Retirement Planning Guide

1. Start Saving Early

When you're early in your career and retirement feels distant, it's not uncommon to delay saving. In reality, the most important tip is to start saving ASAP—even a little bit.

The earlier you start to save, the more time your money has to grow and compound. What's more, having more time between you and retirement means you can afford to take on more risk in your portfolio. That means you'll have more time to benefit from the overall potential growth of the market, while riding out the inevitable lows.

Plus, by starting early, you can set aside a lower percentage of your income and still meet your goal. Financial services company Fidelity suggests these savings rates, assuming a retirement goal of age 67:

The important thing is to focus on starting to save today. If you're over age 50, you can take advantage of catch-up contributions to invest more in your retirement accounts.

2. Come Up With a Goal

Setting specific goals can help you work toward financial freedom in retirement. There are different rules you can apply to set a retirement savings target.

Estimate How Much Income You'll Need

While everyone's retirement spending is different, experts suggest aiming to end up with about 70% to 80% of your pre-retirement income annually in retirement.

For example, say you have an annual income of $60,000. Using the 70% rule, you can calculate your target income as follows:

$60,000 x .70 = $42,000

So, in this example, you would aim for an annual retirement income of $42,000 a year.

Use the 4% Rule

The 4% rule suggests that, in order to avoid outliving your money, retirees withdraw 4% of their total retirement portfolio assets in their first year of retirement. After that, you'll need to adjust the dollar amount you withdraw for inflation each year. The 4% rule assumes you'll need your retirement savings to last for 30 years.

In the retirement income example above, a retiree is aiming for an annual income of $42,000 per year. Combining that goal with an estimated 4% annual draw rate, you can calculate a total goal amount:

$42,000/.04 = $1,050,000

In other words, you'd need to aim for a total portfolio balance of at least $1.05 million to safely retire with an annual income of $42,000.

Use Age-Based Savings Goals

A third way to set retirement savings goals is by aiming to reach these benchmarks, which Fidelity recommends:

• By age 30: Have the equivalent of your current annual salary saved.
• By age 40: Have three times your annual salary saved.
• By age 45: Have four times your annual salary saved.
• By age 50: Have six times your annual salary saved.
• By age 55: Have seven times your annual salary saved.
• By age 60: Have eight times your annual salary saved.
• By age 67: Have 10 times your annual salary saved.

These are just general guidelines, but they can give you a sense of whether you're on track with your retirement savings. If you feel like you've fallen behind, it may be worth reaching out to a financial advisor for advice on how to prioritize your finances to reach your goals.

Learn more >> What to Do if You Don't Have Enough Retirement Savings

3. Contribute to a Retirement Plan

Knowing how much to save for retirement is important, but so is deciding where to invest your money.

401(k)

For most people, the most efficient option is often to invest in your workplace 401(k) plan, if one is available to you. A 401(k) is a retirement plan that lets you invest a portion of your income toward retirement pretax. Your contributions are automatically deducted from your paycheck, and money in your account grows tax-deferred until you take distributions in retirement. (Some companies also offer Roth 401(k) plans, funded with after-tax contributions.)

One of the most appealing things about a 401(k) is that some employers offer to match your contributions up to a set amount, such as 4% of your salary. That equates to free money toward your retirement.

IRA

If you don't have access to a 401(k), you can get some of the same tax benefits from investing in a traditional individual retirement account (IRA).

An IRA also allows you to make pretax contributions, but you'll need to transfer the money yourself and report your contributions when you file your taxes to get your benefit.

Roth IRA

Roth IRAs are another popular retirement account with a different set of tax advantages. A Roth IRA lets you contribute after-tax dollars. Then, your money grows tax-free, and you don't pay any taxes when you take distributions in retirement.

One notable feature of Roth IRAs is that your money isn't subject to required minimum distributions (RMDs) in retirement. While traditional 401(k)s and IRAs will require you to withdraw a set amount of money after you reach age 73 (or 75 starting in 2033), you don't have to withdraw money from your Roth if you don't need it.

Learn more >> Types of Investment Accounts

4. Pick Investments

Early on in your retirement saving journey, it makes sense to invest more heavily in riskier assets, such as stocks. You have more time to recover from market volatility in hopes of achieving higher returns over time.

Some people recommend an allocation rule that says the percentage of stocks in your portfolio should be equal to 100 minus your age. So, if you're 30 years old, the rule suggests you'd hold 70% stocks in your portfolio.

While the idea that you should gradually decrease your exposure to stocks as you age makes sense, it's a far better idea to work with a financial advisor to fine-tune your asset allocation to your personal appetite for risk.

As you approach retirement, a financial advisor may recommend that you rebalance your portfolio toward a more conservative asset allocation (in other words, one that invests more heavily in stable assets such as bonds). That can help to lower risk and preserve wealth.

Learn more >> Best Ways to Invest Your Money at Every Age

Mutual Funds and ETFs

Retirement accounts like 401(k)s and IRAs often allow you to invest in pooled funds, such as mutual funds or exchange-traded funds (ETFs). These invest in a mix of different asset classes, making it easier to achieve diversification in your portfolio.

Retirement savers can pick funds balanced to fit their risk tolerance. For example, you could invest in a 60/40 portfolio fund—one made up of 60% stocks and 40% bonds.

Target-date funds are a popular option for retirement accounts. Target-date funds start off investing more aggressively for growth, then automatically rebalance to become more conservative as you approach retirement.

Learn more >> Steps to Choosing the Right Asset Allocation Mix

5. Balance Other Financial Goals

Saving for retirement is an important goal, but it's wise to balance it with your other, more immediate financial goals. Here are some other priorities to consider working toward in tandem with saving for retirement:

• Build an emergency fund. Experts recommend setting aside three to six months' worth of basic expenses to cover yourself should an unexpected expense or reduction in income occur. An emergency fund can help you feel more financially stable, and it also makes you less likely to rely on borrowing in a pinch.
• Pay off high-interest debt. If you're carrying credit card balances or other high-interest debt, make a plan to pay it off. Not only do monthly debt payments take away from money you might otherwise be able to put into savings, but the interest you're paying is likely more than any potential returns you'd get from investing your money. In other words, one of the best investments you can make is paying off your debt.
• Save for a home. Buying a home offers the opportunity to start building equity, which can lay the foundation for building wealth over time. It can take years of dedication to save for a down payment. Learn about how to save for a house and research first-time homebuyer assistance to get the ball rolling.
• Monitor your credit, and improve it if necessary. It's a good idea to keep tabs on your credit. Maintaining a good credit score will help you save money should you need to borrow to finance a home or car, for example. Sign up for free credit monitoring through Experian to see where your credit falls now, plus personalized insights on how you might be able to improve.

Learn more >> How to Set Financial Goals

The Bottom Line

While starting to save for retirement can feel daunting, the key is to begin today. Setting up automatic contributions to a 401(k) or an IRA is typically the easiest place to begin.

Balancing your retirement savings with other financial priorities can be tricky. Creating a budget can help you see where your money goes and align your spending with your savings goals.

If you need individualized help planning for retirement, consider reaching out to a financial advisor. They can help you evaluate your personal financial situation to set an attainable retirement goal and work toward it.