How to Plan for Retirement

Even if your retirement seems far away, laying the groundwork for it now is essential.

Written by Rafael Bernard / December 16, 2021

Quick Bites

  • Visualizing your retirement can help you stay on track even with goals that seem far away.
  • Once retirement is properly ranked in your values system, weighing trade-offs between spending now vs. saving later makes more sense.
  • Starting to save and invest as soon as possible can pay off later. Your future self will thank you.
  • Expecting—and planning—for the unexpected can keep you from getting thrown off the path to success.

People are living longer than ever, making retirement one of the most significant (and expensive) chapters of their lives.

Since everyone’s ideal retirement is different, figuring out what yours might look like, and getting on the same page with your partner or spouse, if you have one, is important.

Equally important is the date when you begin saving and investing for retirement. Starting early matters, as playing catch up in your 50s can put you up against the clock.

Every retirement plan should focus on starting as early as possible with well-articulated goals in mind. It’s difficult to make any progress until those two boxes are checked. In our retirement guide, we take the guesswork out of getting started by taking you on a simple journey, from defining your retirement goals all the way to protecting your investment plan.

Inside this article

  1. Visualize your retirement
  2. Start saving
  3. Start investing
  4. Keep yourself accountable

Step 1: Visualizing your retirement

Why Visualization Is Important

You can save for a goal more efficiently once that goal has been well thought out. Rather than just having a goal of retiring to a Caribbean beach, you want to work out which country, type of house and length of retirement you envision, which will help you figure out exactly how much to save and invest.

Have a significant other? You should exchange notes on your ideal retirement together. Talking through your goals together preempts any surprises and unpleasant conversations on the eve of your freedom from work.

How to Visualize

Visualizing your retirement doesn’t have to all be in your head. Grab a pen and some paper, and sit down in a quiet spot at home. Feel free to conduct this exercise on your own or with family and close friends.

Rather than simply writing a list of where you want to live and what kind of car you will drive in retirement, start drawing pictures of those things.

Draw the type of house you will live in, doodle in snow or sunshine or your ideal weather. Use props like plane tickets to represent wanderlust. If you have trouble coming up with things to draw, take a look at your surroundings at home, using them as an inspiration for how these parts of your life will look in the future.

Afterward, you can write a list of the things you drew and share with a loved one for their feedback. Having a second pair of eyes with a unique perspective may reveal good ideas for improvement.

Review your list of retirement goals based on how your ideal retirement looks on paper. This should give you a better idea of how much your retirement will cost, depending on whether it looks more or less affluent than your current lifestyle. If you currently take public transportation but envision owning a Cadillac in retirement, that could indicate you will need more income to cover transportation costs.

Tip: By recording your visualizations with pictures rather than words, different parts of your brain will light up, allowing you to access more of your true values and beliefs. No artistic talent needed to benefit from this practice!

Financial Insights from Your Visualization

There are no right or wrong answers when it comes to what kind of retirement you want. You are an expert on your own goals and values, so there’s no reason to feel insecure if your retirement picture seems especially luxurious or thrifty.

Go through your list of retirement lifestyle goals, and reflect on whether each item feels more or less expensive than your current quality of life, and take notes.

For example, if you currently live in a modest ranch house in the suburbs, but would like to transition to a luxury apartment in the city to be closer to culture and art, mark that item as something that could be more expensive in retirement.

After going through your whole list, you’ll be one step closer to figuring out what your retirement will look like and how much it might cost. If you have a lot of items on your list that appear more expensive than your current lifestyle, you may need to plan for more income in retirement than you do now.

Tip: One way to gauge how much money you’ll need in retirement is to calculate 85% of your current income, and multiply this figure by how many years you plan on being retired. Although the 85% figure is hotly debated, the general idea is that your expenses in retirement go down as you no longer need to spend money on things like dry cleaning and college tuition for your kids.

