Retirement Planning: The Definitive Guide (2022)

Time waits for no one. These wise words apply to all areas of life, from catching the bus to catching up on your 401(k). Perhaps no one knows this lesson more deeply than the person who didn’t start saving early for retirement.

The most powerful action you can take today to ensure a long, happy life is to start planning for when you’re older. Taking a couple hours to map out your retirement plan will pay massive dividends throughout your life, and help to make sure you’re as independent, dynamic, and abundant in your golden years as you are today.

And trust us, those golden years will come, whether you prepare for them or not!

Step One: Get Started

Saving for retirement can feel like a daunting prospect, especially when you hear the large sums needed to retire comfortably. How can you be expected to save over a million dollars when you haven’t even started building a nest egg?

Don’t fret. No matter where you are on your financial journey, millions of people have been in your shoes and went on to enjoy their golden years with comfort and security.

The important thing is that, by reading this guide, you’ve already gotten started on securing your golden years.    

Before you stress about how much you need to save, take the first step: make a plan. This is one of the simplest and most crucial steps to empowering your financial future.

Retirement Planning Goals

Building a plan for how much you need in retirement is not only a practical necessity, but will actually make it much easier to “part” with your hard-earned money in the first place.

There is huge value in simply imagining yourself later in life. Your future self will stop feeling like a different person, making it easier to save.

We’ll discuss each of these key steps to building a retirement plan:

1) Figure out how much you need to retire, and if necessary, strategize on how to reduce that number.

2) Create a saving system that helps you automate and secure the growth of your nest egg, and understand what your income will look like when you’re out of the full-time workforce.

3) Find the right retirement account, or accounts, to capitalize on tax-deferred growth and employer contributions.

4) Decide where to put your money to balance risk and healthy returns, based on age, risk tolerance, and personal knowledge.

5) Find support on your journey to a prosperous retirement.

Retirement Plan: How Much Do I Need?

Figuring out how much you need to save is a key step in structuring your retirement plan. Important factors include:

Housing Costs 

You likely spend a sizable part of your paycheck on housing. For many Americans, this remains true in retirement. Americans age 65 and older spend an average $1,400 a month on housing costs, and so it pays to anticipate that expense.  

We’ll also discuss some ways to mitigate this future expense in the next section.

Taxes

When saving for retirement, it’s important to remember that not all the money in your savings will end up in your pocket. Taxes don’t go away after you retire! In fact, the most typical retirement accounts defer taxes until after you start to withdraw money.

As we discuss further below, retirees will likely still pay income taxes on their savings, pension plans, and social security funds. They’ll also pay property taxes if they own their home. Remember that income taxes, and especially capital gains taxes, are still an important factor in your golden years.

Healthcare Costs

According to an estimate by Fidelity, an American couple that retires at age 65 in 2022 will need about $315,000 to cover healthcare expenses throughout their retirement. Of course, this figure is subject to many variables, such as your current health, the state you live in, and what the healthcare system will look like when you retire.

At any rate, it’s important to factor in hefty spending on healthcare when you retire.

Related: Questions? Get Matched with a Financial Advisor in Your Area

Entertainment and Travel

Is your grandma a jetsetter? We hope so, and we hope that you’ll have the health, energy, and means to travel as well!

Factor in the things you’ll love to do in retirement, from trips abroad, to nights on the town, to tee time and other activities.

Lifespan and Retirement Age

People are living longer than ever, especially when they take care of themselves. You should plan to live well into your 80s, 90s, and even beyond when you make these calculations. That means more years with your future grandkids, more trips around the world, and more money needed for a long, comfortable retirement.

If you love your job and have the desire to keep doing it, this could also mean retiring a bit later in life.

Living Expenses

How much will it cost to live when you’re 70? A good clue is how much you spend today on food, utilities, and other necessities. If you don’t know that number, this is an excellent time to find that out! 

Remember that everyday living expenses, such as food, gasoline, and clothing, are some of the most sensitive costs to inflation. When planning how much you need, you should factor in a weaker dollar.

