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4 Keys of Successful Retirement Plans
Long-term retirement planning is like doing a puzzle – but not the kind where you start with the border and then start building the picture one piece at a time.
When it comes to your retirement planning puzzle, step one is deciding what you want the completed picture to look like. No one wants to spend decades of their life piecing a retirement plan together only to discover it’s not really what they wanted.
It’s important to step back and think about what you really want out of your retirement before you start working on your puzzle. That said, there are some common elements to every good retirement plan that you can follow to start piecing together the puzzle you really want.
Planning for retirement can be stressful. You know it’s important and you’re ready to get started, but how can you tell if you’re on the right track? Never fear. We’ve collected these four keys of building a successful long-term retirement plan:
1. Visualize Your Goals
Get out your favorite note-taking app: It’s time to get in touch with your inner self through some good old-fashioned journaling.
Okay, but seriously – the first step for planning your retirement is to figure out what kind of future you want for yourself. It’s something only you can answer.
Maybe you’ve already got your grand plans to travel the world and swim in every ocean.
That’s great – but what about after that?
Don’t underestimate how long retirement could actually be. If you retire at the golden standard of 65, your retirement could last several decades, and you probably won’t be traveling the world that entire time.
A good way to visualize your retirement goals is to ask yourself some basic questions. The 5 “W’s” are a great place to start:
- When do you want to retire?
- Where would you like to live in your retirement years?
- Who do you want to live near or with?
- What do you want to do with your time once you’re retired?
- Why do you want those things?
You don’t have to have everything figured out right away, but the answers to these questions will pave the way for you to build your retirement plan and figure out how much money you’ll need to save.
2. Know the Risks
Grandiose dreams are good for the soul, but reality comes with some (very real) risks – and not just from the stock market.
Specifically, there are three primary risks you’ll want to make sure you address – each in its own unique way:
1. Sequence of Returns
This refers to the risk that the rate of return on your investments will drop significantly during your early years of retirement, forcing you to withdraw more money than you anticipated and leaving your portfolio empty sooner than expected.
In other words, if, right after you retire, the market takes a nosedive, your portfolio could be massively depleted, which could be the difference between you having enough money to live off of for the rest of your life, or running out of money while you’re still alive.
If the market freefalls when you’re in your 30s or 40s, you still have enough runway that there’s a good chance you’ll make it back. While the market typically bounces back from modest declines within a month or so, big drops can take five years or more to get back. For example, the market didn’t fully recover from the 2008 recession until 2013.
So what can you do about this? Spend wisely and stay flexible (more on that later). There are other things you can do, but mastering those two primary tools will go a long way toward protecting yourself from sequence of returns risk.
2. Tax Risk
Tax risk is the acknowledgement that tax rates and laws are always changing, and could affect your portfolio negatively in the future.
Tax-advantaged accounts like Roth IRAs can help you protect yourself against unforeseen tax changes in your portfolio. The money you invest in a Roth is taxed before it is invested and the interest it makes is not subject to taxes.
3. Longevity Risk
Although living forever may seem appealing, a longer life also carries longevity risk, which is basically the chance that you could outlive your money. It’s consistently one of the top concerns among retirees, especially with inflation the way it currently is.
You can do a lot of things to hedge against this risk, from delaying when you claim Social Security to investing in annuities to working with a retirement-focused financial advisor.
Although some of these risks are hinged on factors out of your control, it’s still important to be aware of them and talk through any potential ways to minimize these risks with your financial advisor.
3. Remain Flexible
It’s also important to maintain flexibility in your retirement planning. Your retirement dreams right now will probably look very different than your retirement dreams in several decades, so don’t lock yourself into an immovable path.
Your life goals will vary as you enter different stages of your life. Just like your goal when you’re 30 years old might be to go skydiving and fall from the sky, your goal at 80 years old might be to not fall at all. Your money habits will reflect these changes – and spending is more of a bell curve than a straight line.
4. Remember: Your Portfolio is a Tool, not a Plan
A lot of people fall into a trap where they think that because they have an investment portfolio, they are covered for retirement. Your portfolio isn’t a retirement plan – it’s a tool that can be used to financially prepare for retirement.
