Your Guide to Retirement Planning

Getting ready for retirement requires consistent saving, prudent investing and successfully avoiding penalties and fees. You can build a nest egg faster if you take advantage of workplace retirement benefits and make optimum use of government programs, including Social Security and Medicare.

Here’s how to make a basic financial plan for retirement:

Save Regularly When Planning for Retirement

The key to retirement planning is to save a portion of each paycheck beginning as early in your career as possible. Meghan Murphy, a vice president at Fidelity Investments, recommends aiming to save 15% of your pay each year for retirement. If you can’t save that much, save a smaller amount and then increase it each time you get a raise.

“A 1% increase might mean $30 or $40 each pay period,” Murphy says. “If that’s in line with a raise or a pay increase, you don’t even miss the money because you didn’t have it to begin with.”

Maximize Your 401(k) Match

If your employer provides a 401(k) match, save at least enough to get the maximum possible 401(k) match.

“If they match 50 cents on the dollar, up to 6% of your salary, elect 6% of your salary,” says Allison Vanaski, a certified financial planner for Arcadia Wealth Management in New York. “You just made a 50% return on your money by contributing a little bit each paycheck, and that’s in addition to what the investments will earn over time.”

Take Advantage of Retirement Planning Tax Breaks

You can defer paying income tax on up to $19,500 in 2021 by contributing to a traditional 401(k) plan, and that amount jumps to $26,000 if you are age 50 or older. Income tax won’t be due on this money until you withdraw it from the account. Alternatively, you could contribute after-tax dollars to a Roth 401(k) and set yourself up for tax-free withdrawals in retirement.

Low- and moderate-income workers who save for retirement may additionally be able to qualify for the saver’s tax credit. These tax benefits give you an extra incentive to save money for the future.

Open an IRA

If you don’t have a 401(k) plan at work, consider saving in an individual retirement account. An IRA offers similar tax breaks to a 401(k) plan but isn’t tied to your job.

The traditional and Roth IRA contribution limit is $6,000 in 2021, or $7,000 if you are age 50 or older. Workers who earn below certain income cutoffs can save in a 401(k) and IRA in the same year. You can also roll your retirement savings from a 401(k) to an IRA each time you change jobs to make your retirement finances easier to manage.

Carefully Select a Retirement Investment Allocation

Retirement savers need to choose a low-cost mix of stocks and bonds that suits their risk tolerance. Young savers have many years to recover from stock market declines, so they can generally take on more risk. Many people gradually shift to more conservative investments as they approach retirement.

“You should absolutely become more conservative over time, but you’ve got to make sure that as you are becoming more conservative, you aren’t doing so at the risk of your purchasing power, your ability to outpace inflation over time,” says Benjamin Beck, a certified financial planner and chief investment officer at Beck Bode in Dedham, Massachusetts. “In order to make your income last for the rest of your life, you have to participate in the markets.”

Minimize Fees in Your Retirement Accounts

Fees reduce your investment returns and make it more difficult to build a nest egg for retirement. Remember to compare fees when selecting investments for retirement. Even a 1% fee can cost you tens of thousands of dollars over 30 years.

“Fees for 401(k)s can range widely, and minimizing investing fees means savers have less drag on their long-term returns,” says Christina Empedocles, a certified financial planner for Insight Personal Finance in San Francisco. “If fees approach 1%, it could be more productive to instead invest retirement savings dollars in low-cost, highly diversified index funds or ETFs in an individual retirement account.”

Use Retirement Planning Tools to Help You Financially Plan

Retirement planning calculators can help you determine if you will have enough money at retirement to cover your expected expenses. You can use a 401(k) calculator to figure out how much money you are likely to have at retirement given your current savings rate and expected investment returns. The Social Security Administration’s Retirement Estimator can give you an estimate of your future Social Security benefit based on your personal earnings record.

Boost Your Social Security Benefit

One of the most consequential retirement decisions you will make is when to sign up for Social Security. Payments are reduced if you sign up before your full retirement age, which is 66 for most baby boomers and 67 for millennials, and increase for each year you delay starting payments up until 70. Married couples can coordinate their claiming decisions to maximize their benefit as a couple. Continuing to work or suspending your payments can also have an impact on your retirement payout. Remember that your benefit will be adjusted to keep up with inflation each year.

Sign Up for Medicare On Time

If you receive health insurance coverage through your job, it’s important to enroll in another health plan before you retire, typically through Medicare or your state’s health insurance exchange. Medicare coverage can begin the month you turn age 65. It’s important to sign up for Medicare during the seven-month period around your 65th birthday because there are penalties if you enroll later. Those who continue to work after age 65 need to start Medicare coverage within eight months of leaving the job or health plan to avoid late enrollment penalties.

Make an Estate Plan

You can make life easier for your children and other heirs by creating a clear plan for your medical wishes and finances. Make sure that you have a will and advance medical directives in place and that beneficiary designations on your retirement and other savings accounts are up to date. An estate plan ensures that any assets you leave behind are distributed to the correct person.