For example, at 3% average inflation, a $10 meal today would cost about $24 in the year 2052. 

Account for Inflation, Returns on Savings

Both inflation and returns on your savings are going to be major factors in how far your savings go in supporting you. While inflation has recently spiked to 40-year highs, the long-run average is around 3%.

Over time, your savings should earn well beyond that number. The stock market has averaged about 10% over the past century. The earlier you start saving, the more your money will work for you to grow on its own.

The Bottom Line:

Most experts advise that you need between $1 and $2 million in assets for a happy retirement in the United States. That figure varies greatly from person to person, and you can still happily retire with a lot less.

Moving the Nest-egg Needle

Depending on your age, income, and savings, calculating the amount you need for a comfortable and happy retirement may have you feeling just the opposite: scared and upset.

If you feel overwhelmed by the estimated 1-2 million-dollar figure, you can start taking steps today to lower your costs in the future.

Buy a House

This is one of the simplest and most powerful tools to build wealth and lower your expenses, both now and in the future. Essentially, owning your home means paying yourself rent, aside from property taxes and the interest on the mortgage. You can watch your money flow into your landlord’s pocket month after month, or you can start saving by building home equity.

When you’re a little longer in the tooth, you’ll likely be glad for every year you paid a mortgage rather than rent, and only wish you’d bought your first home a little sooner. Although a mortgage may be a higher monthly expense than rent in some places, it promises to one day eliminate most of your housing expense.

Additionally, you can always cash in on the home equity you’ve built up by selling your home and downsizing when you’re older.

Downsize

One very easy way for retirees to save money, or grow their nest egg, is to downsize their home. Ideally, you could do this once the kids are out of the house, even while you’re still working.

Lowering your monthly housing cost, and ideally pocketing the profit on the home you sold, will help to empower a more secure, comfortable retirement.

Retire Abroad

One of the most dramatic moves you can make, both in terms of finance and lifestyle, is to retire in a less expensive country.

Latin America and Southeast Asia are popular destinations for American retirees. They’re able to start a new adventure, learn a new language and culture, and enjoy stunning natural beauty. Importantly, they’re also able to live well at a fraction of what it costs in the US.

Consider retiring abroad, or buying a home in a second country, to both safeguard and spice up your golden years.

Retirement Income: Work Part-Time?

You may plan to retire from your full time job at 62, but that doesn’t mean you have to stop working completely, or that you’ll even want to.

Depending on your career, it could be easy and enjoyable to work gradually less, rather than going from 40 hours a week to zero. Even four hours a week could go far in stretching out your nest egg by covering some costs.

Skilled professions like accounting, software development, and marketing are perfect for transitioning into retirement because you can gradually reduce the hours you work. Virtually any job that isn’t too hard on the body should lend itself well to part-time work as you get older.

In 2023, freelance and online work are all the rage. Imagine how strong that trend will be in another twenty or thirty years! Continuing to work a bit in your golden years will not only lessen your burden today, but will also keep you sharp and engaged in the community as you transition into the good life.

Regardless of how your planned lifestyle is later in life, one key step is to…

Start Saving!

Is it hard for you to save? Does it almost feel like you’re paying someone else when the money goes from your checking account, where all the fun happens, to a boring old savings account?

We understand, which is why we recommend you automate the process as much as possible, and get the most bang for every buck you squirrel away. 

Build a Budget

The first step to empowering your financial future is to get intentional with your cash flows, and to make sure something is left over at the end of every week.

Try tracking your expenses for a month. You’ll likely be surprised by how much you spend on different things, especially eating out and other unnecessary costs. Once you have an idea of what your cash outflows look like, you can start to reign that figure in.

Related: Get Matched with a Financial Advisor (Based on Your Needs)

Set Up Automatic Transfers

One of the easiest ways to start saving is to automate the process. Setting up automatic transfers to a different account will help to make sure that you pay yourself before you start paying everyone else.