A retirement plan can cover a multitude of factors including healthcare, living expenses and much more.
When to Begin Planning for Retirement
The best time to begin planning for retirement? Yesterday. The second best time to start planning for retirement? Right now. It’s all about the long-term.
Time in the market is one of the greatest assets a person can have when it comes to building long-term wealth – so even if you don’t have much to contribute each month to your retirement account, you should still start ASAP. If those little seeds of investment have decades to grow and compound, you’ll likely reap more rewards than if you waited years to start investing.
But whether your retirement is far in the future or right around the corner, these four key components can ensure you’re on the path to success.
4 Questions to Consider Before You Start Saving for Retirement
Saving for retirement is a strange thing. It feels like a distant concern that you don’t need to worry about, but you also tend to have a constant nagging sense that you’re way behind with saving. Those two perspectives tend to cancel each other out in most people’s minds, so they opt to not do anything.
Today, we want to look at four important questions you should consider when it comes to saving for retirement. But first, let’s look at what the experts have to say, and then look at what the reality is of saving for retirement in modern-day America.
What the Experts Say When It Comes to Saving for Retirement
Every career and retirement plan is unique in some way, so how much you should have saved by the time you turn 40 (or 50 or 60) will depend quite a bit on your work history and financial goals.
That said, there’s nothing wrong with borrowing a rule of thumb to create a baseline estimate for figuring out whether you’re in the ballpark of where you’d like to be. Fidelity recommends the following rule:
“Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.”
They arrived at this rule by making several assumptions:
- You’ll start saving 15% of your annual income at the age of 25,
- You’re going to retire at 67,
- You’ll maintain your current standard of living in retirement,
- and more.
According to this “rule” you should have three times your annual income saved by the time you reach 40. The average 40-year-old earns $72,000 a year, meaning you should have $216,000 saved on your “over the hill” birthday.
While that’s a worthy goal, considering that the average baby boomer had $202,000 when they retired, that’s clearly not most people’s reality.
The Average Person’s Reality When it Comes to Saving for Retirement
The average 30-something has a 401(k) balance of $38,4000, and the average 40-something is at $93,400. That’s nothing to sneeze at, but still well below half of the recommended amount.
So what do you need to know to get your retirement savings on track? Here are four questions that can get you started.
Questions to Consider Before You Start Saving for Retirement
There’s a significant difference between planning a relatively early retirement at 50 and accounting for 40+ years of funds, versus choosing to retire at 70 and potentially cutting your retirement period in half. For that reason, it’s important to figure out when you think you want to retire.
Of course, what you decide now may change. But for most people, if you enjoy working at age 30, you’ll continue enjoying work later in life and want to retire later, or vice versa.
The 21st century has seen the growing popularity of something called the FIRE movement—Financial Independence, Retire Early. FIRE devotees commit to saving 50 to 75% of their income so they can retire in their 30s or 40s. Really, most people in the FIRE crowd continue with some form of work after they retire; the movement is primarily about paying off all debt and freeing yourself from the requirement of full-time work.
The more traditional route is retiring somewhere in your 60s, which is why the earliest you can claim Social Security is age 62 and cashing out your 401(k) before age 59.5 will result in some pretty severe penalties.
Again, this isn’t necessarily set in stone. Your circumstances are liable to change, and maybe your preferences will too. There’s a quantifiable difference though between a retirement that includes taking a cruise ship to exotic locations every year, and say, one that includes the startup costs of opening your own business.
Whether you think you’ll want to live close to family, or foresee a move (or many) to a more ideal location, these differences will determine a good amount of the cost of your future retirement.
This might seem trivial, but it’s not. There really is a difference between what you can afford to save right now, and what you’re actually willing to save on a consistent basis. A little bit of self knowledge can go a long way here, and help you moderate your expectations, but it’s important to stay disciplined.
Be honest with yourself: How much do you spend per month on things you don’t need? Some of the biggest and most common offenders here include:
- Eating out – the average American spends $3,000 per year on eating out, but it’s not uncommon to see twice that much among single 30-somethings.
- Cable TV – there’s really no excuse for paying $100 per month or more for cable anymore when services like Netflix, Disney+ and Hulu offer similar options for a fraction of the cost. If you need the live TV component, YoutubeTV and Hulu Live start at $65.
