PLANNING FOR RETIREMENT

Daniel Prince, CFA May 17, 2024 Core

How to Start Planning Your Retirement: A Comprehensive Guide.

MAPPING A ROUTE TO RETIREMENT

Retirement may seem far away, but the earlier you start, the easier the journey can be.

Before we get into the nitty gritty, it’s important to understand what it actually means to be in the “retirement” phase of your life. No matter what age you may retire or what you want retirement to look like — and it’s different for everyone — the basic financial realities are the same: without steady income from a full-time job, you’ll likely rely on some combination of savings, government programs like Social Security, and your investments to meet your needs.

Ideally, your retirement income will do more than just meet your basic needs — food, clothing and shelter — but also enable you to live your desired lifestyle at the age you want to retire. The “when” and “how” of retirement are very personal questions to different individuals but one principle applies to pretty much everyone when it comes to retirement planning: Save as much as you can, as early and as often as you can.

Yes, there are trade-offs to consider between saving for tomorrow or reducing debt today. We also recommend you have a fund earmarked for emergencies like a sudden job loss or home repairs. In general, consider having at least two to three months of necessary living expenses on hand before you start investing for retirement. Still, the best move you can make is to start saving right away, even if just a modest amount. Doing so allows you to take advantage of compounded savings, tax incentives, and matching contributions.

Getting started sooner gives your money more opportunities to grow and compound. Putting time on your side is key to building a comfortable retirement.

Ready to get started planning for retirement?

Consider the steps below to create a plan to help reach your retirement goals.

1. DETERMINE HOW MUCH YOU NEED TO RETIRE

Retirement is a number, not an age. Upon retirement, you will begin relying on savings and investments to cover all financial costs.

A combination of declining pension incomes and longer lifespans means future retirees will likely need a greater percentage of overall income generated from retirement assets — meaning nest eggs will need to work harder for longer. This is not inherently a bad thing, but it will require a more proactive and focused effort all around: improved savings rates and consistent investing, sound guidance and innovative investment solutions to manage risk and income needs. (Learn more about Spending In Retirement)

Figuring out exactly how much you’ll need each year depends on your personal situation.

A common approach is the Rule of 4. This guideline suggests withdrawing 4% of your retirement savings in the first year of retirement and adjusting for inflation in each subsequent year. In order to translate annual spending in retirement into the amount of money you need to save for your nest egg, divide the annual desired income by 4% (or 0.04). Learn more in our retirement savings guide.

Illustration: Formula depicting the 4% RULE — an approach to figure out how much you’ll need to retire.

Your retirement savings goal may seem like a big number, but time and the power of compounding makes it easier to attain. Learn more about putting time on your side.

2. CREATE A BUDGET & SAVINGS PLAN

Saving for a large financial goal like retirement can be intimidating. Rather than worrying about the final destination, consider implementing a consistent strategy that will put you on the path to your goal. Creating a budget can help set up a pattern of consistently saving and investing.

Don’t know where to start? Consider the 50/20/30 rule which suggests allocating 50% of income to necessities, 20% to savings, and 30% to discretionary spending. Once you have a budget in place, automating transfers into your investment account can help curb impulsive spending and keep you on the path to your financial goals.

Sample budget

Source: Elizabeth Warren and Amelia Warren Tyagi, "All Your Worth: The Ultimate Lifetime Money Plan".

Chart description: Pie chart illustrating the 50/20/30 rule, which suggests allocating 50% of income to necessities, 20% to savings, and 30% to discretionary spending.

3. TIME TO INVEST & LET YOUR ASSETS GROW

Overwhelmed by the options when it comes to investment accounts? Below is a summary of three common account types based on how they are taxed. After all, when you're planning for retirement, keeping an eye on what counts most — after-tax returns — is important.

Accounts 101: Tax-exempt vs. taxable vs. tax-deferred

Caption:
Summary of common account types based on how they are taxed.
Account type (examples)	Funded with	Tax treatment	Benefits
Tax-exempt accounts Roth IRA, Roth 401(K)	Post-tax dollars	Tax-exempt during accumulation and withdrawal.	Suitable for high return assets like stocks and managed funds that might not be tax efficient.
Taxable accounts IRA, 401(K), 403(b)	Post-tax dollars	Taxed upon withdrawal and tax rates may vary based on the holding period of the investment.	Investments taxed throughout but offer flexibility; tax-efficient assets (e.g., municipal bonds) help mitigate tax implications.
Tax-deferred accounts Standard brokerage accounts	Pre-tax dollars	Taxed upon withdrawal at ordinary income tax rate.	Suitable for assets generating recurring income such as bonds, allowing you to defer taxes during accumulation and likely pay at lower rate during retirement.

Source: BlackRock, as of 10/31/2024.

When it comes to investing for retirement, most investors could benefit from following this basic breakdown of where to put certain types of assets:

Tax-Exempt Accounts: Accounts such as a Roth IRA are funded with post-tax dollars and therefore do not pay taxes during accumulation nor upon withdrawal, if certain requirements are met. This could be the ideal place to hold assets that may be less tax efficient and that you expect will generate high returns, such as stocks and actively managed funds. (Read more about key differences between traditional and Roth 401(k) accounts.)
Taxable Accounts: Traditional brokerage accounts are funded with post-tax dollars and your investment earnings will be taxed both during the accumulation phase and upon withdrawal. Consider anchoring these accounts with core equity ETFs, which tend to be tax-efficient, and municipal bonds which are generally exempt from federal taxes.¹
Tax-Deferred Accounts: Use 401Ks, traditional IRAs and similar accounts to hold less tax-efficient assets. Taxable bonds, especially high yield, are well suited for tax-deferred accounts because more of their return tends to come from recurring income than capital gains. Tax-deferred accounts are generally not taxed during the accumulation period; however, because they are funded with pre-tax dollars, you will ultimately pay tax upon withdrawal at your ordinary income tax rate. The good news is that rate is likely to be lower after you’ve retired, assuming your gross income — or all income before taxes and deductions — is less than it was during your working years. (Go deeper on What is a 401(k)?)

