Why is Retirement Planning Important? Here’s What You Need to Know

There’s arguably no financial goal more important than retirement planning. Knowing that you have enough money saved up to comfortably enjoy your golden years is vital—after all, many prefer not to keep working at age 70, 80, or later! But despite the value of retirement planning, many Americans don’t know exactly how to go about it, let alone which retirement strategies to follow for maximum benefit.

Today, let’s explore retirement planning and major financial steps you should take before your career comes to a close. We’ll also dive into different retirement planning strategies for different life stages.

Retirement planning explained

Retirement planning is anything you do to be in a good financial spot after you retire. Most of the time that means saving money by tucking funds into a normal checking or savings account, but it can also include things like:

• Regularly putting money in a dedicated investment account or retirement fund with tax advantages and other benefits so that your money grows as you age
• Setting income targets for your job to make sure you can aggressively save to meet certain goals
• Establishing distribution plans for your saved income so you don’t deplete it too quickly in your retirement years
• Creating passive-income-generating activities to create current and future cash flow after you stop working

These days, there are lots of tools you can use to make retirement planning easy, like online retirement calculators, financial services and advisors, and even employer-sponsored retirement plans that let you “set and forget” your retirement savings.

Why plan for retirement in the first place?

Simply put, it’s vital to save for retirement for two reasons:

• So you don't outlive your money. Generally speaking, life expectancy is getting longer. 
• So you can maintain the quality of life you want in your retirement.

If you don’t save enough money for retirement, you’ll either need to take up another job or continue working as you get older. Furthermore, failing to save for retirement could mean that you won’t get to stay in the same house, take vacations with your loved ones, or spoil your grandkids.

All in all, taking smart steps to plan for retirement now is the best way to ensure comfort and enjoyment later down the road.

When to start planning your retirement

The sooner, the better.

Ideally, you should start planning for your retirement once you begin earning regular income or become established in your career field. For a lot of people, that’s in their early-to-mid 20s. But if you’re already a little older than that (or much older), don’t worry! There’s still plenty of time to save.

However, keep in mind that your age and career position could affect the wisest retirement planning strategies. What makes sense as an early 20s single person may not work for a parent in their forties. Whenever you start planning for retirement, be sure to take your life stage into account. We’ll look at some specific retirement planning strategies for your 30s, 40s, and 50s below.

How much money do you need to retire?

The (oftentimes literal) million-dollar question has a simple answer: as much money as you can save.

More practically, a good rule of thumb is that you need to keep bringing in 80% of your pre-retirement income when you retire. That’s a solid guideline because it’s easy to adjust depending on your income and spending habits.

For example, if you make $100,000 per year, you’ll need investments, dividends, and other payments that can give you $80,000 per year for about 20 years to retire comfortably (20 is the average expected retirement span, assuming you retire in your 60s). $80,000 multiplied by 20 years is $1.6 million. So, in this hypothetical, that’s the overall target number.

There are lots of ways to adjust your target, though. For instance, if you downsize by selling a larger property with a higher mortgage and move into a smaller property with a lower mortgage, your retirement income, whatever it happens to be, can afford to be lower as well.

Still, the 80%-of-your-income rule is a good one to plan for, especially if you don’t have any other specific target in mind.

How to plan for retirement in your 30s, 40s, and 50s

The best retirement tips and strategies can vary heavily based on your age. Since you’ll want to take the retirement steps that work best for your position, let’s take a closer look at some ways to plan for retirement in your 30s, 40s, and 50s.

Retirement planning in your 30s

In your 30s, you’re likely established in your career and have several serious payments to make every month, like a mortgage, car payment, or student loans. Therefore, the best ways to plan for retirement in your 30s involve making the most of spare income and contributing to retirement plans as efficiently as possible, like:

• Allocate your retirement savings investments aggressively—you have time to grow them before you need to move to a more conservative portfolio.
• Open a 401(k) if you haven’t already, then contribute as much money as possible up to the maximum matching percentage from your employer.
• Keep an eye on company stock if that is part of your compensation. If it starts to decline in value, selling the stock and investing it elsewhere could be a good idea.
• If you switch jobs or careers, keep your retirement in mind. For instance, if you get a new job, see if your new employer will let you transfer your 401(k) savings seamlessly to their plan.

