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There Are 6,458 (or 7.9%) Fewer US Bank Branches Now Than in 2020 — Here Are the States, Metros That Lost the MostRetirement Planning: Steps to Saving for Retirement
A retirement plan is a strategy for accumulating, allocating and distributing your assets at life and death. While that might sound complicated, for most people, it simply comes down to saving, investing and knowing when to start withdrawing from your accounts. We cover the main steps to proper retirement planning and answer some of the most common questions when it comes to saving for retirement below.
Steps to plan for retirement
According to a 2019 Gallup poll, 54% of Americans cite not having enough money for retirement as one of their top financial worries. The best way to combat that is by having a consistent retirement plan in place. Here’s how to create one.
Step 1: How much do I need to retire?
The problem with retirement planning is that it’s hard to know for sure how much you’ll need. Your retirement income needs depend on a lot of factors, including your current financial situation, your cost of living in retirement and how long the money needs to last.
That’s why most people turn to retirement benchmarks to help them determine how much they need to save for retirement.
For example, Fidelity recommends aiming to save an amount equal to your salary by age 30, three times your salary by 40, six times your salary by 50, eight times your salary by 60 and 10 times your salary by 67. They say this is possible if you can:
- Save 15% of your income annually beginning at age 25
- Invest more than 50% on average of your savings in stocks over your lifetime
- Retire at age 67
- Plan to maintain your pre-retirement lifestyle after you retire
Of course, circumstances vary from person to person. If you’re still paying off a mortgage and other debts in retirement, you might need to save more. If you are debt-free and in excellent health, you may be able to get away with saving less.
Step 2: What's the best retirement account for me?
First, you need to decide which type of account you’ll use to save. Saving money is the foundation of a retirement plan, but investments are how you build real wealth. So it’s important to do your homework and choose your investing strategy wisely.
There are several options but here are two of the more common ones:
- 401(k): A 401(k) is an employer-sponsored retirement plan that allows employees to contribute pre-tax money from their paychecks and invest in certain products. Some employers also match employee contributions, up to a certain percentage. Contributions and investment earnings aren’t taxed until you withdraw the money in retirement. For 2020, you can contribute up to $19,500 to a 401(k) plan and an additional $6,500 in catch-up contributions if you’re over 50. Employees of schools, non-profit organizations, and government agencies may have a 403(b) or 457(b) plan instead of a 401(k).
- IRA: If you’ve already maxed out your 401(k) contributions or don’t have access to an employer-sponsored retirement account, an IRA is another option for retirement savings. There are two types of IRAs: traditional and Roth. With a traditional IRA, you may be able to get a tax deduction for your contributions, but the money is taxable when you withdraw it. With a Roth IRA, contributions aren’t deductible, but distributions are tax-free in retirement. For 2020, you can contribute up to $6,000 to an IRA. People aged 50 or older can make an additional catch-up contribution of up to $1,000.
Step 3: What should I invest in?
Once you decide where to save your money, it’s time to decide on your asset allocation, which is how your investments are divided across different asset categories, such as stocks, bonds and cash. Two factors determine how you allocate your investments:
- Risk tolerance. Every investment involves some degree of risk. Stocks tend to fluctuate dramatically in value but have the potential for higher returns. Bonds have more stable values but lower rates of return. Cash is the safest of the three major asset categories, but it has the lowest rate of return. Your tolerance for risk may be aggressive, conservative or somewhere in between.
- Time horizon. Your time horizon is the expected number of years you have to save before retirement. Someone in their 20s or 30s may feel comfortable keeping a larger chunk of their retirement assets in stocks because they have decades to weather the ups and downs of the stock market. On the other hand, an investor in their 60s would likely want less volatile investments because they have a shorter time horizon.
Step 4: Leverage the power of compound interest
Compounding is when the money you make from your investments is reinvested, allowing your savings to grow faster. And compounding is especially powerful in retirement planning because investments in retirement accounts can grow tax-free. The earlier you start saving, the longer your money has to compound.
The sooner you start saving for retirement, the better off you’ll be.
