Retirement Planning - How to Prepare for Your Retirement

Retired couple reviewing retirement planning strategies and 401k savings to prepare for secure financial future

Expert retirement planning guide covering savings strategies, 401(k) vs IRA options, and how much you need by age for a secure retirement.

Effective retirement planning is essential for financial security, yet many Americans aren’t prepared. According to the Federal Reserve^[1], only 40% of Americans believe their retirement savings are on track. Without proper retirement planning, you could face working longer than intended or struggling to maintain your desired lifestyle.

This comprehensive retirement planning guide will help you prepare for your financial future. We’ll cover how much you need to save by age, whether to choose a 401(k) or IRA, essential insurance considerations, and actionable strategies to boost your retirement fund if you’re behind on savings.

What age should you retire?

There’s no mandatory retirement age in the United States - the decision is entirely yours based on your health, financial situation, outstanding debts, marital status, and retirement account access rules.

Before deciding to retire, consider whether your retirement savings can support your desired lifestyle. Ask yourself:

Do I have assets beyond my 401(k) and IRA (property, shares, savings)?
Would I be willing to sell my home and downsize?
Will I have ongoing healthcare or medical expenses?
Do I want to travel or participate in activities?

It’s important to take all these things into account, so you can be sure you’ll be able to financially keep up.

How much money will you need for your retirement?

Again, this will depend on the lifestyle you’d like to have when you retire. Will you maintain a modest lifestyle? Or do you intend to travel and take up new leisure activities? It might be worth doing your research to find out how much you might need.

According to the Motley Fool^[2], you should aim to have 80% of your pre-retirement income saved to cover your annual living expenses. For example, if you earned $100,000 before retirement, you’d need to have saved $80,000 for every year.

If you are looking to live a more exciting lifestyle filled with travel and other activities, it’s recommended that you’ll need 90% - 100% of your pre-retirement income.

Just keep in mind that these figures are a rough estimate and that you may need more or less depending on your desired lifestyle.

IRA vs 401(k): where should I put my retirement savings?

When it comes to investing for our retirement, choosing the right strategy is critical. An individual retirement account (IRA) and 401(k) each offer varying benefits that can help with your retirement.

As a quick rundown, an IRA is an account set up by an individual, allowing them to save for retirement, tax-free, while a 401(k) is a retirement plan offered by an employer where a portion of an employee’s salary (before tax) is deposited into the investment account. The employer can also choose to match these contributions.

Depending on your place of employment, you might already have a 401(k) investment account set up. While this is an easy way to kickstart your savings, the contributions might not be enough, especially if you plan to stay busy in retirement with travel and other activities.

If this sounds like your future plans, you might want to consider opening an IRA account, as you are permitted to have both. It’s worth noting that both of these accounts have contribution limits, so be sure to read the fine print to avoid issues with your investment.

When can I withdraw money from my accounts?

As IRA and 401(k) accounts are classified as investment accounts for retirement, there are restrictions on when you can make withdrawals. According to the IRS^[3], a person cannot make withdrawals from their 401(k) account until they are 59 ½. Any early withdrawal will result in a 10% penalty tax in addition to your regular income tax.

Similarly, if a person chooses to make an early withdrawal from their IRA account before the age of 59 ½, you might be hit with penalties and taxes. However if you are between the ages of 59 ½ and 72, withdrawals are permitted. Once you are 72 or older, withdrawals become mandatory.

What to do if you don’t have enough money to retire

Knowing you might not have enough money to retire to your desired lifestyle can be daunting, but there are a few things you can do to boost your retirement fund. Get the ball rolling by checking in on your retirement savings and comparing your balance with the suggested amount for a person your age.

According to Fidelity^[4], the amount of money you need to have stashed away for retirement are as follows:

Age	Retirement Savings Target	Example (Based on 2020 Median Income^[5] of $67,521)
30	1x annual salary	$67,521
40	3x annual salary	$202,563
50	6x annual salary	$405,126
60	8x annual salary	$540,168
67	10x annual salary	$675,210

If you are below the suggested amount, try to make additional contributions to your savings wherever you can. You can do this by funneling any additional money you come into, like tax refunds into your savings.

It also might be worth taking a look at your budget and spending habits to find areas where you can cut back.

What type of insurance do you need when you retire?

During your working life, you might have already taken out a life insurance policy for your family in the event that you were no longer able to work due to sudden sickness, injury or if you were to pass away.

But as you approach retirement and your children no longer depend on you, it’s important to ask yourself whether you will still need your life insurance policy.

There are many situations where you might consider keeping your life insurance policy. For instance, the payout will help cover any expenses you leave behind.

While a lot of us like to think we’d be able to retire debt-free, it more than often isn’t the case. According to a survey by personal finance site MagnifyMoney^[5], almost half (46%) of Americans are expected to retire in personal debt, such as credit cards or personal loans.

If you have debts, it is good to consolidate and get on top of these as early as possible. Learning how to pay off credit card debt can be especially important for retirement preparedness.

Other expenses you might not want to leave up to your family to pay are your funeral expenses, as these can typically range between $7,000 to $12,000. In this instance, your life insurance can cover all of this, taking the financial burden off your family. Nonetheless, whether you decide to keep your life insurance policy is up to you.

What will you do with your time?

One of the more difficult parts about retirement is having to adjust to a new routine, as you’ll have a lot more time on your hands than you did before.

So before you officially retire, it’s important to have a think about what your days might look like. Since there’s no longer a rush to get to work, you might want to dedicate some time to doing some daily exercising in the morning.

Other ways many people like to spend their retirement is to pick up a new hobby, try a new sport or learn a new skill. Jump online to find out whether there are any classes in your local area that spark your interest. Depending on what you’re interested in, there might be free or budget-friendly options around, which can help you save on costs.

If you did enjoy working with people and want to continue doing it on a scaled back level, mentoring or working on a casual or part time basis could be something worth considering. This way, you can enjoy the balance of having free time while still occasionally keeping busy.

Traveling the world is another top pick for retirees, regardless of whether you’re single or in a couple. So pump yourself up by jotting down your travel bucket list!

If you’d like to read more about financial management or learn easy ways to reduce spending, from your groceries to your electricity bill, check out the rest of the Deferit blog! Ready to take control of your bill payments? Get started with Deferit today.