Saving for retirement can often feel like a daunting task filled with complex investing terms and more acronyms than you can count.

However, making sure you have enough money to retire doesn’t have to be overly complex.

In fact, with a basic strategy and a commitment to stick to it over time, it’s possible for you to meet your retirement goals without significantly impacting your current standard of living.

This in-depth guide covers the “investing 101” basics of building out a strategy that can pay for your expenses in retirement.

Specifically, you’ll learn about the basics of retirement planning and the four steps you’ll need to follow to create a plan that works for you.

Note, however, that while this article covers the basics, it’s no substitute for speaking with a financial professional who understands your unique financial needs, now and into the future.

Always speak with an experienced professional before making any decisions about investing and your retirement accounts.

Understanding the basics of investing and retirement planning

Planning for retirement means asking yourself two very basic questions:

1. How much money do I expect to spend when I retire?

2. Where will the money to pay for these expenses come from?

While you may find thousands of articles on retirement and investing online, all of them really boil down to promoting a specific answer to one or both questions.

As you start out on your retirement planning journey, it’s wise to keep a level head as you navigate through the jungle of advice and acronyms that surround this complicated financial topic.

Don’t get caught up in the weeds.

In practice, financial planning, short- or long-term, is a basic math problem. For long-term investing, all you really need to know is that your expected income in retirement (from Social Security, retirement accounts, annuities and other sources) must be higher than your expected expenses (for costs like housing, food and healthcare expenses).

The key takeaway is that—no matter your financial strategy—you should always make sure you balance both sides of the equation.

By saving too much, you may miss out on experiences today and end up with a significant portion of your savings unused when you pass.

By saving too little, you may have to delay your retirement or explore alternative income sources such as a part-time job to help cover retirement expenses.

The real trick to retirement planning is finding the middle road that allows you to meet your financial goals of tomorrow without significantly affecting your standard of living today.

Often, this takes place in four major steps:

1. Figure out how much money you need to retire

2. Balance your retirement plan with your other financial goals

3. Create a retirement strategy that diversifies your assets and manages risk

4. Adjust your investments to match your age and risk tolerance

We’ll outline each of these four steps in more detail below, but keep in mind that planning for retirement is a process. Expect to revisit these steps and reevaluate over time to achieve the right balance that works for you. Retirement planning is never a “one and done” situation.

1. Figure out how much money you need to retire

The first and most important number you’ll need to know when planning for retirement is how much money you should expect to spend on expenses per year.

Naturally, this number will change depending on multiple factors such as your annual income, age and location.

While it’s possible to estimate how much you’ll need in retirement, it’s also generally impractical to go any deeper than a general round number.

No one can predict the future and trying to build a budget to account for your expenses decades in the future isn’t really an effective use of your time.

Instead, you should pick three or more example numbers (some high, some low) to run your calculations against. This will help you figure out a range for how much you might spend in retirement.

Financial experts will recommend one of several shorthand methods for estimating how much money you’ll need to save to meet your spending goals:

• About $1 million — Historically, when asked how much Americans should save for retirement, financial experts would reply with “about $1 million” as a quick, general rule. This amount allows for a healthy withdrawal rate throughout retirement with enough left over to cover any healthcare expenses or other unexpected costs.
• 12 times your pre-retirement salary — Another quick shorthand rule that many people use is “around 12 times your pre-retirement salary.” For example, if you expect to make $75,000 a year in the years leading up to your retirement date, you’d need to save $900,000 to have the same standard of living throughout your retirement.
• A strategy that covers 80-90% of pre-retirement income — Finally, if you want to do some math, you could calculate a more specific number by figuring out how much you’d need to save to have an income equal to around 80–90% of what you made before retirement. This would mean adding up your expected Social Security payments with any pensions and other sources of income, and then subtracting this number from your annual expenses. The remaining value is how much you’d need to withdraw from your savings each year. Multiply this value by your expected time in retirement (12 years, 20 years, etc.) to get an estimate of how much you’ll need to save.

No matter which strategy you choose, you should take your final expected amount and divide it by 4% to figure out how much money you should expect to withdraw per year to help fund your retirement.

Understanding the 4% withdrawal rule

Perhaps the single most important thing to keep in mind when retirement planning is that your money will continue to grow in your retirement accounts even after you retire. Your money will also lose value through inflation over the same period.

Specifically, you can expect the money you have in your retirement account to grow by around 6–7% each year. Similarly, you can expect inflation to average around 3% over this same period.

This means that, when factoring in inflation, your retirement account will experience a net growth in value of around 3–4% each year.

So, if you withdraw 3–4% of your account each year to fund your retirement, the value of the money in your account will remain the same because the account’s growth over time will offset the effects of inflation.

This means you can withdraw roughly the same amount of money from the date you retire to the date you pass.

Consider how much money you’ll receive from Social Security or a company pension

Finally, don’t forget to factor in additional sources of income such as Social Security or a company pension.

Social Security is a program run by the federal government that uses taxes to fund benefits for eligible Americans.