Step 5: Review your performance and rebalance your portfolio
Once a year, set aside some time to review your investment allocation and consider whether it’s still right for your stage in life. This is also a good time to rebalance your portfolio. Over time, investment earnings and losses can tip your portfolio out of balance and away from your original risk profile. Rebalancing adjusts your investments to ensure they align with your intended asset allocation.
Retirement planning isn’t a “set it and forget it” proposition. It's a good idea to check in on your progress occasionally to make sure you’re still on track.
How to approach retirement planning at each age
When it comes to planning for retirement, the earlier you start saving, the better off you’ll be. But no matter where you start, there are steps you can take to boost your retirement savings. Here are some suggestions.
Retirement planning in early career
Make retirement planning a priority from the start. Admittedly, this may be tough when your income is low and you may be paying off student loans or saving for a home or other life goals. But the sooner you start, the better off you’ll be later in life.
Start contributing to an employer-sponsored 401(k), 403(b) or 457(b), if you have access to one at work. Contribute at least enough to max out the employer matching amount to take advantage of this perk.
Retirement planning in mid-career
One of the biggest challenges of retirement planning in mid-career is competing priorities, especially if you’re paying for your children’s education. But it’s important to prioritize saving for retirement at this stage.
If you’re not contributing the maximum possible amount to your employer-sponsored retirement plan, consider increasing your contributions by 1% to 3% each time you get a pay raise. You probably won’t even notice the difference in your paycheck, but the extra savings can really add up over time.
If you’re already contributing the maximum to a 401(k), consider opening an IRA to increase your retirement savings. And remember to check in on your investments regularly to make sure your portfolio is balanced and your asset allocation aligns with your risk tolerance and time horizon.
Retirement planning in late career
When you’re five to 10 years away from retiring, start visualizing the kind of retirement you want. Your idea of a happy retirement may have evolved from the one you envisioned when you were starting out. Do you want to move to a different climate or be closer to family? Will you work part-time or start a business? Is travel a priority?
Getting a clear picture of your retirement lifestyle can help you get an idea of the resources you’ll need. It will also help you determine whether you need to beef up your savings now to get there.
If your savings are a little short, be sure to take advantage of catch-up contributions to your 401(k) and IRA. Look for ways to reduce your spending and pay off debt to reduce the amount of retirement income that will go toward interest payments.
Retirement planning FAQs
When should I start saving for retirement?
Now! It’s never too early to start saving for retirement, and the earlier you start, the more time you’ll have to take advantage of the power of compounding returns.
Should I pay off debt before saving for retirement?
Balancing paying off debt with saving for retirement is a challenge for many people. If you have a lot of high-interest credit card debt, prioritizing debt over retirement may make sense. But if you have a 401(k), contribute at least enough to get the maximum from your employer match. Then make a budget and a plan to pay off your debts as fast as possible. Once your debt is gone, you can redirect the money you were paying to the credit card companies to your retirement savings.
How do I start saving for retirement?
If you have access to an employer-sponsored retirement plan at work, sign up as soon as you’re eligible to participate and aim to save 15% of your salary. If you don’t have a retirement plan at work, open an IRA. Most banks and financial institutions offer IRA accounts.
How much money will I need in retirement?
The amount of money you need in retirement depends on a lot of factors, including your retirement lifestyle and your health. For one benchmark, Fidelity estimates that most people need somewhere between 55% and 80% of their pre-retirement income to maintain their lifestyle in retirement.
Which retirement plan should I get?
If you have access to a 401(k), 403(b) or 457(b) plan through work, definitely take advantage of it. Otherwise, open a traditional or Roth IRA through your bank or financial institution.
This is a well written article. Full of all those complicated numbers like 401, 457, 403. I usually leave all of that stuff up to somebody else.
How adorable.
Not really. Actually my ex said I was pretty simple. I think he meant that in a good way.
Anyway, I really appreciate the article about retirement. I simply adore the idea of not working.
Why the annuities are not mentioned above, is there a reason for it?
My grand parents and now my parents retired on annuity income and when they purchased their SPIA for life, with real-estate money they sold, they where paid back by the insurance company (get ready) almost 10 times more back than the amount invested and they still collect free money until their demise.
