Projection
You need to plan for a financially secure retirement. To plan for retirement, you need to know what retirement looks like to you. For most of us, retirement means ending substantial income-producing work. Retirement may be either voluntary or involuntary. Retirement often coincides with physiological changes associated with advanced aging. Retirement also implies enjoying life, we hope in good health and with enjoyable activities and good relationships. Yet retirement also implies the need for financial support to replace earnings. When planning for retirement, consider variations on the traditional plan of amassing a fortune off which to live in retirement. Recognize and pursue your core commitments. The book What Color Is Your Parachute? For Retirement offers these alternatives to traditional retirement:
refocus your current career toward something more engaging;
go part time to do only that part of your job you most enjoy;
work only periodically on special projects;
retire from your regular job to work for a current client;
retire from your regular job to consult for similar employers;
change careers to do something you would like more;
start and run a new business; or
cut your living expenses drastically to retire early.
Planning
Younger generations today are less prepared for retirement than older generations. A report Retirement Security Across Generations: Are Americans Prepared for Their Golden Years? from the Pew Charitable Trusts’ Economic Mobility Project indicates that Generation X members, born after 1965 and 1980, will have replaced only half of their income by retirement at age 65. In contrast, Baby Boomers born between 1956 and 1965 replaced 59% of their income. But two thirds of Millennials, born between 1981 and 1996, have nothing saved for retirement. We are increasingly unprepared for retirement. Increases in the age at which one receives full Social Security benefits, decline in Social Security’s full funding, increased life expectancy, and decreases in defined-benefit pensions add to the problem. More and more, we must plan on our own for retirement, largely through our own contributions to 401(k) and IRA plans.
⤠ Count the cost before trying to build a big thing. ⤟
Working
Working longer, or continuing to work part time, can be an option for those without sufficient retirement funds. According to the U.S. Bureau of Labor Statistics, a larger percentage of Americans over age 55 are working than ever before, with that percentage expected to increase. The Employee Benefit Research Institute reports that over 40% of employees plan to work past age 66. But check your employer and field. You may face a mandatory retirement age. Altman Weil’s Compensation Plans reports that half of all law firms, for instance, require lawyers to retire by a specific age. Airline pilots, commercial truck drivers, law enforcement officers, and workers in other fields face similar regulatory requirements or employer restrictions. And working can get harder, especially with natural declines in strength, stamina, energy, and vitality.
Funding
Traditionally, retirement funding has involved the three-legged stool of (1) Social Security, (2) an employer pension, and (3) personal savings. Today, the traditional three-legged stool, even supported by fourth and fifth legs of post-retirement work and home value, is wobbly. Social Security retirement benefits are only a floor for retirement funding. Check your anticipated benefits. The Social Security Administration website offers a retirement-benefits calculator, estimator, and planner. The SSA also indicates to expect funding at just 75% of the 2033 benefit level, due to withdrawals and underfunding of reserves. Congress has already incrementally reduced benefits by increasing the full retirement age and will likely continue to do so.
Pensions
Many fewer employers offer pensions today, with many more of those pensions in underfunding peril. Employers funded pensions easily when workers retired at age 65 and had a life expectancy of age 68. Earlier retirement and much longer life expectancies make pensions too expensive. When employers offer tax-qualified retirement plans, they are overwhelmingly the defined-contribution form rather than the traditional defined-benefit pension plan. A defined-contribution plan, like a 401(k), 403(b), or IRA, means that you may devote part of your pre-tax wages to a retirement account, and your employer may match a portion. But your account is all you get. Your employer won’t pay a monthly defined benefit out of its own fund. If instead you qualify for an employer pension, be sure that you understand its value, risk, and terms. Don’t rely on a pension benefit for which you won’t qualify or that disappears.
