No matter your income, age or retirement goals, planning for retirement can seem like a daunting task. We provide an in-depth look at retirement planning, how and when to start and tips for ensuring you’re on the right track to achieve your retirement goals.

Getting started: The basics of retirement planning

Whether retirement is right around the corner or 20 years away, it is best to be proactive in your planning and establish your retirement priorities so you can be better equipped to have a successful transition into your golden years. These key considerations can help you establish a plan to realize your ideal retirement.

First, do you know “your number”? Determining the sum, you need for retirement often takes a mix of practical understanding of your financial situation and thoughtful consideration about what matters most to you. With the number in mind, you now have a goal to work toward. Next you need to learn what it will take to reach that goal. If financial gaps exist, assess and determine how to fill them. It is important to consider the financial implications of several critical areas, including:

  • Current savings
  • Average living expenses
  • Healthcare
  • Mortgage or rent
  • Property and other tax obligations
  • Charitable giving
  • Legacy considerations
  • Business succession

Next, perform an in-depth analysis of your entire financial portfolio to assess total assets and decide how to make your retirement goals achievable. Determine if your portfolio assets can support your desired lifestyle during retirement. If a path to retirement is clear, then begin to think about secondary priorities; these could include leaving a legacy, charitable giving or the opportunity to travel more often. If the path to retirement isn’t clear or if financial assets come up short, consider putting off retirement for a few years, saving more money, adjusting an estimated living plan or reassessing assets.

Planning is the most important aspect of a successful transition into retirement. Planning early and reevaluating often is critical. One way to establish a sound financial plan is to work with a financial advisor, who can help you not only determine goals but work to make them a reality. Additionally, financial advisors can help counsel families to ensure everyone is on the same page.  They can help communicate each person’s unique goals and assist families in creating a shared plan that meets everyone’s needs.

Finally, they can also track your progress and help identify any changes you may need to make along the way. For anyone considering retirement, asking the important questions, creating a strategic plan and consistently evaluating progress can help lead to a successful transition.

Understanding the basics of retirement account types

There are a variety of retirement vehicles to consider contributing to that offer their own unique tax benefits and incentives. Two of these options include an individual retirement account (IRA) and 401(k).

An individual retirement trust allows you to maintain the tax advantages that come with saving and investing in an IRA, while providing you with the long-term control of a trust. You may be familiar with the uses and benefits of an IRA, and you may have a good understanding of trusts, but this unique solution can be the best of both worlds.

An IRA, whether Roth or traditional, is a savings mechanism that allows you to invest funds for your future retirement. The sooner you begin putting money into an IRA, the more time your money has to grow before you reach 72, the age at which you are required to begin taking distributions from the account. IRAs prepare you for retirement and provide tax advantages, allowing you to choose whether to make contributions tax-free (traditional) or receive your distributions tax-free (Roth).

Unlike an IRA, a 401(k) is a tax-deferred retirement savings account that employers offer their employees. Employees contribute money to their account via elective salary deferrals, meaning a percentage of their salary is withheld and contributed to the 401(k). Oftentimes, employers will match employee contributions up to a certain limit or percentage as an added employer benefit. Be mindful of employer match contributions to ensure you are receiving the maximum match contribution.

Supplemental retirement income to consider

Outside of an IRA or 401(k) some employers offer a pension, a fund into which a sum of money is added during an employee’s employment years and from which payments are drawn to support the person’s retirement from work in the form of periodic payments. Some professions that still commonly offer pensions include teaching, government service, insurance, military service, unionized roles and more.

Additionally, Social Security‡ is a government-run program that works by using taxes paid into a trust fund that qualifies you for benefits when it’s time for you to retire. Social Security replaces a percentage of your pre-retirement income based on their lifetime earnings. The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits. It is accessible to receive once you turn 62 years old. However, you are entitled to full benefits when you reach full retirement age. If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.

Lastly, health savings accounts (HSAs) can be used like traditional retirement savings accounts, as many allow account holders to invest the money they contribute, like a 401(k) or traditional IRA. Major HSA providers now offer multiple investment options, including money market funds or self-directed accounts for mutual funds. Unlike other retirement accounts, HSAs have a triple tax advantage:

  • Money goes into the account tax-free
  • Money earns tax-free interest and investment earnings
  • Money comes out tax-free when used for eligible medical expenses

There are no income limits or required distributions when you reach a certain age.

Retirement approach by age and life stage

Saving money is a critical part of long-term financial independence and stability, and planning for retirement starting as early as your 20s can help you stay on track to reach your financial goals. We’ve included a decade-by-decade guide to better understand how much you should save based on your age and tips for ensuring financial success after retirement.

Your 20s is a good age to start building an emergency fund that holds between 3-6 months of your basic expenses and you should be participating in employer benefits like 401(k) retirement plan, tuition reimbursement and wellness incentives. These will vary by your employer. By the end of this decade, you should aim to save 1x your salary.

By your 30s, you should aim to save about 3x your salary and should be working to identify your debt and create a plan to start paying it down.

Your 40s are a good time to focus on long-term planning. Find ways to improve your income, whether through a side business, a raise, an internal promotion or a move to another company. Also be careful about new debt and don’t make decisions that leave you in a vulnerable financial position. You should aim to save about 4x your salary by the end of your 40s.

At the end of your 50s, you should aim to save 8x your salary and should find ways to reduce expenses. You can do this by cutting everyday expenses or taking larger steps, such as downsizing your home.

In your 60s, you should make a new budget after retirement that better represents your income, expenses, debt and other important considerations. Carefully choose when you start receiving Social Security or pension payments. Starting at the minimum age of 62 means lower payments over a potentially longer period of time, while waiting until full retirement age means larger monthly checks.  At this time, you should aim to save about 10x your salary.

By the time you’re in your 70s, you are hopefully enjoying all the fun things retirement has to offer. But just because you’ve retired, doesn’t mean you should stop investing. Lifetime income helps you live comfortably, so be sure to maintain an active investment strategy through your golden years.

Weathering market shifts

It’s important to understand that retirement planning is long-term so depending on when you start, you are likely to experience a variety of market shifts and volatility. And while it may feel risky, staying the course is generally more beneficial for your portfolio than pulling your investments from stocks in a down market.

Retirement planning infographic

Infographic Retirement Planning

Need help planning for retirement? UMB’s calculators can help you address common financial challenges including retirement savings, emergency funds and more. Save and download the infographic here

This material is provided for educational purposes only and contains no investment advice or recommendations to buy or sell any specific securities or engage in any specific investment strategy.
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All mention of taxes is made in reference to federal tax law. States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. Please check with each state’s tax laws to determine the tax treatment of HSA contributions or consult your tax adviser. Neither UMB Bank n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice. Withdrawals for non-qualified expenses are subject to income taxes and a possible additional 20% penalty, if you’re under age 65.
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