Banking 101: Practical Retirement Strategies

Saving for retirement is one of your most important financial goals.

A 2019 survey from the Transamerica Center for Retirement Studies found that 75% of workers are saving for retirement through an employer-backed plan, such as a 401(k), or something outside the workplace, such as an individual retirement account (IRA). While that is good news, the same study revealed that almost 50% are just guessing how much they'll need to retire.

It's good if you're saving for retirement, but it's much better if you have a plan. Here are some common retirement strategies you can implement right now.

No. 1: Start saving today

The easiest retirement strategy is to start saving now. No matter how much you save, the earlier you start, the better.

Starting early allows you to save more money simply because there's more time. It also protects your savings against inevitable market fluctuations. If the stock market tanks, your investments will have time to come back up.

Let's say you're 37 years old and decide to start socking away $465 a month for retirement. With an annual return of 8%, you'd have $697,637 saved when you retire at 67. However, if you're 27 years old and start saving the same amount each month, you'd have $1,634,140 in retirement savings at 67.

Here’s a look at how much you’d save depending on the age at which you start:

Consider this: A 2019 TDAmeritrade report found that 58% of Americans believe having $1 million in retirement savings will be sufficient. If you get going at 27, you'll be ahead of the game. You just need to start saving right away.

No. 2: Take full advantage of your 401(k)

If your employer offers you a 401(k), you need to go all in on it. The max 401(k) contribution for 2019 is $19,000. Catch-up contributions, which are additional 401(k) deposits made by workers 50 and older, can be made up to $6,000 a year.

Growing — and protecting — your 401(k) is vital, said Alano Massi, managing director of Palm Capital Management in Westlake Village, Calif. The sooner you begin contributing to your 401(k), the more money you’ll gain through compounding growth.

If your employer matches contributions, it can be even more advantageous. With a 401(k) match, your company agrees to contribute a percentage of what you put up — up to a certain limit. Vanguard, for example, matches 401(k) contributions up to the first 4%.

No. 3: Identify your retirement savings goal

When saving for retirement, you should think through everything you can to formulate your savings goal.

When do you want to stop working? Do you want to live in a house or downsize to a condo? Where do you want to live? How is your health?

As complicated as a retirement goal seems, Kristian Finfrock, founder of Retirement Income Strategies in Middleton, Wis., said it all begins with a budget.

First, you'll want to identify your expenses and income sources. The key is to make sure you have more money coming in than going out. Once your budget is set, Finfrock suggested using a retirement calculator to determine when you can retire and how much you will need.

"It is simply a math problem," Finfrock said.

No. 4: Open an IRA

Even if you have a 401(k), you should open an IRA. You can open an IRA through a bank or a brokerage firm, and — just like a 401(k) — some of the funds aren't taxed. Here’s a quick breakdown of the two types of IRAs:

• Traditional IRA: Any cash you stash here isn't taxed until you begin to make withdrawals, which you can do without fees starting at age 59 1/2. Annual contribution limits for 2019 are $6,000, or $7,000 if you’re 50 or older.
• Roth IRA: Cash you deposit here is subject to taxes and can't be deducted from them. However, withdrawals in retirement are not taxed. The same general contribution limits apply with a Roth IRA.

When in doubt, you'll likely want to choose a Roth IRA. This is especially true if you're young and in a lower tax bracket. You'll pay taxes at a lower rate, and likely make more money, than you would when you're older. Also, you'll be happy to be making tax-free withdrawals in retirement, when money could be tighter than ever.

No. 5: Be mindful of risk

This one is short and simple: No matter how you decide to invest for retirement, it's important to be mindful of your risk tolerance. You don't want to be making investments that you can't stick with over the long haul.

No. 6: Be prepared for health care costs

One major expense you should be aware of in retirement is health care costs.

According to a 2019 study from Fidelity Investments, a 65-year-old couple retiring in 2019 will end up shelling out $285,000 on health care and medical expenses throughout retirement. That's up $5,000 from last year. For single retirees, women will spend about $150,000, and men will spend $135,000.