As with all investment strategies, it is always best to consult a financial advisor professional.

Planning for retirement in your 40s

In your 40s, your family might have grown significantly, and you should be well into your career. You may have even earned several promotions. Assuming a little extra disposable income, the best ways to plan for retirement in your 40s include:

• Get rid of disposable debts, like credit card balances and car payments, and then use the extra money to boost your retirement accounts.
• Consider investing in an IRA or Roth IRA if you only have a 401(k) to add even more retirement savings to the mix.
• Start to move your investment assets to a more conservative position, though there’s still plenty of time for growth.
• Think about education expenses. If you are a forty-something with kids, you may need to temporarily move retirement money into education funds until their college expenses are saved for.

Saving for retirement in your 50s

In your 50s, you might be planning to retire in the next few years! But whether you have a healthy retirement nest egg built up already or you want to start saving for retirement as much as possible, there are a few common strategies you can adopt:

• Set realistic goals for your savings and investments. If you just started saving 10 years ago, for instance, you’ll need to save much more aggressively compared to someone who started retirement planning at 20.
• Get rid of any lingering debts if possible. If you plan to retire by 56 or 57, you don’t want those debts continuing to take money from your income as you relax.
• Take full advantage of any catch-up contributions. When you are over the age of 50, you can make extra contributions to retirement accounts like 401(k)s and IRAs.
• Consider putting money into a health savings account in anticipation of medical expenses. Even if you don’t currently have illnesses or injuries to worry about, getting older means more medical appointments and medications to maintain your health.

Choosing a retirement plan

No matter your age, a https://www.sharonview.org/banking/savings/iras will likely be a cornerstone element of your overall retirement strategy. A retirement plan is essentially a savings plan or account that accumulates money as you contribute to it. There are a few common retirement plans that most people use, including:

• Traditional IRAs or individual retirement accounts. With a traditional IRA, you make pretax contributions to a retirement nest egg. Your money grows tax-deferred until you make withdrawals, upon which time you pay taxes on the money you take out of the account.
• Roth IRAs, which reversed the tax setup. Instead of paying taxes on the money you withdraw from your account, you pay taxes on the money you contribute. This is an excellent retirement plan if you can afford to pay the extra taxes now since you'll save money in the long run.
• Employer-sponsored plans, such as 401(k)s or 403(b)s. A 401(k) is the most common employer-sponsored plan—you contribute a certain percentage of your paycheck to the savings account, and, if offered, your employer may match it up to some portion of your contribution. These plans are popular, especially if there is an employer match available to effectively multiply your savings.  

Many, if not all of these plans that offer tax-deferred options may have age-related withdrawal requirements to avoid additional “early withdrawal tax penalties.”

Retirement plans are beneficial, even if you plan to take advantage of Social Security. For many Americans, Social Security payments aren’t enough to let them maintain their desired lifestyles. The extra money you could get from a dedicated retirement plan could be just what you need to enjoy your retirement years to the fullest.

Which retirement plan is best?

Ultimately, the best retirement plan for you depends on factors like:

• How much money you currently have saved
• The details of your employer-sponsored plan (if available)
• How much control you want over your retirement investments

The best advice? Consult with a financial planner or advisor, consider your options carefully, and go with the plan that will help you save as much money as possible. A financial planner or advisor will be able to make an informed recommendation and can help you achieve your retirement goals, whatever they might be!

You can find these professionals everywhere. For example, if you’re a member of a credit union like Sharonview FCU, look into their financial services. Many of the best credit unions have financial services professionals on hand to customize plans for members’ objectives, including retirement! The right consultation can ensure you save for retirement the right way from the start, allowing you to save strategically with peace of mind. Contact Sharonview today if you need help with retirement planning; we’ll help answer any questions you may have to lead you in the right direction.