Retirement Planning Guide

March 3, 2022

Planning for retirement can be a formidable prospect for many people looking to arrive at retirement in good financial health. Utilizing the retirement planning guide below can help you achieve your financial goals in retirement by outlining key planning moves to be made throughout your working life. American Express is not a financial or investment adviser and does not provide tax advice. We strongly recommend that you consult your financial or tax advisor to determine the best approach to retirement planning for your situation.

 

Start Saving in Your 20s and 30s

Retirement may be decades away, but now is the chance to leverage compound growth – a powerful feature of investing that can help your money grow faster. With compound growth, a dollar saved today has more time to grow than a dollar invested next year, or next decade. For example, if you save $6,000 at the age of 25 in an Individual Retirement Arrangement (IRA) account and it grows at an annualized rate of 6%, it will grow to more than $82,000 when you reach 70 years old. If you invest the same $6,000 when you are 40 years old, it will be worth less than $35,000 when you turn 70.

 

To take full advantage of compound growth, consider these retirement financial health tips when you’re in your 20s and 30s:

 

  • Aim to save at least 10% of your salary for retirement. According to an analysis by the Center for Retirement Research at Boston College, if you start saving in your early 20s, it’s a good idea to save at least 10% of your salary.1 Savings can be held either in a workplace retirement plan, which might include an employer matching contribution, or your own IRA account. For 2021 and 2022, the maximum you can save in an IRA is $6,000 if you are younger than 50 years old.2 You can save as much as you have available in a regular, taxable, brokerage account.
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  • Consider Roth 401(k)s and IRAs. All IRAs and most 401(k)s will give you an option of saving in a Roth account or a traditional account. The main difference between the two is when you pay taxes. With a Roth plan you contribute money that has already been taxed, and then in retirement you can withdraw money without owing any tax. With a traditional plan, you contribute money that has yet to be taxed, and in retirement, every dollar you withdraw will be taxed at your current income tax rate. A Roth can be a smart option for most individuals in their 20s and 30s, when they have yet to hit peak earnings – at which point the upfront tax break of a traditional IRA may be more valuable.
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  • Don’t touch your savings. When you leave a job, you have the right to cash out your 401(k). As enticing as that may seem, it’s wise to keep those funds in a retirement savings account, whether you move them to a new plan run by your new employer or use an IRA rollover to transfer those funds into your own IRA. This way, they'll keep growing tax-free for your retirement – while benefitting from compound interest.
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  • Consult a financial professional. Retirement planning may seem daunting, but you don’t have to figure it out on your own. Talking to a financial professional can help you successfully navigate the world of IRAs and 401(k)s while ensuring you establish the smart financial habits required to meet your long-term financial goals.

Spend Smart in Your 40s and Early 50s

Retirement plans like 401(k)s and IRAs obviously play a very large role in your future financial health, but what sometimes gets overlooked is how certain spending decisions made along the way can play a crucial role in retirement security.

 

To safeguard your nest egg throughout your 40s and 50s, consider the following:

 

  • Borrow only what you need. When approved for a car loan or home mortgage, lenders will tell you the maximum loan they will offer. That amount may seem enticing, but it’s important to borrow only what you need. The less expensive the car, or home, the more money you will have to put toward other financial goals, including retirement.
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  • Plan how you will allocate raises. This life stage is often when career advancement yields bigger paychecks. One strategy to consider is deciding what portion of each raise you’ll commit to retirement savings. For example, if you choose to save at least half of every raise, when you get a 5% raise be sure to boost your 401(k) savings rate by 2.5%, or add more to your IRA savings. If your retirement savings is already on track, consider using that new income to reduce any outstanding debt.
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  • Right-size your family’s college costs. The best school doesn’t only fulfill academic and social requirements. It should also be a strong financial fit for your family, especially if you plan to pay or help pay for your child’s higher education costs. That means choosing a school where out-of-pocket costs don’t mean halting contributions to – or borrowing from – your retirement savings.

Hatch a Retirement Spending Plan as You Head into Your 60s

If you land in your mid 60s in average health, there is a good chance you will still be alive well into your late 80s – and it’s not uncommon for people to underestimate their lifespan. That’s an argument for building a retirement income plan that can keep supporting you through what can be a very long retirement. To help:

 

  • Resist the temptation to start receiving Social Security benefits in your early 60s. Once you turn 62 you can start collecting a monthly Social Security payment. When you start that early, your benefit will be permanently reduced by 25% to 30% of what you would be entitled to if you set your start date to your full retirement age, which is between age 66 and 67.3 If you wait even longer there’s a bigger payoff: Every year you wait after full retirement and until you reach age 70, your Social Security benefit increases by 8%.4 That could mean a Social Security benefit that is 24% more than if you started at 67 – and more than 75% higher than if you started taking the benefit at 62.

     

    For married couples, what matters most is for the highest earner to consider delaying benefits until age 70. That ensures the surviving spouse will receive the highest possible payout, since the surviving spouse can choose whether they will receive their own benefit or the deceased’s benefit – but not both.
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  • Plan for inflation. Over a retirement that can run for 25 years or more, even mild inflation can put a damper on your spending. For example, even at a 3% inflation rate, costs will more than double over 25 years. Consider keeping some of your savings invested in stocks, which historically have outpaced inflation. You might also consider owning Treasury Inflation Protected (TIPs) bonds.
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  • Consider sitting down with a financial pro. Given all the moving pieces to generating a retirement income plan – how to invest your savings, what you can safely withdraw from savings each year, when to start Social Security – hiring a financial planner to run the numbers can be a great investment. Many planners will work on an hourly or project basis to help you build a sustainable retirement income strategy.

The Bottom Line

 

Retirement planning need not be daunting. When you’re young, aim to save at least 10% of your income in an IRA or 401(k). In the middle years, try to borrow only what you need and carefully consider spending decisions like how you allocate raises. As retirement nears, postpone Social Security benefits if you can and plan how inflation can affect your finances. At any age, working with a financial pro can help you hash out a solid plan for generating sustainable retirement income.

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