- Getting the latest version of everything – Sure, Apple puts out a new iPhone every year, but that doesn’t mean you have to have it. Getting a new iPhone every three years could literally save you thousands of dollars.
- Credit card bills – Credit card debt is a slow drip on your savings and will eventually cost you way more than you spent in the first place thanks to high interest rates. Prioritize paying off your cards as soon as possible.
One trick to maintain your savings rate to hit your retirement target exactly when you want to, is the “pay yourself first” policy. It’s pretty simple. You pay into your retirement savings before you consider any other discretionary spending, thus ensuring you stay on track by prioritizing your retirement savings.
This last question is personal, but it determines how aggressively your investment portfolio will be working toward your retirement goal. Obviously risk is an unavoidable part of investing, but how much risk are you okay with taking?
Traditional wisdom says the earlier you start saving, the more risk you should be comfortable with taking. As you get older and retirement comes nearer, your portfolio should incorporate less and less risk.
If you’re not actively saving for retirement now, start today with whatever amount you can. With a head start on savings you can afford to take those bigger investment risks, so if that’s your speed you can’t afford to wait.
How Much Money Do I Need to Retire?
It’s never too early to start putting together a retirement plan, but you won’t get very far if you’re not asking the right questions. The most basic questions are:
- How much money do I need to retire?
- How do I figure out how much money I’ll need?
Those questions may almost seem a little too basic to you, but the truth is this: Most people either haven’t thought about or are ignoring them altogether.
How Much is Everyone Else Saving for Retirement?
Exactly how well-prepared are people for the expenses associated with retirement? Let’s take a look at the numbers.
Baby Boomers: Completely Under-Prepared for the Cost of Retirement
You might expect the baby boomers (born between 1946 and 1964) to be the most financially responsible and largely prepared for their retirement needs. But, that’s not necessarily the case.
On average, the baby boomers have around $152,000 saved for retirement, while the Bureau of Labor Statistics states that adults between ages 65 and 74 spend roughly $48,885 per year.
The average retirement currently lasts 18 years, so at a cost of just under $49k per year, baby boomers are falling well shy of the $880,000 they should have saved up.
But it’s not just a problem for older generations.
Millennials: “Outlook Not So Good”
For a variety of reasons—whether a comparatively late start on earning or burdensome student loan debt, millennials (generally understood as anyone born between 1979 and 2000) struggle to catch up with previous generations in their retirement savings and preparation. Distinctive spending habits are also a factor, but the COVID-19 quarantine has presented unique challenges to millennials.
Millennials are more likely than previous generations to dip into their retirement savings, and the uncertain market during the pandemic has given them all the reason they need.
Most people aren’t saving enough for their retirement, but why is your retirement savings so important anyway?
Why Do You Need to Save for Retirement?
There are several reasons why you should be saving money for your retirement.
Social Security won’t cover all of your expenses
Advisors estimate that you should have around 70% of your pre-retirement income to carry you during your retirement years. Depending on how much you earned and when you decide to retire, Social Security might only cover 40% of your pre-retirement income (for medium earners retiring at age 67) or as low as 27% (for high earners).
Of course, this assumes you are able to retire when you want, and don’t have to retire early due to unforeseen circumstances.
Investing and the compound effect
While you’re still earning before retirement, you could be investing your money in a tax-deferred account. With the right interest rate, your investment will more than cover whatever amount is due to the tax authorities while increasing the amount of your investment, before gaining interest again.
The smart play is to save for retirement now so your money can start earning for you all on its own. The longer you’re at it—and the more you invest—the better your chances of saving enough to meet your goals.
‘So How Much Money Do I Need to Retire?’
No doubt about it, you need to be saving for retirement, but how do you determine the right amount to invest? Here are some guides to help you think it through.
Common Retirement Saving Rule #1: Multiply annual spending by 25
One of the broadest rules of thumb people apply to saving for retirement begins by figuring out how much you spend each year and then saving 25 times that amount. If you can save whatever your annual spending is times 25, then you can live off 4% of that total amount every year.
Putting some numbers behind that, if you spend $40,000 per year now between all your expenses (rent/mortgage, groceries, bills, etc.), that means you’ll need to save $1 million for retirement.