A company pension works the same way but is managed by your (former) employer rather than the government.

The primary benefit of both is that you’ll receive a guaranteed minimum payment each month to help fund your retirement.

While neither will fully pay for all your expenses (the average Social Security payment today only pays around $1,600 per month), these monthly payments will help ensure you have a consistent, reliable source of income throughout your retirement.

2. Balance your retirement plan with your other financial goals

Once you have a set goal in mind for how much you’ll need in retirement, take a moment to write down any other financial goals you may have for the future.

After all, saving up for retirement isn’t the only financial goal you need to account for.

Saving up an emergency fund, funding your child’s education and paying down debt are all important goals that deserve a place at the table as well.

Importantly, you may prioritize each of these goals differently depending on your financial situation and where you are in life.

Depositing $1,000 a month into a retirement account that grows 7% every year isn’t a good idea if you have significant credit card debt at an interest rate of 20%.

It’s wise to set up a priority system (or a budget) that can help you make wise decisions about where you should spend and save your money.

Generally, this means paying off any required expenses each month (such as food, housing costs and gas), building an emergency fund and paying down any high-interest debt. Only then should you consider strategies to save money for retirement.

3. Create a retirement strategy that diversifies your assets and reduces risk

Once you’ve calculated how much money you need to have—and have the flexibility in your budget to do so—you should plan out a retirement strategy that can get you to your savings goals.

Where you choose to save your money will have a powerful impact on the returns you can expect and the amount of money you’ll have available in retirement.

It’s important for you to have a basic understanding of the different account types common in modern retirement plans.

Individual Retirement Accounts (IRAs)

An Individual Retirement Account (or IRA) is an investment account that lets you save up for retirement with tax-free growth or on a tax-deferred basis.

IRAs play a pivotal role in any retirement plan because they can save you a great deal of money in taxes when compared to non-IRA investment accounts.

There are two main types of IRAs you should know about:

• Traditional IRA — In a traditional IRA, you make contributions to the account using money that isn’t taxed by the government (i.e., the money will be deducted from your pretax income, meaning you don’t have to pay taxes on it when it’s initially deducted). Then, the money will grow during your working years. In retirement, you can withdraw the money, which the IRS will tax as a source of income. Since most retirees have a lower income in retirement than when they were in the workforce, this means that your money will be taxed at a lower rate.
• Roth IRA — In a Roth IRA, you make contributions using money you’ve already paid taxes on. This means that your money will grow tax-free in the account, and you won’t have to pay any taxes on the funds when you begin to withdraw them in retirement. However, this also means that you’ll have a higher tax bill today, as the funds count toward your annual taxable income. Further, there are restrictions and conditions to consider, such as when you can take the money out.

Both options have pros and cons.

It’s recommended that you speak to a financial professional who can help you calculate which IRA account type will be the most advantageous for your specific situation.

Note, however, that you can only deposit $6,500 to $7,500 into an IRA each year (depending on your age and situation), and it’s critical that you start investing early so you can make the most of this account type despite the lower annual limit.

Employer-Sponsored Retirement Plans

An employer-sponsored retirement plan is an investment vehicle offered by your employer that (on your end) provides the same benefits as an IRA.

The most popular form of employer-sponsored plan is the 401(k), which can be further broken up into the traditional/Roth division explained above:

• Traditional 401(k) — Like a traditional IRA, you can make contributions to a traditional 401(k) pretax and will only have to pay taxes when you withdraw funds in retirement (typically when you’re in a lower tax bracket).
• Roth 401(k) — As with Roth IRAs, you make contributions to a Roth 401(k) using income that’s taxable today. The money will then grow tax-free until your retirement when you can take it out without incurring any income taxes.

There are two primary differences between IRAs and 401(k) plans that make 401(k)s more advantageous in most scenarios.

1. 401(k) accounts have a higher contribution limit, currently sitting at $22,500 for 2023 ($30,000 for those over the age of 50).

2. The structure of 401(k) accounts incentivizes employers to match employee contributions into the plan. This means your employer may also contribute money to your retirement plan (with their specific contribution amount depending on their policies).

For this reason, it’s typically advised that you should contribute at least the minimum amount to a 401(k) needed to get your employer’s full match before you consider investing in an IRA or other account.

Since your employer’s contributions are effectively “free” returns on your investment, the benefits of contributing up to your employer’s 401(k) match often far outweigh the benefits of saving your money in another account type.

Annuities

Annuities are financial vehicles that offer tax-deferred growth and the ability to provide income and death benefit protections in your old age.

Annuities aren’t investments. They’re insurance products that offer you a low-risk way of ensuring you have a source of income during retirement.

Like with insurance, you pay a certain amount of money (either over time or in a lump sum), and then the institution offering an annuity will write you a check every month during your retirement (either for a set period or for the rest of your life).

During the accumulation period (the time frame when you’re funding the account), your funds must stay in the contract to avoid penalties.

In return, the organization offering the annuity will pay you a fixed/guaranteed rate of return or invest your premiums into market-based strategies such as the S&P 500.

