Returning to work on a Monday after a vacation is a quick reality check. It might make you dream of when you can take a permanent work vacation, aka retirement. While spending your days golfing, traveling, and living off the clock is appealing, those days of leisure can't happen without careful saving and strategizing.
Regardless of your age, retirement is something you should be planning for now. In this article, we’ll explore retirement strategies for every age group, talk about how much you need to save and give you the tools to measure how your savings rank compared to your peers.
However, remember that this is a general overview — not tailored financial advice. You should consult a financial professional to determine the best individual solution to set you up for the retirement of your dreams.
The Short Version
- An individual’s time left in the workforce will largely dictate their retirement savings strategy.
- According to Fidelity's data, the average individual doesn't have enough savings when they enter retirement.
- The most common retirement savings vehicles include 401(k)s, Social Security, and personal investments.
- An individual’s portfolio allocation will largely determine their success in retirement savings, and that allocation should shift as the individual ages.
How Many Years Are You Away From Retirement?
Many retirement discussions group individuals based on generations. While this is typical, it’s not the most helpful way to compare individuals to their peers. A Millennial born in 1981 (age 41) has been in the workforce 15 years longer than the youngest Millennial born in 1996 (age 26). Therefore, we will consider investing strategies decade by decade instead.
How Much Do You Need To Save for Retirement?
Various factors determine how much a person needs to save before retirement, including the age they want to retire and their expenses. A study by Northwestern Mutual indicates that Gen Z and Millennials believe they will retire just before they reach 60; Gen X believes they will retire by age 65. Baby Boomers anticipate retirement after age 68.
According to Fidelity Investments' general rule for retirement saving, individuals should strive to save:
- 1x their salary by age 30
- 3x their salary by age 40
- 6x their salary by age 50
- 8x their salary by age 60
The calculations above assume that individuals will:
- Save 15% of their income
- Invest more than 50% of their average savings in stocks
- Retire at age 67
Read more >>> Best Retirement Planning Tools & Calculators for 2022
How Does My Savings Compare to My Same-Age Peers?
Fidelity also offers a handy comparison tool so you can see how you're doing among your peers. The calculator uses the average retirement account balances for individuals in different age brackets to generate its results. Here they are expressed in a table below:
|Age bracket||Rate of contribution||Average account balance|
Note that the average individual saves less than 15% of their income each year and has much less saved for retirement than the recommended amount. This means that most people might not be able to afford the comfortable retirement they dream of when the time comes.
What Should My Portfolio and Retirement Savings Look Like Throughout My Career?
As you age and move through the stages of life, the allocation of assets in your investment portfolio should likewise go through changes. Broadly speaking, your portfolio will likely contain fewer growth stocks and more stable investments as time goes on.
Individuals in this age bracket are the furthest away from retirement, so they can theoretically take on the most risk and invest in stocks with higher growth potential without worrying about market dips. The interest from the 401(k)s and IRA will compound over the decades if they open an account now.
At this age, Capital Group recommends as much as 40% of your portfolio in growth-related investments, including stocks in companies growing faster than other companies in their sector. Often, this includes newer, smaller companies.
Individuals in their 30s will most likely have additional expenses like mortgages or growing families, but they still benefit from being 30-40 years away from retirement. Thirty-somethings should start to max out contributions to their employer-sponsored 401(k)s if they didn’t already do that in their 20s. Additionally, they can still invest in riskier stocks while slowly allocating more of their portfolio towards bonds.
Individuals in their 40s likely to reach the most profitable points in their careers. At the same time, they incur more expenses than ever, such as college tuition for their kids. People in their 40s often invest in more stable funds but still maintain some growth funds to minimize the effect of inflation on their savings.
As you near the end of your 40s and enter your early 50s, you might consider halving your growth investments and increasing your bond allocation by 20%. Individuals near retirement age should decrease the volatility in their portfolios by increasing the number of stable investments, like bonds. However, this allocation still capitalizes on some growth possibilities.
Individuals in their 50s can start taking advantage of benefits the IRS permits, including the additional $6,500 catch-up contribution to a 401(k) and the extra $7,000 per year contribution room in an IRA. If they haven’t already, 50-somethings should consult a financial professional to help them reap the most rewards from their remaining working years.
People in the last few years of work before retirement may want to allocate their funds primarily to stable, income-producing savings vehicles. For example, they could move 15% more into bonds while proportionally decreasing their growth and growth-and-income categories. Sixty-somethings should consult with a financial professional if they haven't already.
How Should I Allocate My Retirement Portfolio?
How investors allocate their portfolios might be more important than how much money they save each month for retirement.
Retirement saving requires two simultaneous strategies:
- Diversifying investments for financial security; and
- Building wealth during working years to beat the inflation rate.
American Funds Capital Group developed growth models to display how different age brackets might allocate their portfolios to balance these two objectives best. Please note, however, that these models are merely suggestions, and all individuals should consider consulting with a financial advisor to allocate their portfolios.
What Are the Most Common Retirement Savings Vehicles?
People use various savings vehicles to ensure they have a comfortable retirement. The most popular are 401(k)s and IRAs.
A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest for retirement on a tax-deferred basis. Workers can contribute money to their 401(k) accounts through payroll deductions. Employers may also make matching or non-elective contributions to employees' 401(k) accounts.
The money in a 401(k) account can be invested in various ways, including stocks, bonds, mutual funds, and cash. 401(k) plans often have features that make them attractive to employees, such as employer matching contributions and the ability to save on a tax-deferred basis. However, employees may be penalized if they withdraw money from their accounts before retirement.
With a traditional 401(k), an employee deposits pre-tax dollars into their account, and their contributions are not taxed until withdrawal. A traditional 401(k) can deduct employee contributions from taxes yearly.
However, with a Roth 401(k), the employee allocates after-tax income into their 401(k) account. This means they will not be taxed when they withdraw this money in retirement.
The IRS sets limits each year on how much an employee can contribute to their 401(k). The 2022 limit is $20,500, and individuals over age 50 can make a catch-up contribution (an additional allocation to their retirement account as they near retirement age) totalling $6,500.
Individual Retirement Account (IRAs)
Some people save via an IRA at a financial institution. Traditional and Roth IRAs have the same taxation rules as traditional and Roth 401(k)s. Rollover IRAs are another option. This is when a 401(k), 403(b) or another employer-sponsored plan's assets “rolls over” into an account with a financial institution.
Read more >>> How to Invest in an IRA
Social Security is a government-sponsored program that pays individuals in retirement from a pool of tax dollars all working individuals contribute to, called the Social Security Trust Fund. This fund supports retired individuals, disabled individuals, deceased workers’ survivors, and workers’ dependents.
Individuals can receive their full retirement benefits at age 66 to 67, depending on their birth year. Individuals can opt to get their Social Security benefits as soon as they reach 62, but their monthly benefit will reduce by up to 30%.
Likewise, individuals can delay receiving their Social Security benefits until age 70 and be eligible for slightly more benefits per month. See the below chart for those extra benefits.
The Bottom Line
Ultimately, saving for retirement is a mix of both discipline and strategy. The younger you are when you begin putting retirement savings aside, the more you can reap the interest benefits and potential growth opportunities from fluctuations in the stock market.
However, individuals near retirement may want to reallocate their portfolios to more conservative savings vehicles. That way, when the time comes, you can trade clocking into work with teeing off on the course.