Based on the principle that what really matters are after-tax returns, prioritizing tax advantaged accounts like 401(k)s and IRAs can help maximize total returns. Read our insight on how asset location can help minimize taxes and maximize returns to learn more about how to manage taxes on investments.

Once you have an investment account with automatic transfers, it’s time to select your investments. Each investment you make plays a role in helping you pursue your investment goals and all of your investments as a whole should work together to help your assets grow while keeping an eye on risk.

Looking for a simple solution? Target date ETFs adjust over time to transition from retirement investments to retirement income. Learn more.

If you prefer to select your own mix of investments, iShares Core ETFs make it easy to get started. Learn more.

CREATING A DYNAMIC RETIREMENT PLAN

Life has a way of throwing us curveballs and putting up detours when we least expect them, so your retirement plan needs to be as dynamic as the path you’re traveling. This checklist will help you determine if you’re steering a steady course toward retirement, or if you need to reassess your strategy.

1. HAS YOUR FAMILY GROWN?

Life events such as marriage, divorce, welcoming a new member to the family, or adult children coming back to the roost can significantly alter your financial goals. Any changes in your family’s makeup might require a fresh look at your savings strategy to ensure everyone's needs are met. More dependents could leave you with less income to contribute to your retirement savings each year so you may need to target more growth for longer in your portfolio (or work for longer).

2. HAS YOUR HOUSING SITUATION CHANGED?

Have you upgraded your home, streamlined, or finally paid-off that mortgage? If you have paid off the mortgage, your income needs in retirement may be lower than expected. Conversely, if you’ve upgraded or updated your home (and mortgage payments), you may need more income. Either way, a change in your housing may require a change in your retirement plan.

3. NEW TARGET RETIREMENT DATE?

Deciding to retire earlier or to extend your working years can create two major changes in your retirement strategy. First, your retirement date impacts how long you have to prepare for life after work and how long your money needs to last to support yourself. Ultimately, you may need to reassess how much to put into retirement savings every month. Second, a change in retirement date impacts the amount of risk you can take in your investments, and you may need to adjust the mix of stocks and bonds in your portfolio. Read about how iShares Target Date ETFs can help automate that process.

4. UPDATED/UPGRADED YOUR RETIREMENT GOALS?

Life's about the journey, not just the destination. As your goals and aspirations evolve, so should your retirement plan. Maybe you've developed a taste for more adventurous (and expensive) hobbies like traveling to exotic locales; or maybe you’re happy to stay close to home and plant a garden or volunteer locally. Either way, reassess how you plan to spend time in retirement to ensure it aligns with your current investment strategy. This reflection might lead to adjustments in your retirement portfolio allocation if you determine you want to spend more or less in retirement.

5. HAVE YOUR RETIREMENT EXPENSES SHIFTED?

Like unexpected storms, changes in your health can impact your retirement timeline and finances. If new healthcare needs arise, it may be time to do a retirement strategy check-up by reassessing your income needs in retirement and adjusting your regular investment contributions (and withdrawals) accordingly. Unexpected healthcare needs may require you to save more money or adjust your retirement portfolio allocation to target growth for longer.

6. FACING A NEW NORMAL FOR INFLATION?

Inflation will reduce your purchasing power over time and long-term changes in inflation can have a big impact on your financial needs in retirement. If you have significant time before retirement, you may be able to rely on investments like stocks and real estate which tend to move up and down with inflation. On the other hand, if you’re nearing retirement, you may need to adjust the amount you are investing or your target retirement date.

Explore ETFs that can help you keep pace with inflation.

If you are looking for a simpler option, check out Target Date ETFs that are designed to seek the right risk at the right time. These ETFs are managed by professionals who adjust the underlying fund holdings over time to navigate market changes such as inflation and volatility so that your investments reflect your goals, from saving for retirement to receiving retirement income. Learn more.

Remember, your path to retirement is unique and full of exciting detours and new horizons.

Regularly assessing if your retirement strategy still fits your needs will help ensure that you reach the retirement you have been dreaming of.

REACHING RETIREMENT

Ready to start enjoying that retirement nest egg?

Gliding into retirement means transitioning from retirement saving to spending. Creating a lifetime of income from your retirement investments means taking a careful look at your budget and mix of investments. Employing tax management strategies; adjusting investments to balance income, growth and stability; and setting a regular cadence for reassessing investments can help increase your chances for a smooth retirement.

Deciding to retire earlier can impact your retirement strategy. Your retirement date impacts how long you have to prepare for life after work and how long your money needs to last to support yourself. Ultimately, you may need to reassess how much to put into retirement savings every month. Additionally, a change in retirement date impacts the amount of risk you can take in your investments, and you may need to adjust the mix of stocks and bonds in your portfolio.

INVESTMENT OPTIONS

Need help finding investments to help you access income in retirement? Explore iShares ETFs that can help provide income.

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Pave your path to a worry-free retirement with insights on financial planning, Target Date ETFs, inflation, and investment strategies.

Daniel Prince, CFA

U.S. Head of iShares product consulting and U.S. Head of iShares Core, Stylebox, and Sustainable ETFs

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Brad Zucker, CFA

Product Consultant

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PLANNING FOR RETIREMENT

MAPPING A ROUTE TO RETIREMENT