Any guaranteed returns or growth earned will stay in the contract and accumulate tax-free.

The option to turn the contract’s value into an income stream (based on the guaranteed returns or growth) is available both during and after the contract term.

At the end of the term, you can elect to withdraw your money or continue with the contract as is.

The primary benefit of an annuity is cash flow. Annuities provide a stable, predictable rate of return that you can use to pay for any expenses you may have in retirement.

While they’ll never provide the same returns as money invested directly in the stock market, they’re also protected from markets where stocks may decrease in value over time.

This dependability makes them a great choice for risk-averse individuals nearing retirement age who don’t want to risk losing money if the stock market takes a turn for the worse.

Make sure to diversify by finding the right mix of income sources and funds

With all these various account types in mind, take a moment to think back to your expected expenses in retirement. Then, think of the second major question of any retirement strategy—where will the money to pay for these expenses come from?

As you choose accounts to fund your retirement, keep in mind that your goal should be to acquire a steady stream of income to pay for all your retirement expenses.

It’s a good idea to consider a diverse range of income sources so you can take advantage of the benefits of each:

• Social Security — You should begin by calculating how much money you’ll receive from Social Security for retiring at different ages. While you can start collecting Social Security at age 62, you’ll receive less income per month than if you delay taking your benefits by a few years.
• Pensions and Annuities — Next, calculate how much money you expect to receive from pensions and annuities during this period. Since both pay out a set amount of money each month, you can add them to your Social Security benefits to calculate the minimum amount of money you’ll receive each month before you need to tap into your savings and investment accounts.
• Investment Withdrawals — After you calculate how much money you’ll receive from Social Security, pensions, annuities and other similar income sources, you should subtract this number from your monthly expenses to figure out the gap you’ll need to fill with investment withdrawals.
• Alternative Sources of Income — Depending on your situation, it may be worthwhile factoring in one of several other income sources to help fund your retirement. For example, it’s common for retirees to receive money from sources such as rental properties or part-time jobs as a separate means of funding their retirement.

Solely relying on or planning for income from only one of these pillars is, in most cases, unrealistic. Instead, you should plan to combine several different sources into a comprehensive retirement plan that can cover your expenses as you phase out of the workforce.

Account for Social Security. Consider taking out a contract for an annuity. Compare the tax and withdrawal benefits of Roth and Traditional IRAs and 401(k) plans.

Then, speak with your banker or a financial planner about the mix of account types that’ll provide you with the greatest benefits in your specific financial situation.

There’s no one-size-fits-all retirement strategy. Instead, you’ll need to find a personalized strategy that meets your unique retirement needs.

4. Adjust your investments to match your age and risk tolerance

After you create your retirement accounts and begin investing in funds that make sense for your goals, you may think that you’re in the clear until retirement.

However, an important aspect of planning for retirement is adjusting your asset allocation to match your age and risk tolerance.

Specifically, when you’re young it’s smart to invest in options with a higher risk profile—such as stocks—to maximize your potential earnings, leading to a larger account value in retirement.

However, as you approach retirement it’s often better to choose a less risky option as a way of protecting your portfolio from sudden losses.

This is why, for example, financial professionals may recommend a portfolio of 80% stocks and 20% bonds in your 20s but only 50% of your portfolio in each once you reach your 50s.

Since the 50-year-old investor will need the funds sooner than the 20-year-old investor, it’s important for them to keep their money in investments that have a lower potential for risk.

A common solution to this problem is to invest in a target-date fund that automatically balances itself as you approach retirement.

Other solutions include adjusting the assets you purchase with your account to include more bonds as you get older or speaking with a financial planner who can help you rebalance your asset mix either annually or every few years.

Whatever you decide to do, the important thing to note is that your financial needs will change from when you begin your retirement planning to when it’s time to start making withdrawals after you retire.

When you’re young, you want lots of growth—leading to a riskier allocation that leans more toward stocks. When you’re older, you’ll want stability—which often means putting your money into an annuity or a portfolio that weighs more heavily toward bonds.

You should take the time every few years to review your retirement plan to ensure you’re on track for success.

Often, this will mean adjusting both where you put your money and the types of funds and indexes you choose to invest your money into.

Speak with a financial professional about your options

As you can see, wealth management and retirement planning can be complicated.

However, at their most basic level, they exist to solve a very simple math problem. Namely, how do you generate enough income in retirement to pay for all your expenses?

The answer, for many, is a combination of several different income sources, ranging from Social Security and annuities to withdrawals from an investment account.

Figuring out the right mix, however, will depend on the specifics of your financial situation and how much you expect to spend in retirement.

It’s always smart to start your retirement journey by speaking with an experienced professional.

Our financial experts have the information you need to make an informed decision about your retirement.

If you have any questions about retirement planning or if you’re interested in opening up an investment account with us, give us a call at 800-236-8866, schedule an appointment or stop in at any of our Associated Bank locations.

We’d be happy to help you build a retirement plan or investment strategy that will help you best reach your financial goals.