To me, that is the way to do it, not dependent on the stocks, not dependent on the interest rates, not dependent on fluctuations and the best part of all is, the states protect the invested money with insurance guarantee fund for the annuities and at the end, nobody has ever lost a penny from their annuities, well, since there inception (centuries ago).
Also, most states have a cap on the "guarantee". Some of these caps are based on an individual level. So, you can't necessarily go out and buy a bunch of policies from separate carriers.
Due to the low interest rate environment of the last ten year, insurance companies are in a world of hurt right now. If this causes systemic failures in the industry, kiss your guarantee goodbye.
Most states actually have two funds, one for property and casualty lines and another for life and health. Annuity products are covered by the latter. The NAIC model suggests an annuity state guaranty limit of $250,000 in present value for fixed annuities and the guaranteed portion of variable annuities.
When an insurance company is having a liquidity problem, the state puts it into rehabilitation and tries to save it from becoming insolvent. If the insurance company fails from there, the state government will take it over and liquidate the assets to satisfy its obligations to policyholders.
If more money is needed after that, the state guaranty system kicks in.
Please follow this link to verify my true post:
http://www.annuity.info/stateguar.cfm
and also here:
http://annuitynerds.com/documents/blog.php?entry_id=1309479347&title=texas-guarantee-fund-raises-protection-for-annuities-to-250000
In Texas, 250K, per individual - not per annuity.
If the previous regulations were based per annuity, this is a giant step backwards!
Here's the specifics for Texas.
The limit of $250,000 is per individual. The bill is actually written to say what it does not cover. Sec. 463.204 (2)A says "A contractual obligation does not include...(2) an amount in excess of: (A) $250,000 in the present value under one or more annuity contracts issued with respect to a single life under individual annuity policies or group annuity policies;..."
Example OJ, he's been through civil and criminal trials all his life and anyone holding judgment against him is just that a piece of worthless paper, all the while he is collecting annuity payments since 1980's around $10K/mo non stop, even when in jail and will continue to do so until the day he lives, without worry if someone will take his retirement money away. Now, that is a solid investment for life, not 401k and the rest of the variants, anyone can snatch them from you at any time for any reason. Saving all your life is not a guaranty for future income stream out of the exotic savings numerated in this article.
Yes, the guaranty system exists. What happens if the state mandated, yet privately managed, guarantor cannot pay the insured amount? Neither of the links you provide state the state itself becomes responsible.
Each state is different.
This is a big difference from NCUA / FDIC.
You have to do more digging to educate yourself of how this is done, but every state vouches for your funds, no matter what happens to the annuity insurance or life companies.
By the way, lets say the particular state has 10 different life or annuity insurance companies registered to do business there, just buy annuity to the insurance limit per company and you are insured for a million or more and you can purchase annuities in any state of the nation and in theory you can insure a $ billion or more for free.
How I know this, I used to manage football team assets some times back and we advised the millionaires how to keep their money safe from IRS and the litigants. Just try to attach a lien on an annuity and see what happens to the court order in many states.
And, you are definitely wrong about buying from multiple insurance companies to increase coverage. In my and other states, the limit is for all annuities owned by an individual, not per insurance company. So, going to multiple insurance companies will not increase the amount of coverage.
And, yes, Florida for instance does appear to offer protection for annuities just as it does for houses. I prefer to avoid creditors altogether, and have a large umbrella policy just in case.
This is a good overview for people who are interested in guarantees.
http://nafa.com/wp/wp-content/uploads/2012/07/State-Guaranty-Fund-Directory.pdf
Example for Delaware:
http://delcode.delaware.gov/title18/c029/
You linked to the wrong chapter of Delaware code. Chapter 42 actually covers the Delaware Insurance Guaranty Association.
And it confirms your prior error, only $300,000 in total claims, regardless of the number of policies purchased. § 4208 (a) (1)
I can't find anything in the code about the state guaranteeing the association. Can you please cite the section within Chapter 42? Thank you.
Not that I like SPIAs - in this interest rate environment, they're a joke. But, let's be accurate about things.
Q: What is deposit insurance?
