Investing

How to Plan a Retirement Timeline

Help prepare for what's ahead by creating a timeline to keep your retirement planning on track.

by Nell McShane Wulfhart - December 11, 2017

Retirement planning can be challenging, but creating a timeline can help ensure that your savings stay on track. Here are some expert tips and a helpful timeline for helping to ensure your retirement plans are on schedule at every stage.

1. Set an income goal — and know that it could change

For younger workers, it can be difficult to determine how much income will be needed in retirement and how much their income will increase over their lifetime. Donna Peterson, a Retirement Income Strategist at Wells Fargo Advisors, says that many people start out looking at an income replacement ratio of around 80%. That said, when you’re younger, “80% of your income is not going to be close to 80% of your income at retirement,” Peterson says. “That will change over time.” Some people might choose to set a dollar goal, perhaps aiming to have a million dollars put away for retirement, but Peterson says there’s really no specific number for someone early in their career.

What it means: It’s important to set goals early in your retirement planning process. But be prepared to revisit your goals frequently as you get closer to retirement — and work with your Financial Advisor to make your goals as realistic as possible.

2. Plan to increase your savings rate

If you’re 20 years old, a savings goal of 10% of your current salary per year is a good start. By age 30 you should be putting away at least 15% per year. If have access to a qualified employer sponsored retirement plan (QRP) such as a 401(k), 403(b), or governmental 457(b), start there. If your employer offers matching contributions, consider contributing at least as much as the match — this is free money that you don’t want to pass up and can help you get to the right percentage.

At the same time, consider a Roth IRA or, if available, the designated Roth account option in your 401(k). “Being able to make after-tax contributions might not be so attractive to people when they’re thinking about trying to save or pay taxes today,” says Peterson, “but down the road, when you take income out of your retirement accounts, having that Roth money coming out tax-free can help you save on taxes then. So consider whether a mix of before-tax and after-tax money would make sense for you.”

What it means: Your savings rate should increase as you age; at the same time, you should explore additional investment options so that you’re getting the most benefit now and when you’re in retirement.

3. Sketch out the number of years you could be in retirement

When creating a retirement timeline, one of the most difficult factors is estimating how long you can expect to be in retirement. Peterson suggests planning for 20 to 30 years, but strongly recommends a contingency plan in case something forces you into an unexpected early retirement, such as health problems, perhaps, or an unexpected layoff.

One way of thinking that can help you get there: Plan to retire at age 55. This will allow you to be prepared for unforeseen events, and any money you make by working past that age will be a bonus. “That does make you save rather aggressively,” says Peterson, “but a lot of people lose their jobs in their fifties or have to stay at home to take care of elderly parents or spouses.”

What it means: An aggressive retirement date on your timeline can help you be prepared for unforeseen events as you get closer to retirement age. “There are a lot of reasons to try to be ahead of the game,” Peterson says.

Retirement Milestones to Remember Before Age 50 Contribute to IRAs and qualified employer-sponsored retirement plans (QRPs) Age 50 IRS allows "catch-up" contributions to IRAs and QRPs Age 59.5 IRS 10% early distribution penalty no longer applies to IRA or QRP distributions Age 60 Widows can sign up for Social Security benefits based on deceased spouse's work record Age 62 Early retirement age for taking Social Security benefits (benefits are reduced at least 25% if you begin claiming at this age) Age 65 Eligible to sign up for Medicare Age 65–67 Considered full retirement age, depending on birth year, when you are eligible for full Social Security benefits Age 70 Late retirement age for taking Social Security benefits; after this age, no additional credits accrue for delaying benefits Age 70.5 Must take required minimum distributions (RMDs) from Traditional, SEP, and SIMPLE IRAs, as well as former employer's QRPs, including designated Roth accounts* *You may be able to delay RMDs from QRPs where you are still employed, not a 5% or more owner of that company, and if the plan allows.

4. Set the steps to reach your goals

If you’ve gotten a late start on retirement planning, or if you’re rethinking your timeline around a plan to retire at age 55, there are effective actions you can take now to pursue your goals. Keeping a budget, Peterson advises, is essential. “A lot of people don’t like to do that,” she says, “but it’s the most powerful thing.” As part of that budgeting, be sure to look at your discretionary spending. If you’re supporting adult children at the expense of your own financial future, see where you can cut back. If you’ve been supporting children through college, once they become independent it might be tempting to reallocate that money to exotic travel or home renovations — but it’s your retirement fund that should get the first deposit.

What it means: No matter when you start, planning a retirement timeline is only effective if you budget for saving — and stick with that budget. Your Financial Advisor can help guide this conversation.

Peterson has a final tip for those in their 60s: You may want to withdraw money earlier than you think. If the bulk of your money is in qualified retirement plans or IRAs, most of the money you’ll receive in retirement is taxable — you can even bump yourself into a higher tax bracket. At age 70.5, retired minimum distributions kick in, so if you’re retired at age 62, for example, take some money out then — this will lessen the impact of larger distributions later on.

Nell McShane Wulfhart is a freelance writer based in Montevideo, Uruguay.

Image by iStock

Additional Resources

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