You may be surprised how quickly you adjust to $100 less in your weekly budget, rather than trying to have $100 leftover at the end of the week.

Try setting up an automatic transfer every payday.

Save As you Go

A number of banks and financial apps allow you to send small amounts, even less than a dollar, into a savings or investment account every day. For example, some debit cards will round up your spending, sending the extra pennies into a savings account. It’s amazing how quickly those small transfers add up big savings.

Once you have a saving system in place, you’re already on the right track to an empowered future. However, you may have to meet some more immediate financial needs before focusing on retirement.

First Things First

Saving for retirement is important, but there may be bigger priorities for you to tackle first.

Before putting a big portion of your budget toward retirement, focus on getting yourself on firm financial ground. That means paying off your most expensive debt and saving for a rainy day.

Pay off High-Interest Debt

Paying off high interest debt, such as credit card balances and personal loans, should be a high priority. The interest on these types of debt is likely much higher than the return you can consistently get on your savings, so it makes sense to pay it down first.

If you have a mortgage or other low-interest debt, such as student loans, you don’t have to prioritize these over retirement savings. Paying in manageable, monthly installments is likely your best bet, as your savings should earn a higher return than the interest on the loan.

Start an Emergency Fund

What good is $10,000 in your retirement account if you can’t handle a $1,000 emergency expense? Make sure you set up an emergency fund to give yourself a cushion in the event of an unforeseen hiccup. Experts recommend setting aside 3 months’ expenses in the case of an emergency.

That might be an intimidating number, but you can start by putting aside some cash every week. You’ll be in a much better position in the future, whether it takes a few months or a couple years. 

Retirement Accounts

If you’re saving for retirement without a retirement account, you’re probably overpaying in taxes and missing out on free money.

There are a number of retirement accounts to choose from, and they tend to offer substantial tax advantages over regular saving. The tradeoff is that you’ll likely pay fees and taxes if you start withdrawing from the account before the minimum age.

Tax-Deferred Plans: Traditional and Roth IRAs

Specialized retirement accounts offer tax benefits as a reward for saving for retirement and not touching the funds until you’re older.

Typical retirement accounts (traditional IRAs) are tax-deferred, which means you pay no income taxes on the money you put in the account every year. You pay income taxes on those funds when you withdraw them, allowing them to grow tax-free over the years.

You may also have heard of a Roth IRA or 401(k), and wondered what the heck a “Roth” is. If an account begins with “Roth”, it also has tax benefits, but those benefits kick in when you withdraw, rather than deposit. That means you pay regular income taxes on your deposits over the years, but pay no taxes on the gains when you withdraw.

If you expect to be in a higher tax bracket when you’re older, a Roth plan may be right for you, since you’ll pay no income taxes on withdrawals.

Individual Accounts

You can set up an IRA (Individual Retirement Account) in your name without involving your employer. The tax benefits are the same, but you miss out on the contribution matching of an employer-sponsored account.

Investopedia has a great guide to finding an individual IRA for new savers. You can expect to find options for setting up an IRA with just about any of the major online brokerages such as E*Trade, TD Ameritrade, or Fidelity.

Pension Plans

Some companies, and especially government jobs, still pay out a defined pension benefit. This means you will receive a fixed monthly payment in retirement, which may grow over the years to keep up with inflation.

This is less common in 2023 than it was 50 years ago. It’s also less common to stay with the same employer throughout your career. If your employer offers a pension benefit, remember to factor it into your retirement planning calculations for how much you need to save.  

Employer Sponsored Retirement Plans

401(k)’s, rather than pension plans, have become the most common employer retirement benefit package over the years. While they don’t quite have the security or predictability of a fixed pension, they do offer the powerful benefit of matching and tax deference.

If your employer offers some sort of retirement benefit, as most do, they will likely match some percentage of your annual 401(k) contributions. That means free money for you, so don’t leave that option on the table!

