The coronavirus pandemic reminded all of us - at various stages in our careers - of the importance of retirement planning. It also reinforced the fact that if you focus on retirement from the early part of your working life, you have a better chance of achieving the lifestyle you want when you're ready to shift careers or stop working altogether.
That's because a lengthy retirement requires intentional planning. The age for people born in 1960 or later to receive full retirement benefits is 67, according to the Social Security Administration. The average life expectancy for Americans in 2020 was 78.
“For clients who are considering retirement, we use a framework that focuses on four key financial pillars," said Angie O'Leary, head of wealth planning for RBC Wealth Management-U.S.
The pillars include:
Though the framework above can be used at any phase of life to address planning, your financial planning moves often depend on your age. This is because your income, assets and goals are expected to change with time.
“The main thing that your age changes is your time horizon for investing," said Irene A. Damaryan, a senior wealth planner with City National Bank. “The earlier you start, the more opportunity you have for greater accumulation of assets."
Keep reading to understand how you might consider your age group and personal circumstances to start planning for retirement today.
Your first priority when you start working is to establish an emergency fund equal to three to six months of your wages, said O'Leary.
“You should also create a student debt repayment plan if you have loans," she said.
At the same time, take advantage of employer-sponsored retirement benefit plans, especially if they offer matching benefits. “The earlier you start saving for retirement, the less you need to save," said Damaryan. “Put as much as possible in your 401(k) at work to save on taxes. If you can, open a Roth IRA to save even more for retirement."
For example, you would need to save almost twice as much annually if you have 25 years to save for retirement compared to your savings target if you start 35 years prior to retiring, said Damaryan.
Once your income is above $200,000, said Damaryan, you're no longer eligible for a Roth IRA, but you can open a traditional IRA.
Even if you come from a high-net-worth family, developing a spending plan in your 20's still is important, said Damaryan.
“You have more leeway if you have family money, but you still need to instill discipline for saving and investing," she said. “You need an emergency fund too, especially if your money is in a trust and inaccessible."
A financial plan should be reviewed annually to see if your goals have changed and if you're still on track to hit your goals.
“Your 30's are often when you get married, start a family and start a business," said O'Leary. “While many couples today keep their finances separate even after marriage, it's important to have careful conversations about your wealth, your debt and your goals with your spouse."
Paying off debt, saving and investing are important financial steps to take in your 30's, when you can have a more aggressive investment portfolio since your time horizon until retirement is still relatively long, said Damaryan.
“If you start a business, you need to figure out what your retirement savings number needs to be and avoid investing those savings into your business," said Damaryan. “You also need to make sure you have an emergency fund with at least six months' worth of expenses in cash that's separate from other financial accounts."
Your 40s are a hectic time for most people, with business and career concerns and perhaps a growing family, said O'Leary.
“If you haven't reached out to a financial advisor yet, this is an important time to get help because you may be too busy to work on retirement goals," said O'Leary. “You should be maxing out your retirement savings at work and with supplemental accounts that are intentionally taxable or tax-deferred, depending on your liquidity needs."
Thinking about your lifestyle in retirement should start in your 40's, said Damaryan.
“If you think you want a private jet or to fund $20,000 annual vacations for your family, then this is the time to consider how to meet those needs," she said. “If you receive a windfall, such as an inheritance, or if you sell property or a business, it's important to make that work for your future."
Once you're over 50, the IRS allows you to make catch-up contributions to your 401(k) and IRA accounts.
Before 50, you're limited to saving $19,500 annually in a 401(k) account. But after 50, you can save up to $26,000 annually. The catch-up contribution for IRA accounts rises from $6,000 before age 50 to $7,000 after age 50.
“If you haven't saved enough for retirement, one option is a 'mega back-door Roth IRA'," said Damaryan. “You can transfer money from your 401(k) into a traditional IRA and then sweep it into a Roth IRA for the tax savings."
Estate planning is also extremely important at the later stages of life.
“The average age of widows is 59 1/2, so plans need to be in place to handle a possible loss of income," said O'Leary.
O'Leary said that a health care goal, including the potential need for long-term care, should be part of every retirement plan, including for self-employed individuals.
“Business owners need to make sure they're funding their own retirement plan and have incorporated their business value into their wealth plan," said O'Leary.
One option for business owners, said Damaryan, is a cash balance plan to “turbocharge" your savings. A cash balance plan reduces your taxable income and offers higher limits for savings.
“It's important to consult a financial advisor if you own a business because you need to meet the nuances of a cash balance plan, such as being at least five years from retirement and matching employee contributions to the plan," said Damaryan.
In your 60's, as you approach retirement, you'll need to apply for Medicare before you turn 65 and incorporate Social Security benefits into your plan. Damaryan said it's best to wait until you're 70 to take Social Security benefits, so that you can maximize the monthly payments.
“Every year you should have an annual review with your financial advisor and portfolio manager to evaluate your goals and your progress," said Damaryan.
You are invited to keep up-to-date with the latest economic perspectives and shifting global markets by signing up for City National Bank's newsletters here. Delivered biweekly, straight to your inbox.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.