A: FDIC deposit insurance covers the depositors of a failed FDIC-insured depository institution dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default, up to at least $250,000. For example, if a person had a CD account in her name alone with a principal balance of $195,000 and $3,000 in accrued interest, the full $198,000 would be insured, since principal plus interest did not exceed the $250,000 insurance limit for single ownership accounts.
https://www.fdic.gov/deposit/deposits/faq.html
The Facts: The FDIC occasionally receives calls from depositors about this myth; it often comes from consumers who attended a financial seminar and heard that the FDIC can and will take up to 99 years to pay the depositor’s insured deposits after a bank is closed. This claim is false and entirely without merit.
The truth is that federal law requires the FDIC to pay deposit insurance "as soon as possible." For insured deposits — those within the deposit insurance limits — the FDIC almost always pays insured depositors within a few business days of a closing, usually the next business day. Payment is made either by providing each depositor a new account at another insured institution or by issuing a check to each depositor.
The limited exceptions that may take longer to process primarily are deposits that both exceed $250,000 and are linked to trust documents, and accounts established by a third-party broker on behalf of other individuals. "The delay, if any, for a depositor to receive payment for insured funds is a function of the time it takes for the depositor or their broker to provide missing supplemental information that is needed for the FDIC to complete the insurance determination," Troup explained. "This is supplemental information that is not in the bank's records, and it may include affidavits from depositors and copies of trusts and death certificates. And if there is a delay in receiving insured funds, it is typically a matter of a few business days."
https://www.fdic.gov/consumers/consumer/news/cnfall14/misconceptions.html
"If you fail to plan, you plan to fail" a quote attributed to Benjamin Franklin and I think
quite fitting concerning retirement.
One last thing, If you think annuities are good for anyone other than the "Insurance Agent"
that sold it to you, You probably also believe that Time Shares are good too.
One of the big unknowns for those of us not near retirement is how much money we should actually budget for. I have the suspicion that typical recommendations like "replace 90% of your pre-retirement income" etc. are all not very useful and set the bar so high that it makes people take on more risks than necessary or turn them away from trying to meet the goal altogether. First of all, the budget should be set based on expenses, not income level!
Those of you who are close to or in retirement, please relate your story on how much money you thought you'd need in retirement, and how much you actually need! Thanks!
For example, when I was working if I blew 100K in the stock market I could recover that loss within a year. Now that I'm retired, it would basically take an eternity.
How much should you budget for retirement? I'd said every dime that you make over your living expenses that the government will allow you to put into your retirement accounts.
In the beginning this may not amount to much but as your income increases the trick is to avoid increasing your expenses to the extent that they wipe-out the income increase.
Most of my IT Consultant pals liked buying fancy houses, cars, boats and even airplanes. Even with 6 figure incomes, they still managed to spend more than they were making.
About the only expense that will disappear when you're retired is your mortgage. Everything else is going to stay pretty much the same. So you're right, budget based upon your expenses, not income.
Thats the way you get the trophy wives, or because you HAVE a trophy wife or you KEEP a trophy wife.
If you own your residence and have paid it off by then. Unfortunately not everyone can count on that.
All good points otherwise, though!
"Those of you who are close to or in retirement, please relate your story on how much money you thought you'd need in retirement, and how much you actually need! Thanks!"
Retirement is not a planned event, there are so many variables involved that no one can plan ahead, reason, unexpected events, from illness to catastrophic family expenses to investment failures, therefore, the retirement should be based and adapted on the real money already staring to poor in the day you retire (if ever). That way, there will be no disappointments and depression. Planing is for the ego and to dream big, but in reality, it is the real money that flowed in the day you said: I will live on what I've got.
"Planing is for the ego."
I guess that woodworking could boost one's self-esteem.
Living below one's means and saving some portion of your income, no matter what your income is, never grows old. Perhaps "out of style", but still tried and true !
I was taught that as a young teenager, EARNING money after school and WORKING summer jobs. Carried that philosophy all through my working life and am now living a comfortable retirement life style.
The education system today teaches them to become leaches, unproductive, dependent and in between **** specious.
They will become not self sufficient and will be manipulated by the party that made them dependent throughout all of their lives.
Nonsense.
I know a 11th grader with a lawn "maintenance" business. He owns a few mowers and trimmers and has one "employee" working for him. I asked him for a recommendation on string trimmers. He borrowed cash from his dad in 10th grade, started with a used mower and repaid the loan by the end of the summer. His friend noticed and is now his summer "employee".