Step 2: Saving for retirement

Now that you have a better image of what retirement means to you, it’s time to work out how to save for your long-term goals.

You want to start saving as soon as possible because of compound interest. When you invest, any interest that your investments earn also earns interest, so your money can grow significantly over time. And the more time your money has to grow, the more you earn. For example, if you invest $100 a month for 30 years, assuming a 7% rate of return, you’ll have saved $114,114. Do it for 10 years and you end up with only $16,776. To see how much you could potentially save, use the U.S. Securities & Exchange compound interest calculator.

How Much to Save

One of the most common questions people have about retirement planning is how much they should save. A good starting point is 10% of your salary; that has been the textbook answer for some time. Even if you can’t afford 10% yet, it’s important to start with whatever amount you can, and work your way up as your career progresses.

But you don’t have to stick with 10% by any means. If you can, up your savings to 15% or even 20%, depending on how much you anticipate to spend in retirement.

Another way to frame your saving goals is to use a method popularized by Fidelity, which sets saving needs depending on your age. For example, Fidelity advises that you should have saved one time your salary by age 30, two times by age 40, all the way up to 10 times at age 67. This strategy can be super motivating for adjusting your retirement saving rate if you feel like you are falling a bit behind.

Tip: If you have student loans, credit card balances or other types of debt, you may wonder how much to save for retirement vs. paying off those loans. That depends on how much you expect to earn in the markets vs. the interest rates on your debts. For example, if your expected rate of return is 6% annually in the stock market, but your interest rate on your credit card is 12%, then you may consider paying off that debt before saving for retirement.

Making Room in Your Budget

A lot of folks find it difficult to find room in their budget for retirement savings. And that makes total sense. Life can be so expensive, it’s hard sometimes just to keep up with the bills.

But it’s crucial that you do your best to evaluate your future needs even though the farther away we need to pay for something, the less important we see that expense. For example, if you expect to need to repair your air conditioning system in 20 years at a cost of $6,000, you won’t feel the need to save for that expense as strongly as you would if the repairs needed to be covered in two years. Not just because you have more time to save for costs 20 years away, but also because you may underestimate the true importance of needs your future self will have.

So try to be more mindful when looking at how much you can save for retirement. At first glance, it may seem there is no room in your budget to save for retirement. But if you recognize how we often discount our future needs, you may feel that saving an extra 1% a year is more in line with your values than upgrading your sound system.

Tip: Another tool to combat discounting your future self and encourage retirement saving is a face aging app. It may seem a little kooky, but the idea is, when we see how we will look in our later years, it can make retirement and aging feel more real and not so far away, motivating us to save more. Download AgingBooth, and try it.

Factoring in Social Security

Social Security provides a regular paycheck during retirement to those who qualify for this federal program. It’s been very helpful in assisting the elderly in our communities with their bills. But it has unfortunately convinced many that they don’t need to save at all for retirement. A common misconception is that Social Security exists to cover all retirement expenses.

There’s a real debate on whether Social Security will be around long enough to fund everyone’s retirement. And that debate will continue for some time. It may be a good idea to save more on your own if you can.

Social Security is an extraordinarily complicated benefit, but there are great resources on the program’s website. And there are financial consultants and estate attorneys specializing in Social Security planning who can assist you.

Step 3: Investing for retirement

Saving cash alone is often not enough to be able to fund retirement. Investing your retirement savings can help you earn enough for your goals. Investing is a learning process, but getting down the basics is a good start.

Account Types

You’ve probably heard the saying, “It’s not what you make. It’s what you keep.” When it comes to investing for retirement this slogan is never truer.

If your investments grow and pay dividends, so will your nest egg. But taxes can quickly eat away at your earnings. That’s why it’s important to invest in retirement accounts that offer tax sheltering. They defer paying taxes on earnings until you withdraw your funds in retirement. Some accounts avoid even having to pay taxes then. So, paying close attention to where you invest your wealth can have big returns.

