is a major reason that young families struggle with debt payments. A budget can help your family pare down expenses, prioritize purchases and pay down debt. Less money spent on debt payments means more money for necessary expenses and savings.
  • Participate in employer-sponsored 401(k) and 403(b) plans. Matching funds from employers can increase the power of your contributions; make sure you qualify by maximizing contributions. Continue to consider a more aggressive growth strategy for choosing investment options because you still have years to recover from market downswings.
  • Buying a home? Search for a home that meets both your needs and your budget. Buying more house than families could comfortably afford was one factor contributing to the foreclosure crisis of recent years.
  • Maintain an emergency fund. With young families, most thirty-somethings need a three-to-six month emergency fund more than at any other stage of life.
  • Ensure that retirement planning is part of overall financial planning. For example, starting a higher educational fund for young children may also be important during these years. Life insurance to protect one's family is also a consideration.

Retirement Planning in Your 40s

People in their 40s (through mid-50s) are typically reaching maximum earning power. Net worth is also substantially higher than for people in their 30s. Equity from home ownership contributes to net worth along with savings and investments. Forty-somethings typically have more credit card debt but have less trouble paying the bills on time. Your 40s decade is crucial for retirement savings.

  • Assess where you are in saving for retirement. If you established a retirement savings plan in your 20s or 30s and have stuck with it, you're probably in good shape. But assess retirement goals in light of current economic factors, your progress toward those goals, and any adjustments you might need to make.
  • Ramp up retirement savings.This task is particularly important if your retirement savings to date are modest or if you haven't begun to save. If possible, contribute the maximum allowable in both your 401(k)/403(b) plan and an individual IRA. With 20 years to save before retirement, the maximum of $5500 annually in a Roth IRA at a 5% to 7% return grows dramatically.
  • Assess and adjust plans for other financial needs. This includes educational funds for your children. Because your income and your spouse's are important to your financial well-being, evaluate your needs and your coverage for life insurance and long-term disability insurance. Employer-sponsored long-term disability insurance usually offers the most affordable options.
  • Pay off credit card and installment debt. The money you save on monthly credit card debt and/or payments for a new vehicle (when your current vehicle is only 3 years old) or luxury home entertainment center (a "want" not a "need") could go to retirement savings.

Retirement Planning in Your 50s

Reaching your fifties for most Americans means reaching your highest earning power. For many families, children are grown and independent (or nearly so). With higher net worth, including higher home equity, fifty-somethings also typically have accumulated greater savings. The fifties are the ideal time to assess where you are in saving for retirement and where you want to be and then to adjust your savings plan.

  • Assess your retirement savings and plans. The fifties are a good time to reassess how much you will need for retirement as you envision it and how close you are to reaching that goal. It may be time to begin to think seriously about when you plan to retire.
  • Maximize your retirement savings. Once you turn 50, federal regulations allow you to contribute additional funds to tax-advantaged retirement savings plans. If the amount you've saved is less than you need, these rules help you catch up. Most financial planners encourage contributing the maximum allowed if possible. That maximum in 2016, for example, is up to $24,000 for a 401(k) or a 403(b). The limits of your individual plan may be lower. For an IRA in 2016, the over-50 maximum contribution is $6,500. These resources offer helpful insights and suggestions for making the most of the time and opportunities you have.

  • Review your insurance needs. Review your needs for life insurance and long-term disability insurance. Investigate options and rationale for long-term care insurance. Experts vary widely in their recommendation for the best time to get long-term care insurance, so pay particular attention to this decision.
  • Review your Social Security options. Your fifties are a good time to review projected Social Security income for different possible retirement dates. For example, what would projected Social Security income be if you retired at 62 compared to later ages such as full retirement (66 or 67)? How would different retirement dates for you and your spouse affect Social Security income?
  • Consider cutting back on expenses to maximize savings. Trimming expenses as children leave the nest and while you still are earning maximum dollars can be an excellent way to increase retirement savings, according to planning experts.

Retirement Planning in Your 60s

By the time you reach your sixties, retirement is just around the corner. So it's time to start seriously planning for the transition to retirement—a transition that you choose, rather than one dictated by circumstances.

  • Keep saving. As you hit 60, you still have a few years to maximize savings. Experts recommend continuing to use catch-up options. If you are in 25% tax bracket, for instance, every dollar saved costs you only 75 cents. The higher your combined state and federal tax bracket, the less each dollar costs.These resources offer helpful insights and suggestions for making the most of the time and opportunities you have.

  • Review your retirement plans. When would you like to retire? Where? Do you plan to work part time or not? What income will you require and how does your potential income from savings, pensions, Social Security and assets match up to that requirement? Have you made a detailed income plan for retirement? If you have care-giving responsibilities for parents or other older or disabled relatives, how might these obligations affect your plans?
  • Review Social Security options. Many people would like to retire at 62, but taking early Social Security has an impact on what you receive monthly and on your potential lifetime income. Using the tools on the Social Security website can help you consider all your options.
  • Pay off credit card debt. Americans in their 60s continue to carry relatively high levels of credit card debt. While you're still earning peak or near peak income is a good time to pay off this debt so that it does not become a burden on your retirement income.
  • Evaluate insurance needs. Are you planning to retire before you become eligible for Medicare at age 65? If so, you'll need to plan for health care insurance. What are your other insurance needs and options related to life insurance, disability insurance, long-term care insurance? What are your options for supplemental insurance to accompany Medicare?

Next: 4. Social Security