Retirement planning is one of the most important financial topics that we face. The thought of retiring after decades of work is hard for people to grasp, and many times no one explains to us how to effectively plan for when that day comes. I want to simplify what it means to retire and how you can determine what to do about it now, before it is too late. The earlier you can plan for what your life will look like, the more time you have to make it a reality.

Plan for Your Future

To build a more effective plan to retire, try to get as specific as possible about what retirement will look like for you. When will you retire? How much money will you need? Do you have any vacation or gifting plans? What about your spouse’s retirement? In today’s world, it is no longer as simple as working 9 to 5 until age 65, and then living on a predetermined pension and social security for 15 years. You want to start identifying what your life will look like (stop working, sell the business, go part-time, move out of state, etc.), and what that means financially.

There are two main projections to ensure you save enough for retirement. The first is projecting your income in retirement. If you know that you will live off of your social security and a pension alone, then you could make a strong argument that you do not need to save anything for retirement. Think in terms of income. When do I need to pull money out of my investments to fund my lifestyle? If you need $100,000 to live on each year, but your social security and pension add up to only $80,000, then you should plan on generating $20,000 in income yourself throughout retirement. 

This brings us to the second main projection to track: your assets over time. Having a golden nest egg once you hit your retirement age can fund the lifestyle and withdrawals needed from above. The goal is to make your nest egg big enough to never run out of money in retirement. For example, if you need to withdraw $20,000 a year from your investments, then having a $500,000 retirement account (assuming a 4% withdrawal rate) could be sufficient. If you need to withdraw $80,000 each year, then $2,000,000 is a better target. There is a larger debate in the industry whether a 4% withdrawal rate is too much, but I don’t want to get into that in this post. Use 4% as a rule of thumb. In its simplest form, as long as your rate of return is more than your withdrawal rate in the long term, you should never run out of money and hit your goal for retirement.

How Much Should You Save?

Answering this question will be specific to your goals and will most likely be different for everyone. The extreme version of this idea, called the FIRE movement (Financial Independence, Retire Early), focuses on saving as much as possible now, to retire much earlier than normal. Some people in the FIRE movement save up to 70% of their yearly income. On the other hand, the Federal Reserve has reported that only 31% of non-retired Americans feel their retirement savings are on track¹. Even if you do not “plan on retiring”, you still should have a plan for your future income and assets, and should save for it.

For most people, saving for retirement (and other future goals) will be somewhere in between. There are many retirement calculators online you can use, as well as many financial planners like myself who can help you create a more educated answer. Once you decide how much you need to save, then you should compare that to your current savings. Take the time to add up all the contributions into your retirement accounts and divide them by your total income. Dave Ramsey is famous for his “baby steps”, one of which is saving 15% of your income for retirement². There is no general answer to whether 15% is enough or too much, but it is a decent start. Remember, the more you save now, the less you can spend now, and the more you have later. How much to save is a tradeoff between living well now and in the future. 

I should mention that there are some limits to how much you can save for retirement in normal tax-efficient retirement accounts. The IRS has placed contribution and income limits on many of the best retirement accounts. For example, for 401ks, you can contribute up to $23,000 ($30,500 if over age 50) in 2024 as an employee. If you add the employer portion as well, you can save up to $69,000 ($76,500 if over age 50) in a 401k. These limits vary between different retirement plans, so if your goal is to save more, start focusing on different accounts to do so. It is always possible to save more for retirement, but as you increase your savings rate it could get more difficult to place those savings in the most efficient location.

Changes to Make Today

Start with the most accessible accounts you have access to currently. If you are already contributing to a Simple IRA, SEP IRA, Solo or Traditional 401k, then start by increasing your contributions into those accounts. If your business doesn’t have a retirement plan, then setting one up is an easy win. Not only do you create a retirement savings pipeline for yourself, you can provide a great employee benefit that is also deductible for your business (at least the employer contributions). 

When you start making changes, you are going to run into some form of traditional vs. Roth question. This is when tax planning gets involved. There are three main tax buckets to think about. The first is a “tax-free bucket”, or money that will never be taxed again (think Roth IRAs or Roth 401ks). The second is a “tax-deferred bucket”, or money that has not been taxed yet (think 401k or traditional IRA). And finally, the “taxable” bucket that is taxed along the way via capital gains (bank accounts, real estate, etc.). To keep things simple, try to fill up each of these buckets over time and you should have a more successful retirement. If you are inclined to have higher deductions now and pay less taxes, focus on the tax-deferred bucket. If you think your tax rate will be higher in the future, then Roth could be better.

Finally, not all retirement planning and accounts need to go through work. We work with many clients who have Traditional and Roth IRAs outside of their company as well. Some believe the best retirement account available is the standard brokerage account. These investment accounts cannot be opened through your company, and act like a savings account that you can buy stocks and bonds in. I don’t think they are the best, but the reason I am such a big fan of these accounts is for the liquidity of (or access to) the money. IRAs have penalties if you take it out before age 59.5, or age 55 for 401ks (there are rare exceptions). So, if you plan to retire at 50, you should fill your taxable bucket with a brokerage account to cover you before your retirement accounts kick in. Opening any of these accounts will depend on your situation, but filling each of the three buckets within accounts at the company and personally will give you added flexibility when it comes time for retirement.

Start Now

Retirement planning is not about understanding exactly what your life will look like in the future. Instead, it helps create flexibility and independence in the future so you can live more comfortably now and then. Focus on what you want retirement to look like and build backwards from there. As you narrow your desires, you can start projecting the income and assets you need over time. There are many different ways to save for retirement, with many accounts and strategies to maximize your money. Don’t get hung up on finding the perfect strategy. Slowly increase your savings rate and revisit your plan every so often, and you will be lightyears ahead of most people.

Sources: ¹Investopedia, ²Ramsey Solutions