⤠ Chasing fantasies bankrupts the pocket and the soul. ⤟
Taxes
Tax-qualified retirement plans like a 401(k), 403(b), or IRA provide significant tax advantages for retirement saving. Contributions to 401(k) and 403(b) plans and traditional IRAs are before income tax rather than after tax, effectively reducing your current taxable income. You pay income tax on contributions only when withdrawing from the account in retirement, when lower earnings and marginal rates may mean saving on your tax bill. Roth IRA plans differ in this respect. Contributions to Roth IRAs are after-tax contributions. You get no tax deduction when contributing to a Roth IRA. But you pay no tax on retirement withdrawals from a Roth IRA. Better still, interest, dividends, and capital gains within tax-qualified plans, including a 401(k), 403(b), IRA, or Roth IRA, accumulate tax free, creating a huge investment advantage over time that could double or triple your retirement savings.
Strategy
If your employer offers a 401(k) plan with an employer match, take advantage of it. The employer match and tax delay should easily prove to be worthwhile advantages. If your employer does not offer a 401(k) plan, then contribute to either a traditional IRA or Roth IRA. In deciding which plan and how much to contribute, a good strategy is to contribute and withdraw in a pattern that reduces your marginal tax rates. Without explaining the details of why, that strategy would generally mean contributing to 401k and IRA plans in higher-income years, while contributing to Roth IRAs in lower-income years. Let your bank’s private banking service or another financial advisor help you determine your best tax-advantaged vehicle for retirement contributions, after taking advantage of your employer’s plan. Contributing after-tax dollars to a Roth IRA is harder than contributing pre-tax dollars to a traditional IRA, but you’ll be happier you did so when withdrawing after retirement.
⤠ Mere talk leads to poverty. Instead, work at it. ⤟
Investing
Retirement accounts like a 401(k), 403(b), or IRA permit you to direct the investment of your retirement funds. Federal regulations, though, require employers to tell employees the costs and fees associated with the investments into which employees direct their retirement contributions. To simplify that reporting burden, employers tend to require employees to select one of a limited number of investment managers and vehicles. When making that selection, look carefully at the risks, growth, terms, conditions, and costs of each of the offered investment plans. Choose your best investments using the principles described in the prior section on investing. The book What Color Is Your Parachute? For Retirement lists the following retirement investment factors for you to consider:
the volatility of your retirement sources, meaning how much they can change through economic cycles;
the markets for your retirement investments, meaning how they respond to economic trends;
the issuer of your retirement source, meaning how secure it is to guarantee your return over the long term;
the manager of your retirement funds, meaning how competent management will be over the long term;
the effect of inflation on your retirement funds, in all of its uncertainty;
the effect of interest rates and changes on your retirement funds; and
the political landscape including changes to IRA, Roth IRAs, 401(k) plans, Medicare, and Social Security.
Cycles
Your employer’s 401(k) or 403(b) retirement plan may require you to invest through a management company offering only low-cost, long-term, indexed mutual-fund investments that rebalance as the employee ages. These life-cycle funds rebalance between stocks and bonds as you approach your retirement year, to match the preferred risk and growth strategy. You may also select a life-cycle fund for your IRA, Roth IRA, or other investments. If you do not want to pay attention to your investments between the time you purchase them and when you retire, then a single low-cost life-cycle investment fund tailored to your anticipated retirement date may make sense for you. Beware choosing a life-cycle fund for only part of your retirement savings and then buying other investments for the rest of your retirement. Doing so can lose the advantage of rebalancing and skew your overall retirement holdings. Also beware buying a life-cycle fund investment within a managed account. You may end up paying two management fees, one within the life-cycle fund and one to manage your portfolio within which you hold it.
⤠ Don’t spoil a sacred place with thoughts of money. ⤟
Conversions
You may have the option of converting your traditional IRA retirement account, taxed at distribution, to a Roth IRA account, with no tax at distribution. The government taxes the conversion at your marginal income-tax rate for the year in which you convert. The economic sense of converting depends on comparing your marginal tax rate at conversion, which you would know, against your marginal tax rate at each retirement distribution, which you do not know. We ordinarily assume that we will draw less money in retirement than we earn now, making our marginal rate lower in retirement than now, suggesting that conversion makes economic sense. But the government changes tax rates, and with federal debt at unprecedented levels, tax rates may increase. Converting now may make sense for individuals with lower current income and reasonable marginal tax rates.
