Retirement rules of the road

From your 20s and on, here are some steps to consider on your road to retirement.

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Key takeaways

  • In your twenties and thirties, it's important to set good financial habits. That means establishing an emergency fund, limiting debt, and saving for the future.
  • In your thirties and forties, life may get more complicated, and your finances might as well. Trying to accomplish all of your goals may require a plan.
  • In your fifties and sixties, you may begin to think about retirement. That means creating income from savings and managing your finances without a regular paycheck.

Life is a journey with surprising twists and turns—and so is saving for your future (AKA retirement). Marriage, babies, divorce, bills, bonuses, job changes, and more can throw you off course—or give you an unexpected boost forward. But, while there are lots of things you can't predict, there are a few key things to think about at every age that can help increase the odds of success.

Here are some road-tested ideas—by age—to consider along the way. They are not meant to be rigid, one-size-fits-all directives, but guideposts to help you stay on track.

Starting out

In your twenties and thirties you're likely at the beginning of your career, and much of your take-home pay may be going to pay student loans, credit card debt, and monthly living expenses. Saving for "the future" may not be top of mind—but when it comes to retirement planning, it's never too early to start saving.

Consider saving at least a total of 15% of pretax income each year.
It should help ensure enough retirement savings to maintain a person's current lifestyle in retirement. While 15% may seem like a lot, "free money," like employer-matching contributions, to a 401(k), 403(b), or other workplace retirement account, or profit sharing from an employer, counts toward the annual savings rate.

No 401(k)? There are still ways to save for retirement. As long as you have some earnings, there are some tax-advantaged saving options, such as IRAs and self-employed 401(k)s.

If saving 15% immediately is tough, save what you can, and perhaps aim to increase the savings rate each year by 1%. For example, an investor starting at 5%, can aim to increase to 6% by year-end, bump it up to 7% the year after that, etc.

Watch "must-have" expenses, working to keep them at no more than 50% of take-home pay.
Some expenses simply aren't optional, such as housing, food, health care, transportation, child care, and debt payments. But just because some expenses are "essential" doesn't mean they're not flexible. Small changes can add up, such as turning down a thermostat a few degrees in the winter (and up in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work.

Try to save 3 to 6 months of essential expenses in an emergency fund.
An emergency, like an illness or job loss, is bad enough, but not being prepared financially might only make things worse. Think of an emergency fund contribution as a regular bill every month, until there is enough to cover essential expenses for 3 to 6 months. After that, save for those short-term expenses that pop up unexpectedly. Setting aside 5% of monthly pay can also help with these "one-off" surprise expenses. If saving enough in an emergency fund is challenging, consider having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings.

Building for the future

In your thirties and forties, you're probably focused on buying a home, funding your kids' college and your retirement, and just paying the monthly bills. Managing your finances may be a balancing act. That's why it's important to have a plan.

Make the most of tax-advantaged accounts.
When saving for retirement, it's makes sense to do it in tax-advantaged accounts like traditional and Roth IRAs and 401(k)s, and health savings accounts (HSAs).

For those saving in taxable accounts too, consider having less tax-efficient investments (like taxable bonds and bond funds or stocks you trade short term) in tax-advantaged accounts and more tax-efficient assets (like stocks and stock funds held for the long term) in taxable accounts.

A balance between accounts where withdrawals in retirement are taxable [like traditional IRAs and 401(k)s] and those where withdrawals are tax free1 (like Roth IRAs and HSAs) can also help manage taxes in retirement.

Invest for growth.
If retirement is decades or more away, there is plenty of time to ride out the inevitable ups and downs of the stock market. So make sure to consider stocks, which historically have produced higher long-term returns than bonds and cash, albeit with more volatility.

Building a mix of investments for the long term, which reflects your time horizon, financial situation, and risk tolerance, is important. It is a good idea to stay diversified. Remember that you may have 25-plus years in retirement and you’ll need to outpace inflation, so you'll probably need to keep growing your portfolio and have an investment mix tilted toward growth.

If you don’t have the skill, will, or time to manage your investments, consider a target date fund, asset allocation fund, or a managed account, each of which typically adjusts the investment mix over time, and also provides professional management. And remember to revisit and review your investments at least once a year or when your situation changes.

Getting ready for retirement

In your fifties and sixties, you're getting closer to a point when you might like to retire. So, it's a good time to think about a plan for generating income in retirement. Think about the lifestyle you want, and creating a retirement savings and spending plan.

Make the most of Social Security.
The longer you can wait to take Social Security (up to age 70), the higher your monthly benefit will be. Consider this hypothetical example: Colleen is 62, with a full retirement age of 66. (Full retirement age is the age when you first become entitled to full or unreduced Social Security benefits.) If she starts taking benefits at 62, she will receive $1,200 a month. If she waits until 66, she will receive 33% more, or approximately $1,600 a month. If she waits until 70, her benefits will increase another 32%, to almost $2,112 a month.2 If she were to live to age 89 (her life expectancy), her lifetime benefits would be about $38,000, or 13%, greater if she waited until age 70 rather than age 66 to collect benefits.3

If you're married, there are more advanced strategies to maximize your combined benefits. And if you are divorced, you may still be able to claim your ex’s benefit, if it's higher than yours. 

Think 45% of retirement income from savings. 
Fidelity analyzed extensive spending data and found that most people needed to replace between 55% and 80% of their preretirement income after they stopped working to maintain their lifestyle.4 Of course, you may need more or less depending on your situation. While some costs—like savings, taxes, and insurance—may decline in retirement, you may spend more on health care, travel, and entertainment. Where will the money come from? Social Security may cover some of your spending needs. But, our research shows that at least 45% of a person's pretax paycheck may need to be replaced from savings,5 including pensions, although the exact amount will vary depending on income, retirement age, and other factors.

Figure out expenses.
As you near retirement, make a detailed retirement budget to see how much money is needed to cover essential expenses such as food, shelter, and insurance, and see what can be covered by guaranteed income from sources such as Social Security or a pension. An annuity is one way to create a simple and efficient stream of income payments that are guaranteed for as long as you (or you and your spouse) live.6

Thriving in retirement

Now is the time to reap the benefits of your hard work and years of saving and planning. It is important to manage withdrawals from savings so you won't run out of money. That means learning a few more rules of the road. Consider the following to make sure your plan stays on track.

Manage withdrawals.
As a rule of thumb, Fidelity research suggests holding portfolio withdrawals to no more than 4% to 5% of your initial retirement assets, adjusted each year for inflation, over the course of your retirement horizon. Of course, your particular withdrawal rate will likely depend on a variety of factors, including your investment mix, your anticipated life span, and market performance.

Update or establish your estate plan.
No matter how much money you have, it’s important to have an estate plan and decide who will inherit your assets. An estate plan goes much further than a will. Not only does it deal with the distribution of assets and legacy wishes but it may help you and your heirs pay substantially less in taxes, fees, and potential legal expenses.

Keep your eyes on the road

While budgeting and saving may not be fun, worrying about money when you're retired sure isn’t either. If you still have many years until retirement, saving more now can have the biggest impact. If you are close to retirement, consider working a bit longer, thereby potentially boosting savings and increasing your Social Security benefit. If you're in retirement, you can also try to boost cash flow by cutting spending, working part time, or tapping home equity. And at any stage, attention to expenses and tax-savvy planning can help.

Next steps to consider

Take advantage of potential tax-deferred or tax-free growth.

Get your Fidelity Retirement ScoreSM—a credit score for retirement.

This small percentage can add a lot to your savings by the time you retire.

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