Common Retirement Saving Rule #2: The 80% Rule
Another simple rule you can follow reframes the question from spending to income.
Expenses in retirement tend to drop, due to the fact you’re no longer paying for work-related expenses such as commuting, eating out, new clothes, etc.
This rule says you only need about 80% of your pre-retirement income to live off after you retire. Now this percentage can be adjusted up or down according to the kind of retirement you plan on, but the basic idea is the same.
If you fall into “typical” retiree ranges of spending with a combined household income of about $120k, you’ll need $96k, or $8k per month.
When Are You Planning to Retire?
One important piece of the retirement saving formula is when you plan on retiring. Here are some factors to consider:
- Currently, full retirement age is 66 (rising to 67 for people born in 1960 and later).
- The earliest you can get Social Security is age 62, but claiming early will result in a decreased payout amount in every check you receive for the rest of your life.
- Social Security benefits max out at age 70. Checks could be 24%-32% more than at full retirement age (up to 76% larger than what you’d get at 62).
Of course there are other factors, too. For instance, if you’re part of the FIRE crowd (Financial Independence, Retire Early), then you are going to want to save a lot more aggressively so you can move retirement up a couple decades.
What if You Haven’t Started Saving Yet?
As the old saying goes, the best time to start saving for retirement is yesterday. But that’s simply not the case for the majority of the population, from boomers to millennials and everywhere in between and beyond.
So what are you supposed to do if you didn’t start saving for retirement as soon as you got your first job?
Thankfully, there are ways you can catch up. The government even makes exceptions for late-comers with a category of savings called “catch-up contributions.” One of the first places we encourage people to look is at your workplace benefits to make sure you’re maximizing those wherever possible.
If you’re playing catch-up, the best thing you can do is get started today rather than waiting for the “right time.”
6 Costs You’ll Need to Cover in Retirement
Do you sit in a cubicle dreaming of retirement? Are there a host of hobbies just waiting for you to hit that sweet 65 mark? If so, you’re not alone. Most people hope to retire from working at some point to travel, spend more time with family and friends, or even just relax.
Whatever your retirement plans look like, you’ll need a strong financial foundation to make sure you save up enough money to support everything you want to do.
But how long is retirement, and what costs will you need to cover when you get there?
How Long is Retirement, Anyway?
One of the trickiest parts of retirement planning is figuring out how long retirement will last. It’s easy to save money when you know how much you’ll need, but retirement could last anywhere from 1 to 30 years (or even beyond that!).
Although you probably can’t pinpoint when your last moment on Earth will occur, you can look at the stats and make a conservative estimate. For example, the average life expectancy for an American is about 76 and a half years, but it’s not uncommon for someone to live well into their 90s. Also, the average life expectancy has increased by about two years every decade for the last hundred or so years, so by the time you retire, the average retirement will be longer than it’s ever been.
Another thing to consider is your family history. If your family has historically trended toward the longer or shorter end of the life expectancy spectrum, that should be taken into account.
A great rule of thumb many advisors recommend to those who retire around 65 years old is to plan for a 30-year retirement. In the event you pass away early and don’t spend it all, you’ll have a nice little nest egg to leave for your loved ones. And if you do make it well into your golden years, you’ll be glad you prepared financially for the long haul.
What Costs Should Your Retirement Plan Account For?
When you’re trying to figure out how much money you’ll need for retirement, you need to do a full, thorough accounting of which expenses you’ll have to cover. Let’s break down the basics.
Housing and Bills
This will likely be one of (if not the) biggest expense you can expect down the road. Rent costs big bucks, and it usually increases by about 3% each year. Depending on how close you are to retirement, the cost of your future rent could seem unfathomably high right now.
However, if you’re well on your way to a paid-off mortgage (or have already paid off your mortgage), you’re in good shape to keep housing costs low. Just don’t forget to account for expenses like home insurance, regular maintenance and property taxes.
Senior discounts are going to be an amazing perk of retired living, but they won’t cover all your food needs. Are you planning to spend your later years trying out all those fun recipes you’ve collected over the years, or are you just as happy with a PB and J?