Discipline
Another advantage of retirement plans, and their biggest selling point well beyond their tax advantages, is that they encourage early saving. The biggest factor in successful retirement planning is your commitment to the plan. Your employer having a plan in place creates an expectation that you will participate. Do so, making the maximum contribution. In most cases, it is the most-sensible option. Your employer may contribute separately or may match your contribution. The Bureau of Labor Statistics reports that more than two thirds of employees have an employer retirement plan available to them. When choosing an employer, check for the availability of a retirement plan. An available plan indicates that the employer is thinking of you.
Erin’s 401(k) through her employer was growing nicely. She and Pat had decided that Erin should have the employer withhold the maximum contribution from her paycheck. The employer continued to make its year-end contributions. Pat on the other hand had no retirement plan available through his work. For a time, it had not mattered. Pat and Erin had no extra money to devote to retirement. The tax-favored treatment of Erin’s 401(k) plan made it their best retirement option. Pat was unconcerned that the plan was formally Erin’s. They both felt that what was hers was his and his hers. Yet when they paid off their house, they suddenly had some budget room for a little more retirement savings. They together committed to making the maximum Roth IRA contribution for Pat every year.
Withdrawals
Avoid using tax-deferred retirement accounts to solve your financial problems. Federal law discourages early withdrawals from tax-deferred retirement accounts by imposing a 10% penalty on top of the withdrawal’s income tax. If you withdraw before the permitted age-59 ½, then you pay the IRS your marginal tax rate in the year of withdrawal plus the extra 10% penalty. You could lose in taxes as much as half of your withdrawal. Tax laws do offer a hardship exception for certain unavoidable financial emergencies. Hardship includes total and permanent disability or unreimbursed medical bills exceeding 10% of your income. Tax law also permits early penalty-free withdrawals from IRAs (not 401(k) plans) to pay health-insurance premiums, for a first-time buyer’s down payment on a home, and for higher education. You still pay the income tax, just not the 10% penalty. Federal tax law treats early withdrawals from Roth IRAs differently from 401(k) plans and traditional IRAs. After five years, you may withdraw tax-free and penalty-free from a Roth IRA, including both contributions and earnings.
⤠ Sleep and slumber, and poverty will sneak up on you. ⤟
Timing
How to manage your retirement accounts and tax obligations when you start to live off of those accounts is a big subject. The best course depends on your marginal tax rate if you have earned income and on your mix of retirement accounts and investments. Federal income-tax laws permit penalty-free withdrawals from tax-deferred retirement accounts beginning at age 59 ½. The account administrator will generally withhold federal income taxes. You receive only the net amount after taxes. With certain exceptions, federal income-tax laws require minimum withdrawals (RMDs) from tax-deferred retirement accounts beginning in the year to turn age 73. The government wants its tax revenue. Plan to spend those RMDs before selling and paying capital-gains taxes on other investments. On the other hand, because tax-favored retirement accounts also defer taxes on their earnings, you might better draw on other investments before you invade tax-deferred retirement accounts beyond their forced distributions. If you do not need the income, then re-invest the forced distribution. If you don’t need the re-invested income, then make a qualified charitable contribution of the RMD to avoid tax on it altogether.
⤠ Ill-gotten gain steals one’s life. ⤟
Homes
Retirees give both too much and too little thought to their home as a retirement asset. The tendency of some is to see the home’s equity as a piggy bank for retirement, from which to make withdrawals. A home is not a piggy bank as long as you need it for shelter. On the other hand, a paid-for home is still an asset and can supply needed support. With a reverse mortgage, also known as a home-equity conversion mortgage, the lender pays the homeowner for growing incremental secured interests in the home. A reverse mortgage, while representing increasing debt, may be an option for elderly owners who expect to remain in the home only for a defined and limited duration, before transitioning into assisted living or other alternative housing. When a retired homeowner does transition out of the home, the home’s net sale value can add substantially to the retiree’s retirement funding. And even while still in a home, a retiree can use it as a base for work, projects, and other productive activities. Figure your home in your retirement plans, but do so conservatively.
