Personal Insights

7 steps to start planning for retirement

Planning for retirement may seem unusual when it’s more than 40 years away but it really does pay off to start early. Here are a few helpful tips for investing in your future.

It may feel unusual to plan ahead more than 40 years, but it’s worth starting now. Here are a few helpful tips for investing in your future.

It can seem strange to start thinking about the end of your career when you’re just starting out at your first job. But when you’re just starting out is actually the best time to start planning for retirement.

“When planning for retirement, I would say start as soon as possible,” says Francisco Fernandez, a financial advisor with Regions Investment Solutions. “Time is your best friend.”

Following these seven steps can help set you on a path toward a successful retirement.

1. Set long-term goals

Retirement can last a long time — for a young person today, it can be 30 years or more. Start planning by listing what you expect your retirement to look like:

• How old do you want to be when you stop working full time? 
• Do you want to live in your home without paying rent or a mortgage?
• How do you expect your budget and expenses to change? 
• Based on your family history, do you anticipate any significant medical expenses as you age?
• Do you hope to travel and see new places?  

The goals you establish will help determine how much income you will need in retirement. For example, if travel is important, try to set a ballpark figure for how much you might spend each year on trips. As an overall guideline, The U.S. Department of Labor suggests saving 70 to 90 percent of your preretirement income to keep up the standard of living that you had while working. While programs like Social Security are designed to help offset some of this cost, these programs are only intended to supplement your own retirement nest egg.

Remember, too, that inflation will affect the value of your savings over time. Inflation increases the cost of goods and services, so it will cost more in the future to buy the same things you do today.

2. Understand compound interest

The earlier you can start saving for retirement, the more you can benefit from compound interest. Here’s how it works: If you don’t withdraw money from your retirement account, the interest you earn from your savings adds to your total balance. Then, going forward, you’ll earn interest on that larger sum. Think of it as earning interest on your interest. You can use an online calculator to calculate the expected compound interest for your own financial situation.

Compound interest is also why it’s important to avoid withdrawing money from your retirement account before you retire, if at all possible. When you take out money early, you lose years of compound interest. Also, there are often fees for early withdrawals. If you encounter unexpected expenses, consider other options before touching your retirement savings.

3. Review your options

Most people rely on a handful of primary income sources in retirement. These may include:

• Social Security: Social Security is only meant to provide a part of your income in retirement, depending on how much you earned and when you retire. It’s a supplement not intended to replace all the savings you accrued while you were working. 
• Employer-sponsored retirement plan: Your employer may offer a retirement account such as a 401(k). Teachers and employees of some nonprofit organizations have access to a similar retirement account called a 403(b).
• Individual Retirement Account (IRA): You can use IRAs to set aside money for retirement outside of an employer-sponsored plan. There are different types, each with its own tax benefits, and IRS restrictions involved. 
• Pensions: Few workers starting their careers now are likely to have a company pension, in which an employer sends you income each month in retirement. That makes it especially important to have other plans in place.

If you’re worried about saving enough cash, you can also consider continuing to work in retirement. While this isn’t a perfect solution because you won’t know what your health or the job market will be like down the road, planning to work in retirement could reduce the amount you need to save to cover your expenses. 

4. Check your company benefits

When you start a new job, carefully read through the benefits that are available to you. Taking advantage of these benefits can be an important step toward building your retirement savings.

Usually, employer-sponsored 401(k) plans have an important advantage: Both your contributions and your employer contributions are not taxed until you take distributions. Also, any investment gains are not taxed until you withdraw funds from the account. 

“If you are an employee, maximize the employer 401(k). At a minimum, you should be putting in the percentage of the employer match,” Fernandez says. “You will be doubling your money if it is a dollar-per-dollar contribution.”

Often, you can have contributions to your retirement account automatically deducted from your paycheck. When you get a raise, consider increasing the percentage you contribute to the account. Note that the IRS sets a maximum amount that you can contribute each year.

You can invest the money you contribute to your 401(k) plan in different ways. Mutual funds, stocks, and bonds are common options. It can be a good idea to consult with a financial professional about what mix of available investments best fits your situation.

If you change jobs, you won’t lose your 401(k). You can take the money you have saved for retirement with you, either by rolling it over into a new company plan or to an IRA. If you have $5,000 or more invested, some plans might allow you to keep the account as is. There is also the option of cashing out old 401(k)s, though this could expose you to additional taxes and penalties.

5. Learn about Social Security

Social Security is a federal government program that provides benefits to you, and sometimes to your spouse, children, or parents. While you are working, your employer withholds Social Security taxes from your paycheck to fund the Social Security program. When you retire, people who are working at that time will fund your Social Security account with their payroll taxes.

You can check your Social Security account online to get a record of your earnings and an estimate of what your benefits will be in retirement. At age 65, you can begin collecting Social Security at a reduced monthly amount. If you wait until age 67 to retire, you can collect your full Social Security benefits.

6. Start budgeting and saving

To understand how much you can begin saving for retirement, you first need an overall picture of how much money is coming in and going out every month. If you don’t already keep a detailed budget, take a month and track every single dollar you spend. 

Once you have a full monthly expense list, subtract your total expenses from your after-tax income to get a sense of how much is left over, and budget around that for savings. To increase your savings, look for ways to reduce your expenses. For example, you might review your credit card statements for any subscription services that you don’t regularly use.

“The higher percentage you can save, the less burden you will have in your retirement,” Fernandez says.

Even if you can’t save as much as you want right now, start with a small amount each month. If possible, automate your transfers. The sooner you develop the habit of saving for retirement, the easier it will be in the long run to reach your financial targets. You can increase your contributions as you earn more, or tighten up your everyday expenses. The objective is to strike a healthy balance between your short-term and long-term goals.

7. Adjust your goals as needed

What’s important to you in your 20s may become less important in your 40s and 50s. If you have a spouse or partner, you might decide on retirement goals together that look different than the goals you set at the beginning of your career. 

“Review your portfolio, at a minimum, on an annual basis,” Fernandez says. “Have a good relationship and good communication with your financial advisor.”

If your goals have changed, consider how those changes will affect what you need to save. If you start to fall behind, don’t panic. Take another look at your budget, and see what you can do to increase your retirement contributions when you’re on better footing. Make up any lost ground over time, rather than jumping into risky investment schemes that advertise higher returns. 

While it seems strange to start planning for the end of your career when you’re just starting out, changes you make now can have a big impact in the future. Be flexible, adjust your plan when you need to, and invest in your future.