M1 Blog

Guide to retirement

M1 Team
M1 Team January 24, 2022
Photo of two men playing chess

Planning for retirement is important for people of all ages. It becomes increasingly important as you grow older. While most people generally understand that they should save money for after they retire, many do not save enough or think through a strategy that fits their goals.

It’s never too early to build a retirement strategy. But before you choose a strategy, you’ll want to know how much you need to retire.

How much do I need to retire?

Depending on your retirement goals and ideal lifestyle, many experts say that your retirement income should be 80% of your last pre-retirement income. This retirement income can come from many different sources like Social Security, pensions, and your investment portfolio.

To figure out how much you’ll want in your investment portfolio (nest egg) before you retire, you can use the 4% rule: divide your desired annual retirement income by 4%. So, if you make $100,000 at the time of retirement, your math may look like this:

  • Last pre-retirement income: $100,000
  • Target retirement income: $80,000
  • Target nest egg: ($80,000 / 0.04) = $2 million

Keep in mind the 4% rule assumes a 5% return on investments after taxes and inflation, no additional retirement income like Social Security, and a lifestyle like the one you were living at the time of retirement. It also assumes you’ll be in retirement for 30 years.

Depending on your life expectancy, medical costs, and retirement goals, you may consider adjusting your target nest egg amount if using the 4% rule. And the 4% rule works best when you practice it consistently. Other people may choose another method of calculating how much they need to retire.

What are retirement strategies?

Retirement strategies are the plans that you make and implement so that you will not run out of money when you are retired. Retirement strategies should consider the need to grow the savings balances while also balancing the need for safety.

Growth is important as a hedge against the inflation rates that you may face after you retire. As time passes, an investment portfolio that is too safe will erode in terms of its value. The right retirement strategies should balance your need for safety with your need for growth (aka risk) so that you can maximize the amount that you will have available to you.

Different types of retirement strategies

There are several different types of retirement strategies that you can choose. One good way to start is to divide your portfolio into two areas. One part may be diversified as broadly as possible to enjoy growth while also hedging against inflation. The other portion may be focused on a fixed income and have lower risk. This helps to reduce the volatility of the total portfolio.

The best retirement strategies for you will depend on multiple factors, including the following:

  • Your current age
  • When you plan to retire
  • The needs of your family
  • The amount of money that you want to have
  • Your life expectancy
  • Plans to age in place
  • Your income

The most important strategy for planning for retirement is to start saving now if you haven’t already. Savings and investments are a lifelong practice that you engage in constantly whenever you get paid. Beyond that, your individual retirement planning strategies will depend on your goals, how near to retiring you are, how much you have already saved, and your life expectancy.

Retirement plans and retirement planning

Some people approach their retirement plans by drafting comprehensive financial plans and then following them as closely as possible. Others take a less planned approach, which can make actual retirement more stressful and less financially secure.

Planning for retirement can be done on your own or with the help of a financial advisor. Having help from a professional with your retirement planning may help you to make certain that you do not overlook anything and that you will have the best retirement plan possible for your goals. However, there are automated alternatives that can help you to enjoy low or no-cost investments and that keep your best interests in mind at all times.

Why personal retirement planning is important

Personal retirement planning is essential so that you can realize your goals of being able to support yourself comfortably after you have retired. While you might look forward to receiving Social Security benefits, they will likely only pay for the most basic of your living expenses. Personal retirement planning can help you to make certain that you are able to live well rather than living poor in your golden years.

Most people no longer receive pensions from their employers, making it necessary for you to consider other types of accounts. These accounts may include the following types:

  • 401k and 403b plans from your employer
  • Simple IRAs
  • Roth IRAs
  • SEPs
  • Solo 401k plans
  • Individual retirement arrangements
  • Health savings accounts

What is a simple retirement plan?

People who do not have the time to devote to drafting a comprehensive financial and retirement plan can rely on a simple retirement plan. While a simple retirement plan may not be as precise, it can still operate as a fallback option to help you to save enough on which to live comfortably. Some of the steps that are included in a simplified retirement plan include the following:

  • Save 15% of your gross income
  • Save money in a tax-deferred 401k or an IRA
  • Put some of your money in a target date fund
  • Review your plan at least annually
  • Make certain that you are still on track when you are 10 years away from retiring

What is a financial plan?

A financial plan is a comprehensive evaluation of your assets, income, liabilities, and financial goals. Drafting a good plan may take some time and effort, but it can serve as an important roadmap to your financial future.

Your plan should include the following elements:

  • Your financial goals
  • Your net worth
  • An income and spending plan
  • Retirement strategies
  • Comprehensive insurance plan
  • Customized asset allocation strategy for long-term investments
  • Income tax plan
  • Estate plan

Retirement plan options

There are multiple retirement plan options. You should review the different types of accounts so that you can select the types that fit your needs and your goals the best. After you have chosen your plans, you will then need to pick your investments.