Sufficiency
A common guideline for how much in retirement savings is enough is that your total retirement income from all sources including investments, pensions, and Social Security should equal about 85% of your income while working. The Wall Street Journal Complete Retirement Guidebook reports other retirement-income guidelines at 70% to 80% of earnings. Don’t take these guidelines as gospel. Your needs could be higher or much lower. Your expenses could go way down in retirement, for instance, by eliminating commuting and clothing expenses, no longer paying income taxes, and moving to a less expensive area. But other expenditures may increase in retirement, especially healthcare but also hobbies and travel.
⤠ When the heavens open, you’ll give to everyone and ask from none. ⤟
Support
As to your retirement support, you can find out from the Social Security Administration your projected benefit. You can get similar projections from the manager of any pension you expect. As to your retirement savings, one guide is to assume that you can draw about 4% annually of your retirement savings to add to any other retirement income like pensions and Social Security, without substantially depleting the principal amount. Under that guide, if you retired with $1 million in investments, then you could draw $40,000 per year from those investments to add to your other income sources. Other advisors suggest 5% as a better figure, while still others suggest figures as low as 2% or 3%. Recognize that nothing is certain. Plan, and then adjust as life happens.
Calculators
You can find much more sophisticated retirement calculators online. Check the website of any financial-services firm with which you have an investment or retirement account. Try using two or three different calculators. Examine the assumptions that the calculators make and the options that the different calculators give you, to learn more about your risk preferences, goals, and expectations. Online calculators can be especially helpful projecting your retirement funds, giving you a good sense of your progress.
Healthcare
Your largest costs after retirement may be healthcare. Healthcare costs are the most difficult to predict because of varying lifespans, diseases, onsets, and treatments. Within that wide variability, the Fidelity Retiree Health Care Cost Estimate projects an average $165,000 cost out of savings for a single individual aged 65. Average total costs are around double that amount, with the other half paid for by Medicare and related programs. Women should expect somewhat higher costs and men somewhat lower costs because of a woman’s greater life expectancy. By far the greater part of your lifetime healthcare cost typically occurs late in life in retirement. Do not be surprised to see your healthcare costs go way up. Many retirees find themselves unable to afford uninsured portions of their healthcare costs, severely impacting their savings. Beware underestimating healthcare costs. The Wall Street Journal Complete Retirement Guidebook suggests budgeting $600 per month in unreimbursed healthcare costs.
⤠ Exploiting the poor brings judgment. ⤟
Medicare
Medicare will help pay for healthcare costs once you reach age 65 and enroll. You must act to enroll. Enrollment is not automatic. At age 65, Medicare Part A, funded through employment taxes, then provides free basic hospitalization, short-term nursing home stays, and hospice care at the end of life. Many Medicare enrollees pay monthly premiums to purchase Medicare Part B insurance, expanding coverage to doctor’s visits, certain outpatient care, and some services like physical therapy. Your premium depends on your income with a standard monthly premium of $185. Enrollees may also buy Medigap insurance to cover Part A and B deductibles and copays, and additional services not covered under Parts A and B. Medigap coverage varies widely but has an average $217 monthly premium. Enrollees may also buy Medicare Part D coverage for prescription drugs, with those premiums averaging $46 per month.