Talk to your employer (or prospective employer) about their retirement benefits, and try to maximize your 401(k) deductions to access those extra contributions and tax savings.

Self-Employed Accounts

There are specialized accounts for self-employed savers, since they aren’t able to benefit from employer contributions or defined pension plans. Simple IRAs, solo 401(k)s and SEP (Simplified Employee Pension) IRAs enable you to contribute much more per year than a typical retirement account.

For some accounts, you can “match” your own contributions and gain additional tax benefits, since you’re technically your own employer. You can also add a limited number of employees to the plan if you have them.

If you work for yourself, make sure to look into these accounts rather than simply opening a regular IRA account.

 This chart covers the basic differences between different types of retirement accounts:

Source: CNBC

Retirement Planning: Where to Put Your Money

It’s important to save a chunk of what you earn, and that your employer matches part of those contributions (which amounts to free money for you). However, one of the most powerful and overlooked factors in building your nest egg is how to invest your savings.

To illustrate, take the graph below. In each case, you save $1,000 per month from age 30 to 60, depositing a total of $360,000. The only difference is the average return on your savings: 8%, 5%, and 2%. Look at that difference in total returns!

At 8%, you would earn roughly a million dollars on returns alone, almost triple what you put in, compared to just $120,000 at 2% returns.

You can check this out yourself at investor.gov’s Compound Interest Calculator. Play with different time periods and rates of returns to see the power of compounding interest.

Of course, knowing where to get the best return is essential for maximizing your growth. There are certainly a lot of investment options to choose from:

The Stock Market

One safe, simple place to put your money and accrue healthy gains over time is the American stock market. Broad indices like the S&P 500 have averaged about 10% over the past 30 years. While that average glosses over some gut-wrenching drops and euphoric climbs, the trend holds up even 100 years back.

That means that if your time horizon is long enough, you can just keep putting money in the market until that retirement date starts to approach, without worrying about last week’s dip.

Remember that if you have 20 or 30 years before you start withdrawing, you don’t have to worry about short-term fluctuations. You’re likely to trend toward that 10% growth figure. 

In fact, each time the market dips, it becomes cheaper for you to invest!

Bonds

Bonds are an attractive option for savers, particularly lower-risk bonds like Treasury securities and high-quality corporate bonds. They are generally less volatile than the stock market, since you’re guaranteed interest and principal payments unless the issuer defaults.

Even when a company goes bankrupt, creditors always get paid first, and stockholders get what’s left of the company. 

Bonds also offer consistent, fixed interest payments over their lives, which becomes more attractive as people get older and their risk tolerance goes down. The riskier the market considers a bond, the higher the interest it will pay.

Real Estate

Real estate is a powerful tool for not only growing your savings through appreciation, but generating cash flows by renting out your property. As we discussed, even buying a home for yourself to live in will greatly increase the wealth you build.

Remember that most of your mortgage payment goes back into your pocket. Consider trading that big monthly rent expense for relatively low mortgage interest, property taxes and homeowners’ insurance, while you benefit from your home’s appreciation.

Related: Buy & Hold Real Estate - Ultimate Investor Guide

Foreign Assets

Investing in foreign assets, such as real estate or stock markets in other countries, is a great way to diversify your portfolio and access higher returns. Other countries’ property markets tend to be much less expensive than the United States, and offer higher rental yields as well.

A self-directed IRA is a great tool to invest in less conventional assets, giving you greater control over how you invest your retirement funds. They’re particularly common for investing in real estate, but also allow for other ‘alternative’ investments like bitcoin and gold, often not made available through traditional 401(k) or IRA plans.

Precious Metals

Source: goldprice.org

Precious metals are an excellent way to hedge against different economic conditions. As you can see in the chart above, gold has appreciated from roughly $300 twenty years ago to over $2,000 in a recent peak.

Because of its continued scarcity, gold functions as an excellent store of value compared to cash, especially during inflation and market volatility. Many Americans choose to diversify retirement savings with physical gold and silver.

