Phase 1: Accumulation (Saving and Investing)
It may seem daunting to accumulate a large sum to fund your retirement. But the earlier you start, the less you’ll need to save, thanks to the power of compound growth. Tips like these can help you accumulate what you need to reach your retirement goal.
- Contribute to retirement accounts regularly. If your employer offers a 401(k) plan and matches all or some of your contributions, aim to invest at least enough to earn the full employer match. If you don’t have a 401(k) available, try to save the maximum allowed in an individual retirement account (IRA).
- Push the boundaries on your savings. Rather than save what’s left at the end of the month, strive to put aside 10-15% of your gross income. Automating your savings is a great way to ensure it happens.
- Diversify your portfolio. To grow your assets and reduce risk, we believe you need to invest in a variety of asset types, including stocks and bonds. How you allocate your investments will depend on factors like how much (or little) risk you’re willing to take and how many years you have until retirement.
For more tips on saving for retirement, check out our guide to the three phases of retirement.
Phase 2: Planning & Preservation (Creating a Plan)
Once you’ve started investing for the future it’s time to develop a plan to make sure your assets grow effectively, while reducing your taxes and your risk. An experienced financial advisor can help with steps like these.
- Identify your retirement goals. No matter how long you plan to work before you call it a day—or what you envision doing once you’re no longer working—you can’t create a good roadmap unless you know your destination.
- Determine how much money you’ll need. It’s a complicated number to calculate, based on factors like your expected monthly expenses, the projected rate of inflation, the amount you currently have invested, and your likely rate of return. And since lots of changes can happen along the way, modeling different scenarios is helpful to see how those changes will affect your portfolio and ultimately your ability to reach your goal.
- Don’t forget taxes! You may be in a higher tax bracket now than in retirement, and that can impact which investments are best for reducing your current and future tax bills. A financial advisor can help you assess the tax implications of different investment options, like a traditional vs Roth 401(k) or IRA, for example.
- Plan for medical expenses. Your medical costs are likely to go up as you age, so be sure your retirement plan factors that in. It’s also important to decide when to enroll in Medicare, especially if you’re still working when you reach age 65 (the age at which you’re eligible to enroll).
Learn how to adjust your allocations, diversify your taxes, plan for Medicare, and assemble the right financial team in The 3-Phase Retirement Planning Guide.
Phase 3: Distribution (Enjoying Your Money in Retirement)
After years of saving and planning, you’re finally ready to enjoy the wealth you’ve accumulated! But it’s not as simple as withdrawing money whenever you need it. Taking distributions from your investment accounts requires proper planning to minimize taxes and ensure you don’t outlive your money.
- Don’t overlook required minimum distributions (RMDs). If you have a retirement account like a traditional 401(k) or IRA, you’ll be required to start taking mandatory withdrawals, called RMDs, when you reach a certain age. If you don’t withdraw enough, you may face a whopping 50% penalty on the shortfall.
- Be strategic about taxes. Various types of investments are taxed differently, so it pays to give careful thought to which accounts to tap and when. A financial planner can advise you on which accounts to take distributions from and in what sequence, to minimize your taxes.
- Prepare for life as a retiree. The transition from working to retirement is about more than finances. It’s a mental, emotional, and social adjustment that takes planning to navigate. Have you thought about how you’ll spend your days? Have you considered a phased retirement to ease the transition, reducing your work hours as you near retirement? Questions like these can help you prepare for your next chapter.
Planning how to fund 20 or 30 years of retirement can feel overwhelming when you think about it conceptually. But when you break it down into these three key phases, it starts to feel a lot more manageable. Learn more in our complimentary download: The 3-Phase Retirement Planning Guide.
By tapping a professional financial advisor—and adding a CPA and estate planning attorney to your team—you can develop and follow a personalized plan designed to turn your retirement dreams into reality.
The CERTIFIED FINANCIAL PLANNER® professionals at Team Hewins have helped countless clients achieve their retirement goals. We take a holistic, integrated approach, using our Smart Life Planning Process to develop a comprehensive financial plan that reflects your life, your money, and your priorities.
Contact Team Hewins to discuss how to get started developing your customized retirement planning roadmap!
Team Hewins, LLC(“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein. Certain information contained herein constitutes forward-looking statements. Team Hewins does not guarantee the achievement of long-term goals in the portfolio review process. Past performance is no guarantee of future results and a diversified portfolio does not guarantee a positive outcome. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.
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