Nursing
Another retirement cost we tend to underestimate, along with healthcare costs, is the cost of long-term care in an assisted living center or nursing home. Average annual cost for assisted living is $68,000 and for private-room nursing care $117,000. About one in five persons older than 65 years is disabled. About 37% of us need long-term care. When retirees remain independent, household expenses can look like expenses before retirement. The moment retirees need in-home attendant, assisted living, or nursing-home care, costs substantially increase. Long-term care is unpredictable. Some decline slowly and gradually, needing little care. Others suffer a sudden adverse event like a stroke or fall, requiring substantial care much earlier and longer than usual. Long-term care insurance is an expensive option, especially if purchased at retirement rather than earlier. Maintaining physical fitness, mental health, and a healthy lifestyle helps, but plan for long-term care costs.
Social Security
Social Security retirement benefits play a role in retirement planning. Social Security entitlement is not a personal account into which the federal government has placed your Social Security taxes over the course of your work life. Congress spent the Social Security trust fund. Your Social Security tax now pays the Social Security benefit of those who retired before you. Your Social Security retirement benefit, while tied to your lifetime contributions, depends on rates that Congress sets and changes. Substantial reductions in Social Security benefits are now about a decade away unless taxpayer funding and government spending patterns change substantially. The Social Security Administration sends taxpayers statements showing their anticipated retirement benefit. You can also check your statement online at any time. Use the estimated benefit for your retirement planning, with a reduction risk element.
⤠ Just because you can take from another doesn’t mean you should. ⤟
Benefits
You get to decide when to begin your Social Security benefits. Your decision is among your most-important retirement-planning opportunities. The earlier you take Social Security, the less you get per month, although of course the longer you get it. Once you decide to start your Social Security retirement benefit, you’re locked in at your monthly benefit amount for the rest of your life, although with an annual inflation adjustment. Depending on your year of birth, full benefits begin at age 66 to 67, but you may begin benefits as early as age 62 or delay benefits to age 70 ½, when you must take the benefit. The monthly benefit increases by about 8% per year, the longer you delay starting your benefit. Your Social Security Administration account shows you the difference in benefits.
Deciding
From a purely financial standpoint, when to start your Social Security benefits depends on two things: (1) how long you will live and (2) whether you need the income. Your monthly need for support aside, you’d probably prefer to maximize how much in benefits you receive back. By waiting a few extra years to start your benefit, you can increase the monthly benefit enough over your remaining life to receive more than you would have by starting your benefit at a lower rate earlier. But if you wait too long to start benefits, your fewer payments over your shorter remaining life won’t accumulate to the amount you would have received by starting earlier. You don’t know how long you’ll live, but you can make estimates based on health, lifestyle, and family histories. Online calculators are available to help. But if you need the benefit to meet expenses month to month, the total payout won’t matter. Start when you need to. And be aware, too, that starting your Social Security retirement benefit can ease pressures to work or meet a strict budget, improving your lifestyle. You decide based on your total picture.
⤠ Giving gifts to the rich brings poverty. ⤟
Taxes
As of early in 2025, the tax code provides for income tax on Social Security benefits if the beneficiary is earning income and receiving benefits totaling more than a certain amount, depending on your tax filing status. That is, you pay tax on your earnings and tax on your Social Security benefit. The effect of this double taxation means that working while on Social Security brings in significantly less take-home pay than it otherwise would. You may thus find it far better to delay your Social Security benefits while still earning a full-time income, so that taxes don’t eat up a big portion of the benefit, and your anticipated benefit amount continues to increase due to the delay in start date. Do the math. Don’t let taxes on the Social Security benefit you earned by paying taxes unduly reduce the benefit. Taxation once is enough. Twice is an injustice. Three times is a crime. The current administration has promised to eliminate the tax on Social Security benefits. Perhaps it will soon be gone.
Checklist
Reflect, research, investigate, and act until you are able to confirm each of the following statements summarizing the advice and counsel in this section:
I am taking full advantage of my employer’s tax-favored retirement plan, making maximum contributions whenever able.
I have estimated in a written plan the income and funds that I will need at retirement, comparing them to my current progress on retirement income and savings.
I am committed to implementing my retirement plan so that I have sufficient funds to financially secure my retirement.
I will check my progress on my retirement plan at least annually and adjust my plan to ensure its continued viability.