They are being brainwashed in school to be arrogant, dependent, not self inspirational and all the negatives in life.
Are there any exceptions, of course there are, but majority are lazy leaches with indoctrinated minds to be passive and not inspirational on life itself. Most want to be served with food instead of cooking for themselves.
You're first mistake was asking.
Every negative outcome after that was inevitable.
Young people CRAVE leadership and external discipline. It's their job to **** up and it's the adult's job to ensure they don't destroy themselves in the process. The word NO is a word whose meaning my generation mastered early in life. I worked with young people for the past 40 years and there are kids today every bit as "good" as they ever were. Problem kids come from problem homes.
Especially major oversight for an article on a site focused on CDs and bank accounts! ;-)
Some modest observations.
1. When deployed in a ladder of CDs, cash can offer a yield comparable to (or often exceeding) bond funds. Especially in a rising-rate environment.
2. Unlike bonds or bond funds, FDIC/NCUA-insured cash has no default risk.
3. For retirees (such as me), having a bucket of cash means you don't have to sell stocks (or bond funds, for that matter) in a down market to satisfy your RMDs. As most retirees know, RMDs can be satisfied from one (or a combination of more than one) IRA account.
4. Stuff happens. Cash is really handy when the inevitable occurs.
To say the least, most financial planning blogs and articles I have read over the years give short shrift to cash and CDs. Ken's blog is an exception, which is why I suspect he has a loyal following, and is oft-quoted in the financial press on such issues.
You are rich by everyday standard, you have money in all kinds of investments, you complain a lot if the posts are not done to your liking and now the question arises again, why do you want to save the money you will never succeed to spend while alive?
Is there a philosophical meaning to the saving matter, a greediness, a habit or there is something deeper that inspires you to save even more fully knowing that you do not need any more money?
Is there a goal that you want to achieve or you just want to prove a point to someone in your life?
As Neil Young sang so well in the 1972 "Harvest" album "It's such a fine line - I hate to see it go."
Please read the Bozo response #43, he is smart and you can learn something from him. The money has different meaning to different people and yes philosophical is one of them. If you do not need the money but you save them under all circumstances, they have philosophical (sentimental and spiritual) value, but not intrinsic.
As a retiree, my main concern is for my wife, as she will (at least actuarially) outlive me. I want her to have at least 2X in "safe and secure".
Observations: (1) Saving can become obsessive/compulsive (i.e., a disorder). Trust me, we're not in that category. (2) Grandchildren offer ample opportunities to splurge, which we do. (3) We are now able to give more to the Church and the local Hospice. (4) We have a family tradition of leaving more to the next generation than we received from the former.
Anyone who wants to educate themselves is making a mistake hanging out here. Try bogleheads.
1. Fixed-income, assuredly.
2. Interest-rate risk, not at all.
3. Default risk, NCUA/FDIC, non-existent.
As an aside, the Bogleheads Forum has historically been populated by folks who hate the conventional wisdom. Unless it's theirs.
You are correct...
https://www.ally.com/do-it-right/banking/cds-or-bonds-whats-the-difference/
No, CDs are certainly not bonds. But, they are more like bonds than cash.
Get a first year accounting book. Look up the definition of cash and cash equivalents.
As noted below in comment #60, perhaps it is time to abandon the three categories entirely.
*Indeed, some have argued that any account which restricts withdrawals in any form creates a mini-ladder of bonds. At a certain point, this verges on angels dancing on the head of a pin.
Perhaps we should abandon the classic "stocks, bonds, cash" asset allocations and acknowledge that asset classes are much more diverse these days. For example, go to the Vanguard snapshot (or any snapshot, for that matter) and where will your CD ladders land? Under bonds, or under cash?
This is more than merely an academic issue for retirees in a rising-rate environment. For example, if an "age appropriate" risk tolerance is 40% equities/60% bonds, is that 60% comprised of (a) bond funds, (b) individual bonds, (c) CDs, or (d) a combination of (a), (b) and (c). If (d), how does the retiree decide what to do? I sure wish I knew. As a retiree myself, I'm hedging my bets by being in bond funds, CD ladders, high-yield savings, and demand deposits. No individual bonds, however.
