Starting to Plan For Retirement in Your 30s and 40s

Okay, you've established your career. Maybe you've paid off your student loans. You may have started a family, but have you started planning for retirement?

You've got somewhere between 15 and 35 years to make sure you have enough retirement funds in place. There's still time to get in gear and build your nest egg. Don't forget that retirement planning is just one element of a comprehensive financial plan. You'll want to balance your retirement planning against other important objectives, such as savings, budgeting, insurance, and debt.

Where Does the Money Come From?

Three commonly available sources of retirement income are:

1. Private savings or investments, including Individual Retirement Accounts (IRAs)

2. Employer-sponsored retirement plans, such as pensions, 401(k)s, Keogh plans, SEP-IRAs, or SIMPLE IRAs

3. Social security benefits

There is an additional source of retirement income — working after you reach retirement age. And while you may decide to continue working during your retirement years, you may want to start your retirement plan now so you won't have to rely on this income.

Private Savings or Investments

Creating this portion of your retirement income is entirely within your control. Many financial advisors agree that you should save approximately 10% of your income annually. Some of this should be set aside for emergencies and the rest should be earmarked for retirement.

For your retirement, consider taking advantage of tax-deferred investments. Tax-deferred means you don't pay taxes on your investment earnings until you use the funds. You can invest in an IRA to maximize your rate of return. You might even be able to deduct your IRA contributions on your taxes. Check with a financial professional or the Internal Revenue Service (IRS) to determine if you qualify for a tax deduction. Don't forget that IRAs are specifically designed as investments for retirement, and you may pay a substantial penalty for early withdrawal. See IRSPublication 590: Individual Retirement Arrangements.

Employer-Sponsored Retirement Plans

If you are eligible to participate in your employer-sponsored 401(k), take full advantage of this savings opportunity. Even though retirement seems a long time away, starting now will make it easier to reach your goal of a comfortable retirement.

The contributions you make to a 401(k) plan are tax-deferred. This means they are deducted from your pay before taxes are assessed. For example, assume you are in a 20% tax bracket, and you are thinking about investing $50 of every paycheck into a 401(k). If you were not investing in the 401(k), that $50 (considered part of your income) would be taxed at 20% and you would only receive $40 (20% = $10, subtracted from $50). However, if you put the $50 into a 401(k), it is not considered part of your income for tax purposes (and lower income means lower tax). Even better, you earn tax-deferred interest on your investment in the retirement plan.

If your employer matches your contribution, you've got a windfall! You'll need to decide how important that portion of your paycheck is to your budget before deciding how much to invest in a 401(k). Don't forget that 401(k)s are specifically retirement investments, and you may pay a substantial penalty for early withdrawal. Careful planning is important to ensure the right balance between savings and retirement investments.

For more information about 401(k) retirement plans, read the Federal Citizen Information Center article Life Advice About 401(k) Plans and the related articles in our Knowledge Center Library.

If you currently work, or previously worked for a company that provides an employer-paid pension, that's great news. A pension is a retirement plan paid for by your employer. You may want to check with your company's benefits administrator and ask for an estimate of how much you will receive once you finally retire. Don't forget to periodically check the financial condition of previous employers that owe you a pension to make sure it's still a reliable source of retirement income.

Social Security

The Social Security Administration (SSA) provides free estimates of your projected retirement benefits based on your historical income to date and the number of years you have worked. In order to prepare a comprehensive game plan for a comfortable retirement, you can request this estimate anytime. You've been paying into social security now for several years. It's about time to find out how much your benefits will be. The Social Security Administration will estimate the amount of your benefit if you complete a Request for Social Security Statement. You can request your personalized estimate by either calling toll-free at 1-800-772-1213; writing to the Social Security Administration at 8515-A Liberty Road, Randalstown, MD 21133; or by visiting the SSA webpage at www.ssa.gov. See the Social Security Statement page for more information.