Maybe you’re planning on dining out more often than not – that’s great, too. Just make sure to leave extra room in your retirement plan for those expenses.
Entertainment, Travel and Other Fun Stuff
Nothing throws off a budget like a brand new grandkid – how can you not spoil them?
But there are other fun things you can spend your money on in retirement, too. Think about all the places you’ve wanted to travel, all the fun activities you never got to try (was that goat yoga as fun as it looked?). While the idea of sitting at home on your couch might sound appealing now, it can grow old pretty quickly. One study found that retirees were 40% more likely to be diagnosed with clinical depression than those who were still working.
Make sure to save a substantial amount for your own entertainment: the hobbies you love, the places you need to see, or even just spare change for those matinees at the local theater.
Healthcare and Insurance
A recent Fidelity study estimated that a 65-year-old retired couple in 2021 would need about $315,000 saved to cover their healthcare costs throughout retirement.
The average single 65-year-old man would need an estimated $150,000, while a woman of the same age should expect to spend about $165,000 on their healthcare costs post-retirement. In all likelihood, those numbers will only continue to rise.
When you’re young and healthy, it’s easy to overlook healthcare as a big expense down the road – but the numbers don’t lie: you’re going to need it. From healthcare premiums to medications or even that super-bejeweled cane, you need to plan for whatever health concerns might arise in retirement.
Now for the fun part: taxes.
Even if you’re not working, chances are you’ll probably still be paying income tax somewhere. Sure, it felt good investing those pretax dollars in your 401(k), but Uncle Sam has been patiently biding his time waiting to take his cut. That’s part of what makes a Roth Conversion such a popular option to consider – you can get the taxes out of the way before you retire when it might make more sense.
A financial planner can help you estimate and plan the costs of taxes for your retirement, helping to ensure you have enough money for all your other expenses.
Emergency funds are always important, even when you’re older – and maybe especially when you’re older.
From fires to falls down the stairs, emergencies can spring up any time or place. If you have spare money in your account to cover these emergencies, you won’t be left hanging during tough times. A great rule of thumb for emergency funds is to save at least six months worth of living costs. However, your advisor can help narrow down a more specific number that aligns with your lifestyle and goals.
A well-rounded retirement plan covers more than just survival. You need to save enough to fund your home, health and even entertainment for what could be several decades. When creating your retirement game plan, don’t forget to include these six common costs.
How to Find an Advisor to Help You Save for Retirement
Lasso offers a quick, easy-to-use interface that doesn’t require any financial know-how and puts you in the driver’s seat as you build plans for your future retirement.
Start on your financial planning journey quickly with an easy profile-building process. Where many financial apps require that you link to multiple accounts before you do anything, Lasso lets you get right to work.
Get Started with Lasso
Once you’ve signed in to Lasso with a profile, it’s time to set a goal for your retirement fund. How much wealth do you have now? How much do you want, and by when? As you answer these questions in Lasso, your financial plan will start taking shape.
Choose the “Retirement” goal and answer these five questions to build your plan:
- Goal: How much do you want to save?
- Time: When do you want to save it by?
- Savings: How much do you have now?
- Contributions: How much can you save every year?
- Portfolio: How much risk are you comfortable taking?
Your retirement savings plan is now ready!
Now, you can play around with your inputs to see how they would impact your plan. See how a shorter time frame or more aggressive saving could impact your results. In just a few clicks, your financial plan is ready to go.
How to Find a Financial Advisor to Help You Save for Retirement
Once you have a plan, you can browse a community of financial advisors and share that plan with as many advisors as you’d like for ideas on how it could be improved. Share your plan and see how they might be able to help improve it, without having to sign or pay anything.
You can share your plan with an advisor you already know, or browse the Lasso community for an advisor who matches your style. Filter by gender, experience, location and specialty to make sure you find an advisor you’re comfortable with.
After you share your plan for your retirement fund, wait for the advisor to respond with a proposal, which will show how they would improve your plan if you worked with them. When you get back proposals, you can decide whether or not there is a conversation worth pursuing.
People who build a plan to reach their savings goals are 10x more likely to accomplish them. The sooner you get started, the more you can save and the sooner you’ll have a fully funded college savings account.
Ready to get started? Click here to download Lasso now.