Planning and saving for retirement is a lifelong process, and it's worth checking in with yourself periodically to make sure that you're on track to afford the retirement you envision. Toward that goal, we've got several savings and investment milestones you should be hitting to feel confident in your retirement planning.
Of course, everyone's exact milestones will be a little different, depending on their life specifics and the goals they've set. However, you can use these general guidelines as a good starting point to check whether you're on the right path.
Age 20 - Start a 401(k)
To begin asking yourself, “How much money do I need to retire?" It's more than you might think. By age 65, you should have almost $3 million saved in order to maintain an annual income of $250,000.
The time to start saving for retirement is now. Don't wait until you get paid more or you have "extra" money. Take advantage of the tax and compounding benefits of your company's 401k plan and strive to save at least 15 percent of your pre-tax income. You may not have a lot of money at this stage of your life, but you do have something much more valuable: time. It's never too early to start saving for retirement.
By age 30, you should have about 1 year's worth of your current salary squared away.
Age 25 - Update Your Investment Strategy
As a retirement saver, the large number of investment choices can be dizzying. How do you put them all together? Research shows that asset allocation—the specific mix of stocks, bonds and other investment types—makes a bigger impact on your long-term investment success than investing acumen.
As you age, you should reduce your stock exposure because, while stocks have more earning potential than bonds, they have greater volatility, leaving you more exposed to risk as you get closer to retirement. To quickly arrive at the percentage of stocks to own, one good rule of thumb is to take 125 and subtract your age. So, when you are 45, your stock allocation should be 80 percent. The recommended starting point used to be 100, but many financial experts have upped it to tilt portfolios more heavily toward stocks given the higher life expectancy of current generations.
Alternately, consider using target-date funds, available in most 401(k) plans and brokerage accounts. These funds automatically match the level of risk and growth potential to your age and time horizon and come up with the asset allocation for you.
Age 30 - Protect Those You Love with Life Insurance
Don't think of life insurance as something to take care of when you're old. Protecting your family and loved ones is something you want to do as soon as possible.
Of course, nothing can replace you, but life insurance can help your family navigate a difficult time without the specter of financial hardship looming over them by providing much needed funds for paying everyday bills, saving for college and keeping retirement planning on track.
How much life insurance to buy? Consider your income and liabilities. As a general rule, financial experts advise life insurance coverage of 10 times your annual salary, so someone earning $100,000 should consider a policy with a $1 million death benefit. However, if you and your spouse have substantial debt or have a special needs child, you should consider a bigger policy.
Term life insurance is a cost-effective way to get protection, especially during the years when your death would cause the greatest financial difficulty. With term life, you choose how long you want coverage to remain in place, typically 10, 15 or 20 years. The cost of insurance depends on the death benefit, the term, your age and how healthy you are. The younger you are, the more affordable life insurance is.
There are some cases, however, when it makes more sense to purchase a permanent life insurance policy. As the name suggests, you can buy a permanent life insurance policy without an end date, which is why it tends to cost more. On the flip side, it can provide important coverage in certain situations, such as if you have a special needs child or you have significant financial obligations that are not time-sensitive. Another bonus of permanent life insurance: policies build cash value that you can tap or leverage while you are still alive, though any money you take out without replacing could reduce your heirs' death benefit.
Finally, remember that life insurance is not a set-it-and-forget-it financial instrument. As your life changes—through the birth of children, the launch of a business, the purchase of a home, a divorce and so on—you'll need to revisit your policy to make sure it's still meeting your obligations.
Age 35 - Open a Roth
A workplace 401(k) can be a retirement workhorse, especially if you get an employer match, but it does have its limitations, particularly as your career advances, and your ability to save grows.
First, as of 2019, your annual contribution limit to a 401(k) is capped at $19,000. Second, while your contributions come out of your paycheck pretax, you'll eventually have to pay taxes when you start withdrawing from the account.
To give yourself additional bandwidth to save, and gain some tax flexibility at retirement, consider opening a Roth, as well. A Roth individual retirement account (IRA) is a tax-efficient retirement saving tool that lets you put away $6,000 (or $7,000 if you are 50 and older) with after-tax dollars. You won't get a tax deduction for the contribution, the way you do with traditional retirement savings vehicles, but in exchange you get tax-free withdrawals in retirement. Having a Roth lets you have more control over your tax situation at retirement, and it can even be used as a tax-free inheritance for your heirs.
Age 55 - Decide On Your Social Security Strategy
You're eligible to tap Social Security at age 62, but you'll pay a penalty for every month before your full retirement age that you take the benefit. (Your full retirement age is between age 66 and 67, depending on the year you were born.)
Wait until full retirement age, on the other hand, and you'll win a larger monthly check. What's more, you significantly increase your Social Security benefit by waiting beyond your full retirement age until age 70, because you get a bonus for each month you wait. Consider this strategy if you are in good health.
If you are married, you and your spouse have a number of claiming options that can result in larger overall payments. Consult with a financial adviser who can explore these more complex strategies with you.
Age 60 - Plan Your Retirement Income Withdrawal Strategy
Going into retirement, you will likely have different pools of retirement assets, from 401(k)s to IRAs to taxable investment accounts. Each one has different tax rules and withdrawal requirements. For example, traditional 401(k)s and IRAs are taxed on the full amount of the withdrawal as ordinary income. In taxable investment accounts, though, you are only taxed at the lower capital gains rate on gains.
The order in which you make your withdrawals matters. Typically, financial advisers suggest tapping retirement accounts in this order to deplete accounts with the highest tax rates first:
- Traditional 401(k) and IRAs
- Taxable investment account
- Roth 401(k) and IRA
Follow these basic guidelines to prepare and strategize for your retirement, and you'll be much more likely to enjoy your golden years with a substantial, well-planned nest egg.
Investment and Insurance products are offered and sold by Bankoh Investment Services, Inc., a nonbank subsidiary of Bank of Hawaii and a member of FINRA/SIPC. Investment and insurance products are NOT FDIC INSURED, NOT BANK GUARANTEED, NOT A DEPOSIT AND MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL. Asset allocation and diversification do not assure a profit or protect against loss. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Bankoh Investment Services or its affiliates to buy or sell any securities, investments or insurance products.
Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Bankoh Investment Services or its affiliates to buy or sell any securities, investments or insurance products. The views and strategies described herein may not be suitable for all investors. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.