Even though many people believe the social security system will become defunct before they are eligible to receive benefits, it is more likely that reform will be adopted so people your age will be able to depend on the availability of social security benefits. While you should be able to rely on social security as a part of your retirement income, there may be an additional tax burden levied on your benefits. You may also encounter a delay in receiving full benefits due to changes in the predetermined retirement age. If you were born in the 1950's, the normal retirement age has been increased from 65 to 66, and, if you were born in 1960 or later, the normal retirement age has been increased from 66 to 67. To learn more about social security benefits and penalties, use the SSA Retirement Planner.

How Much Do You Need?

Many financial advisors agree that, to maintain the standard of living you have become accustomed to, you should plan on needing roughly 80% of your annual working pay during retirement. Remember, your retirement funds can come from any or all of the sources discussed. To illustrate, let's say you earn $65,000 during the year just before you retire. You'll need to plan on having $52,000 ($65,000 x 80%) each year during retirement to live comfortably and in the general style to which you have become accustomed. Let's take this one step further. If you plan on a long retirement of 20 years, you'll need $1,040,000 ($52,000 x 20). This is a very simplistic approach, since it doesn't allow for potential investment earnings or the effect of inflation on your buying power. But it will give you a general guideline of how much your expenses may be during your retirement years.

How Do You Get There?

You are responsible for investing your private savings and your 401(k) funds to maximize return, growth, and income. When you are in your 30s and 40s, you may want to apply some conservative principals in your investment choices. While many financial advisors subscribe to some general investment strategies for people in your age bracket planning their retirement, you should consider your personal financial situation carefully and may want to consult with a financial professional. The most important evaluation criteria you need to consider is your own financial condition and your risk tolerance.

As a general rule, you may want to consider keeping about 70% of your investments in stocks and the other 30% in bonds and other fixed-income investments. This approach tends to minimize risk and still allow you to grow your nest egg at a decent rate of return. Remember that stocks are always potentially risky, so you should adjust your allocation according to your own personal circumstances.

Supplementing Your Retirement With Part-Time or Full-Time Work

If you are still in good health at retirement or you need additional income to make ends meet, you may decide to supplement your retirement income by working either full-time or part-time. There are many options to consider, from turning a hobby into a business, to starting your own brand new business, to continuing your old career. Recent legislation passed makes this an attractive option for current retirees. Working after retirement may also provide benefits beyond those that are financial; it allows retirees to preserve social interaction and reap the personal rewards of maintaining a working life. Keep in mind, though, you might not want to count on this income as part of your retirement. Your health and the availability of jobs are an unknown at this point, so plan carefully now and make sure you have enough set aside. This way, you may not have to rely on this as a necessary source of income and can choose to work only if you want.

Consider your situation carefully today. Once you get into the habit of setting aside money for your retirement, it will be easy and you probably won't even miss it. You may even enjoy watching your savings grow. Remember, you can always adjust your retirement savings plan and investment decisions as your situation changes.

For more information on retirement, 401(k)s, pension plans, or social security benefits, read the related articles in our Knowledge Center Library.

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Related Retirement and Estate Planning Articles:

• Starting to Plan for Retirement in Your 50s - You don't have much time left to create a nest egg, but you can still get started. Create a comprehensive financial plan that includes any debt management, current credit, savings, and avenues to save more to get a grip on how much you'll need in order to retire in the next 15 years. This can include 401Ks, pensions, part-time work, and Social Security. Don't wait until it's too late to really see the big financial picture and make the necessary corrections.

• Individual Retirement Accounts - You've no doubt heard of an IRA, but how does it really work? It's easier than you think, and an invaluable element to financial planning and debt management. It is typically used to save for retirement and comes with tax advantages you can't get with a typical bank savings account. Even if you are going through debt consolidation, including this type of investment in your financial plans can help ensure you won't be managing debt well into your golden years.

• The Ins and Outs of 401(k)s - The retirement plan of choice for many private companies, the 401(k) is a user-contributed (and employer-matched, oftentimes) savings plan also designed to help you save for retirement. Your earnings in a 401(k) are tax-free until you use them. If you have the option of a 401(k) and are dealing with debt management, it's important to look at a 401(k) as part of your overall financial picture to ensure that your efforts to repairing debt or credit are on track with the care you give to your 401(k). No matter your situation, with employers matching sometimes exactly what you put in, it's like getting a bonus each time you get paid!