The IRS has compiled a list of different types of plans. It might make sense for you to read about each type so that you can decide which ones will fit your needs and help you to accomplish your financial goals.

What is a traditional IRA?

A traditional IRA is a type of account that you can establish on your own outside of your job. This type of account allows you to contribute up to $6,000 beginning in 2019 if you are under age 50 and up to $7,000 if you are older.

Traditional IRAs allow you to make deductions on your taxes for your contributions in your current year. When you take distributions later, you will be taxed at your ordinary tax rate.

What is a 401k?

A 401k is a type of employer-sponsored account. 401k accounts became much more widespread when companies started ending pension plans. These plans have special rules and are governed by ERISA.

There are several 401k strategies that you might want to implement at your current job. There are also several 401k strategies that you might want to consider if you have funds left behind in 401k plans that are managed by your former employers.

Your 401k strategies

Your 401k strategies may depend on several factors. If your employer offers matching contributions, you should plan to contribute at least the matching percentage amount. You should avoid including company stock of your employer in your 401k plan because your savings could disappear if your employer goes under in the future.

If you have accounts that have been left behind with your former employers, your 401k strategies should include completing 401k rollovers into an individual retirement arrangement account or a Roth IRA at a low- or no-cost brokerage. By implementing wise 401k strategies, you can maximize your savings for the future.

What is a Roth IRA?

A Roth IRA is a type of account that allows you to take future distributions that will not be taxed. When you open a Roth account, you will not be able to deduct your contributions in the current year.

Implementing strong Roth IRA strategies can help to ensure that you will be comfortable in the future. These types of accounts also allow you to continue making contributions past age 70 1/2 instead of having to take mandatory distributions.

Roth IRA strategies

There are several Roth IRA strategies that you should consider. Since you do not have to take mandatory distributions beginning at age 70 1/2, you can treat your Roth IRA as a legacy for your family.

Other Roth IRA strategies include contributing your Social Security benefits to your account if you are older and still working. Roth IRA strategies also include starting early, taking advantage of compounding, making the maximum contributions that you can make each year, and converting your traditional individual retirement arrangement account into a Roth account. The reason to convert is because there is no contribution limit when you rollover funds into a Roth.

Self-employed retirement plan options

If you are self-employed, it might be more challenging for you to save for your future. However, it is just as important for you to save money as it is for people who are employed by others.

Self-employed people may also reduce their taxable income by opening their own accounts. Your retirement plan might include opening a solo 401k or a SEP-IRA as a self-employed person. Your self-employed retirement plan should address your goals, and it should also include income tax strategies. When you have a self-employed retirement plan, you can help to make certain that you will be able to retire and not be forced to continue working well into your old age.

Your planned retirement age

Your age now and the age at which you plan to retire are important when you are designing your retirement strategies. Your retirement planning strategies should include an assessment of how much you need to save to reach your savings goals. When you have a lengthy period to save, your retirement strategies may include higher-risk investments.

If you are nearing the age of retirement, you might want to adopt retirement strategies that are more conservative. The retirement strategies that you choose will also be impacted if you need to catch up on your contributions.

Retirement rules

Your retirement strategies and your IRA strategies should also consider the applicable rules. Retirement strategies that work take the rules into account so that errors are minimized in your retirement planning.

Your retirement planning strategies and IRA strategies should likely include plans to make the maximum contributions that are allowed for each different type of account. You will also want to include retirement planning strategies that help you to retire on time. IRA strategies should be undertaken with the knowledge that you will have to take mandatory deductions beginning at a certain age.

Early retirement strategies

If you plan to retire early, you will need to employ special retirement strategies and IRA strategies to reach your goal. Planning for retirement for people who want to retire early will require you to implement some of the following early retirement strategies:

  • Add passive income streams
  • Contribute the maximum allowed amounts
  • Budget carefully and stick to it
  • Cut out unnecessary expenses
  • Invest as much of your post-tax income as possible
  • Pay off your debts
  • Save up an emergency fund

Retirement planning for people who want to retire at an early age should begin as soon as they start their careers. The retirement strategies should be reviewed and modified as necessary so that your early retirement strategies continue to work to help you to meet your goal.

Start early no matter your strategy

No matter how you approach retirement planning, retiring when you want will be easier if you make saving a habit with each regular source of income. If you decide to continue working because you want to work, having enough retirement savings can make the decision one that you can make freely rather than being forced to remain in the workforce.

It’s never too early to start, and it’s not too late to revise your strategy according to your goals.