There are many different accounts. But they can largely be divided into three groups, though some overlaps do exist. Here is a quick rundown:

Taxable Accounts

Things like individual or joint brokerage accounts and saving or checking accounts are fully taxable. That means, generally, when you realize a gain, you will owe taxes on it that year. If you buy a stock and sell for a quick $100 profit, you will likely owe the IRS and some states a similar rate to what you pay on your earned income. These accounts are not designed to offer tax sheltering for retirement.

Tax-Deferred Accounts

Examples include traditional 403(b)s, IRAs, 401(k)s and pensions. With these types of accounts, you pay taxes when you withdraw money in retirement.

Often you can contribute to these accounts with pre-tax money, or get a tax deduction on your contribution, lowering your tax bill during your working years. There are a lot of bells and whistles with these accounts, such as rules around loans, early distributions for education or a home and so on. But the main catch is that withdrawing funds before your retirement years can trigger a penalty fee in addition to taxes.

Tax-Free Accounts

These accounts often offer the most flexibility and tax advantages during retirement. They include Roth IRAs and Roth 401(k)s. You don’t get any tax deductions or tax avoidance when you contribute to these accounts. But once you contribute, your money grows tax-free, as long as you follow the rules for the account. As always, there are a lot of loopholes with these accounts, so don’t be surprised when you learn new ways to withdraw money penalty-free.

Tip: HSAs, or health savings accounts, are unique accounts that can be tax-free. If you spend the money in retirement on regular expenses, the account is tax-deferred. If you spend the money on health care at any time, it’s tax-free. Another perk: You don’t pay Social Security taxes on your contributions, or federal or state taxes.

Investing Based on Your Time Horizon

Using a time horizon-based approach can be a good starting point for figuring how to invest your retirement savings.

It is simply taking on less and less risk as you get closer to your retirement date. The market will inevitably go down sometimes. As long as you are far enough away from retirement, however, you may have time to recover your losses, because markets generally have moved upward over the long term. But as you move closer to retirement, you have less opportunity to recover from a potential bear market, possibly diminishing your appetite for risk.

For example, if you are 30 years old, you may buy a mutual fund that is more aggressive. It might consist of 80% riskier stocks, and 20% bonds, a historically less volatile investment.

As you near retirement, let’s say in your 50s, you might switch to a fund that is 60% stocks and 40% bonds. And so on until you are at retirement and now bonds may make up the bulk of your portfolio.

Tip: You may have heard of target date funds, which automate time horizon investing. You just pick a target date mutual fund aligned with your retirement date, and they take care of the rest. The funds acquire a higher percentage of bonds as you get closer to retirement. This is one of the easiest and quickest ways to save for retirement. Just keep in mind that these funds ignore market conditions and your risk tolerance, which may not be ideal for everyone.

Step 4: Keeping yourself accountable

Building up a nest egg for retirement is a marathon, not a sprint. It’s easy to veer off the path to success every now and then. And that’s OK as long as you quickly get back into the good habits of savings and investing responsibly.

Anytime we are faced with a big goal, it’s easy to get discouraged after facing a little failure. That’s why Fitbits work so well. They break down the tremendous goal of losing weight, one step at a time. So if you have one bad day spent on the couch, the next day you can focus on tiny successes like taking a few more steps.

Try doing something similar with saving for retirement. Saving hundreds of thousands or even millions of dollars for retirement is pretty intimidating. Instead, break your nest-egg goal into a bunch of mini goals. Instead of trying to save $26,000 a year, for example, aim for $500 per week. If you don’t meet your goal one week, remind yourself that it’s no big deal. Next Sunday will bring another opportunity for success.

About the Author

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Rafael Bernard

Rafael Bernard, MSFP, CFP®, is a CERTIFIED FINANCIAL PLANNER™ practitioner and personal finance editor at Decisionary Media who specializes in financial therapy, which combines traditional financial planning with a therapeutic approach.

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