Related: Gold IRA Rollover Guide - Diversify Your 401(k) with Physical Gold

Inflation-Protected Securities

We are currently in high-inflation environment, made scarier by the volatility in the stock market, leaving people uncertain of how to keep their money safe without getting eaten up by inflation.

One excellent option is Treasury Inflation-Protected Securities, or TIPS. These bonds are backed by the US government and adjust their payout according to inflation, making them one of the safest assets to own during a high-inflation, high-risk environment. 

Talk to a Pro

We understand that there may be a lot of new information in this guide. Deciding what retirement savings plan to use and what to invest in are some of the most important financial decisions you’ll make. It makes sense not to go in alone.

Financial professionals specialize in making these retirement planning decisions on behalf of their clients, or providing them with expert advice on how to manage their nest egg. Developing a strategy with a professional will not only maximize your odds of success, it will take a lot of stress off of your shoulders.

Here are some things to keep in mind when shopping for a financial adviser or wealth manager:

Face Time

Different people will expect a different level of access to their financial advisors. Similarly, different advisors will have varying levels of availability for their clients. If the value of your assets drops in a market dip, will you want to hear from your advisor right away?

If the answer is yes, make sure that’s a mutual expectation. You may have to pay more for a financial advisor who’s available for a call whenever, but if you’re inclined to worry about your finances, this may be a price you’re willing to pay.

Risk Tolerance

How much risk are you willing to take on? While this may be something you learn after speaking to an advisor, you may already know that you’re willing to give up some returns for a smoother ride to retirement.

If you’re younger or less risk-averse, make sure to communicate this to a prospective wealth manager or adviser. Shop for a financial professional who fits your risk appetite and financial goals. 

Track Record

Take the time to research how a prospective advisor has performed for his or her clients over the years. The further back you can go, the better.

While history is no guarantee of future performance, your advisor’s track record is a great clue to her abilities.

Fees

This is perhaps the most important retirement planning consideration you can make. Don’t overpay for wealth management!

Warren Buffett, one of the most brilliant minds in finance, famously called investing a “simple game”. He says that financial professionals will often try to scare clients into paying high fees for their services, or overstate their performance relative to the stock market.

Remember that in the long run, the stock market generates great returns, without the hefty fees of financial advisors. Make sure your financial relationship is truly generating value beyond its cost.

Qualifications, Specializations

Are you speaking with a Certified Financial Planner? You want your advisor to have the bona fides to back up their promises. CFA, CFP, and other bona fides offer assurance that they know what they’re talking about.

It’s also worth looking for someone who specializes in retirement planning.

Related: How to Choose a Financial Advisor 

We’re Just Talking

You might be amazed at how much value you get from just one conversation with a financial professional. Regardless of whether they charge for their time, you’re likely to benefit greatly from simply asking the questions you may have after reading this guide.

Ask about different retirement accounts, what you should focus on first, and how much you’ll likely need in retirement. How much of a role will social security benefits play into your overall retirement planning?

Answering these key questions will put you on much stronger footing for your financial future, and won’t require a lifetime of fees to address.

Just Get Started

This guide will hopefully serve as a great springboard for your journey to prosperous retirement.

Remember that all long journeys begin with a single step. You took the time to review this information, which means you’re already on the right path.

The steps to a happy retirement are simple:

·   Figure out your cost of retiring, based on your desired lifestyle and planned income.

·   Develop a saving strategy to reach that number, starting with getting your immediate finances in order. Open a retirement account, either individually or through your employer.

·   Find ways to invest and grow your savings, depending on your time horizon, risk tolerance, and knowledge.

·   Finally, (or firstly), talk to a professional! There is a bounty of resources to make this process as smooth and automatic as possible.

Congratulations on starting your road to a healthy retirement. Reading through this retirement planning guide is the first step to hitting your retirement goals.

Remember that planning for retirement is a long-game. Consistent moves in the right directions, no matter how subtle, will have a huge impact on your future.