Also agree that "60% bonds" is a much too simplified advice. For example, some short-term bonds or ultrashort-term bond funds will behave more similar to cash than most bonds.
In my case, my fixed income is spread between something like: high-yield savings, reward checking, CD ladders; short-term, mid-term, long-term bond funds; government, investment-grade, and junk bond funds; floating rate funds; and U.S. savings bonds. So yes, the "60% bonds" can be as complicated (or actually probably more complicated) to allocate than the stock allocation.
I think VBTLX, as a bond index fund, follows the AGG index (aggregate bond index) so there's not much that Vanguard can do to influence the fund's performance when rates rise. The AGG's performance is currently "distorted" due to the heavy issuance of Treasuries in recent years, so the Treasury component is now very high in the index. Treasuries are more sensitive to interest rate changes than corporate bonds, so any index fund using the AGG is currently not performing so well. (On the bright side, if and when the economy tanks, Treasury funds do best.)
As an alternative to consider, Vanguard does offer a nice selection of actively managed bond funds at low cost, some of which have a much higher corporate bond component than VBTLX. Or, you could also consider something like a "bank loan fund" which tends to do well when interest rates go up (e.g. FFRHX) ... these are probably best described as junk money market funds.
The question (which has never been addressed to my satisfaction): in a rising-rate environment, does holding an intermediate-term bond fund in an "age-appropriate" allocation (say, 60% for a retiree) act as a help or a hindrance? Were I to suggest a worthy thesis topic for a PhD candidate in economics, well, you get my drift.
Now, turn it around. Assume that retiree has his fixed-income tilted to CD ladders. While rates have been in the doldrums over the past few years, an average 5-yr CD ladder probably sports a 2%+ yield. And the trend is upward.
So, were one to calculate a SWR for a retiree, would 40% equities/ 60% bond funds generate a demonstrably different result than an asset allocation of 40% equities/ 60% 5-yr CD ladders. I suspect the answer is in the affirmative.
1. Bond funds will typically have a higher yield because of credit risk from holding corporate bonds. Since CD ladders don't have credit risk, they can only be compared to something like Treasury funds or Agency funds.
2. A 5 year CD ladder will have a duration of approx. 2.5 years (because the CDs will mature between 0 and 5 years) so should probably be compared to a short-term bond fund.
Looking at the Vanguard funds, the short-term treasury fund has a YTM of 2.3% and the short-term investment grade fund has a YTM of 2.8% (both have a duration of 2-3 years). I'm thinking that a 5-year CD ladder will perform similarly to these funds over time.
I read that with bond funds, it's best to select funds with a duration similar to one's time horizon for withdrawing the money. VBTLX has a 6 year duration. So one strategy might be to keep the money you plan to withdraw in the next 5 years in a CD ladder or a short-term bond fund and the rest in 40% equity/60% intermediate-term bond funds. (This kind of "different pots for long and short money in retirement" is not my idea, rather something I read in a finance magazine recently. If I remember correctly, I think they even showed that it would not significantly affect the SWR to keep the money you need sooner in a less risky fund.)
But the article did not give much actual data on this, and I agree with you there is an information vacuum on these topics ... especially the part you point out, how it affects retiree's SWRs.
Because I am married.
Answer to question 2:
Because I am married.
Answer to question 3:
Because I am married.
I also think the government should increase the "look back" years. Running out of money is one thing, but too many people are giving away their assets to family members just before they reach their declining years and then stick the rest of us taxpayers with the bill for their long time care.
You can find details of this retirement for dummies guide here: http://www.altcp.org/retirement-for-dummies/.
Plan your retirement, work your plan.
Those were two different retirement scenarios with pretty much the same problems. No detailed operating budget, no forward projection (fixed income versus increasing expenses) and no idea about the true costs associated with Medicare and supplementary insurance.
A good friend, after 32 years of maxing his 401K and frugal living, retired. I told him people would hate him. He said no way. He went to a family reunion. He said he was retiring. Jealous family members with big trucks and big houses said that was impossible. One got downright hostile. I told him again people would hate him. He agreed. He retired at 57.