Retirement planning is challenging, but these tips for creating a timeline can help your savings stay on track at every stage of your life.
1. Set an income goal – and realize it could change. It’s important to set goals early in your retirement planning, though younger workers often find it hard to determine how much income they will need in retirement and how much their income will increase over their lifetime.
Your goal may be an income replacement ratio of around 80%. But when you’re younger, 80% of your income is not close to 80% of your income at retirement. Be prepared to work with your financial advisor to revisit your goal frequently, especially as you get close to retirement.
2. Plan to increase your savings rate as you age. If you’re 22, a savings goal of 10% of income is a good start. By age 30 you should be putting away at least 15%. If you have a qualified employer-sponsored retirement plan such as a 401(k) or 403(b), start there. If your employer offers matching contributions, consider contributing at least as much as the match. This is free money you shouldn’t pass up.
3. Think about Roth options. Consider a Roth IRA or, if available, the designated Roth account option in your 401(k) for its potential tax-free distributions.
4. Sketch out how long you could be retired. We suggest planning for 20 to 30 years but strongly recommend a contingency plan in case bad health or a layoff forces you into early retirement. One smart way to think: Plan to retire at age 55. Any money you make after that will be a bonus.
5. Take measures to reach your goals. Keeping a budget is essential, especially if you’ve started late on retirement planning. Look first at discretionary spending: If you’ve supported children, once they become independent, it is tempting to reallocate that money to exotic travel or home renovations – but your retirement fund should get the first deposit.
A retirement timeline is effective only if you budget for savings and stick with that budget. Your financial advisor can help guide this planning.