Consider opening a health savings account (HSA) — which is essentially a 401(k) for health care — to ensure you don't get caught off guard by medical expenses in retirement. HSAs are beneficial because contributions are 100% deductible and all withdrawals to pay qualified medical expenses are tax-free.

No. 7: Nail the withdrawal percentage

Make a plan to execute the correct withdrawals from your portfolio each year during retirement. While some experts suggest a 4% withdrawal rate, Finfrock suggested that may not always be the right move.

"With increased volatility, longer lives and sequence of return risk, this may be too high,” he said. “If the portfolio isn’t large enough, it may not provide enough cash to support your lifestyle at a 'safe' withdrawal rate of 4%, tempting you to withdraw more and deplete the portfolio."

No. 8: Be wary of inflation

As you move through your career, chances are you're going to start earning more money. Do your best to avoid the lifestyle inflation that could come with it.

Lifestyle inflation refers to the phenomenon of people spending more as they earn more. Keep your mind on the long-term goal of a robust retirement account. Save the extra money rather than spend it.

Speaking of inflation, remember to build it into your plan. One way to make sure inflation doesn't eat away at your retirement funds is to wait as long as possible to take Social Security benefits, because those payments are inflation-adjusted.

You could also choose an investment strategy that focuses on products that are likely to keep pace with inflation.

No. 9: Establish a will or trust

No one wants to think about what will happen when they die, but it's your duty to do so. Whatever nest egg you've built up, make sure there's a plan for it after you die.

"The last thing anyone should want is for his or her assets to be left to probate," Massi said. "A comprehensive trust or will can ensure an individual’s assets are divided accordingly, and not left for the court to decide."

Probate, as Massi explained, can lead to sticky situations. This is a legal process in which a will is reviewed by a lawyer to determine how it is distributed.

No. 10: Delay Social Security benefits

The longer you can wait to take your Social Security benefits, the better. Depending on your age, full retirement is somewhere around 65 or 67 years old. If you were born in 1955, your full retirement age would be 66 and 2 months. If you were born in 1958, it would be 66 and 8 months.

Here’s a deeper look:

If you want the full paycheck you're due, you need to wait until at least that age to retire. However, if you can delay retiring past your retirement age, you'll get a big boost. For context, in 2019, the average Social Security retirement benefit is $1,461 a month. However, the maximum benefit available for someone who waits until 70 to retire is $3,770.

For every year you delay past full retirement, you'll add credits that increase your benefits by 8%, up until age 70. That's a lot of extra cash that could come in handy down the line.

It’s also extremely important to note that a recent Social Security trustees report found that its trust funds could be depleted as soon as 2035. When that happens, benefit payments could drop by 20%.

No. 11: Buy an annuity

One way to safeguard your money from the ups and downs of the stock market is to buy a fixed annuity.

This is an insurance product you can buy using your retirement funds. You pay a big chunk up front and then get fixed payments throughout retirement. You can also choose to have a lump-sum payment.

Annuities can be good since there are no taxes on the gains until you start making withdrawals. You can also easily pass on payments to a loved one should you die before they're distributed.

No. 12: Know what fees you’re paying

Depending on your retirement strategy, you're going to be dealing with fees. Mutual funds can come with expense ratios (the cost to manage the investment). Your employer would inform you of 401(k) charges. Even IRAs can have a maintenance fee, especially if your account doesn’t contain a certain amount of money. Make sure you're considering these charges when planning for retirement.

No. 13: Meet with a financial advisor

What you don't want to do is invest without a plan. A financial advisor can help map out the details. Massi said he sees a surprising amount of investors without a plan in place.

"It’s important that an investor knows what age he or she can retire, and how much he or she can afford during retirement each year," Massi said. "This should guide the positioning of investments within a portfolio, along with risk tolerance. A home is not built without first creating a blueprint. Why should investments be any different?"

The bottom line

Saving for retirement isn't complicated. No matter what strategy you take, personalize it to your needs, wants and financial situation. Start saving early and stay dedicated, and you'll have plenty of fun during your golden years.