3 Phases of Successful Retirement Planning

Your retirement saving strategy should be customized based on your age.

Three generations of women filling piggy bank
Getty Images
By Robert Berger

Successful retirement planning is not one size fits all. Retirement planning for a millennial just doesn't fit retirement planning for a baby boomer who is nearing retirement. There are several reasons planning should be custom fit.

First, there are several economic unknowns for those many years away from retirement. From market returns to inflation and Social Security to Medicare, it's simply not possible to make reliable predictions decades into the future. Second, personal circumstances that affect retirement planning are impossible to predict. Whether a couple will remain married and whether the mortgage will be paid in full at retirement are just two examples of unknown outcomes for those just starting out. And that says nothing of an individual's career path.

However, these uncertainties should not prevent successful retirement planning. Instead, we should adapt retirement planning to our stages of life.

Early birds. For those just starting out, retirement planning is generally the easiest. There's no need to evaluate whether you are on track to meet your retirement goals because you are just starting. While assumptions can be made about future inflation, market returns and expenses in retirement, such guesswork 40 years or more into the future is of limited value. Further, it's nearly impossible to make reliable predictions about whether your home will be paid off before retirement or what other debt you may have in 2050.

While these unknowns may make retirement planning seem harder, the opposite is true. The one thing millennials do know for certain is how much money they are making today. With that number, it's easy to follow what I call the 10-15-20 rule. Saving 10 percent of gross income for retirement is the minimum, saving 15 percent is the sweet spot and saving 20 percent is a home run.

Mid-lifers. For those in their late 30s to early 50s, retirement planning takes on a few added dimensions. While it may still be difficult to reliably estimate retirement expenses a couple decades into the future, mid-lifers now have more information to evaluate. For starters, we can now assess whether an individual is on track with their retirement savings.

My favorite tool for this exercise is investment adviser Charles Farrell's money ratios.
To replace 80 percent of pre-retirement income, Farrell believes one needs to have amassed 12 times annual income in savings by retirement. While we should not accept a financial rule of thumb uncritically, the 12 times your income objective seems reasonable. To reach the 12 times income goal at retirement, Farrell calculates that one should have saved 1.4 times their annual salary by age 35, 2.4 times by age 40, 3.7 times by age 45 and 5.2 times by age 50. With this information in hand, one can make mid-course corrections in their retirement savings.

In addition, mid-lifers know more about their debt. They may be able to estimate if they will have paid off the mortgage and other debt by retirement. They likely have a better idea of the trajectory of their career and income. Mid-lifers also know how they handle finances and investing, both key factors in successful retirement planning. In addition, personal circumstances such as divorce or health issues may have a significant influence on retirement planning. While this information may not fit nicely into a retirement calculator, it can significantly shape planning for your golden years.

Near retirees. For those within 10 years of retiring, planning should get far more detailed. Unlike retirement planning 20 to 50 years earlier, near retirees should begin to focus on actual expenses in retirement rather than using income as a proxy. Depending on circumstances, retirement expenses may be significantly less than what a near retiree is earning.

For starters, there is no need to save for retirement during retirement. In addition, many people will have paid off their mortgage and other debts. Other expenses such as commuting costs and raising a family typically vanish during retirement. Those nearing retirement should be armed with the information necessary to finely tune exactly what they will need when they accept the golden watch and punch the clock for the last time.

Those nearing retirement also have a clearer picture of their savings. Whether they have fallen behind or have more than they will need, they can begin to make the necessary decisions in light of their savings. Finally, those nearing retirement have a clear picture of their Social Security and Medicare benefits. While these benefits may change in the future, they are unlikely to change for those in or near retirement.

Retirement planning is not an exact science. However, we can use the information available to us in each stage of life to make reasonable assumptions and choices to better prepare us for our golden years.

Rob Berger is an attorney and founder of the popular personal finance and investing blog, doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing, and the host of the weekly Dough Roller Money Podcast.

More from U.S. News:

Increase your money and finance knowledge from home

What is Inflation?

Why do prices go up?

View Course »

Understanding Credit Scores

Credit scores matter -- learn how to improve your score.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:
Greg Shallus

If you need help to see if you qualify for medicaid check http://www.seniorsfinancialsolutions.com

November 26 2013 at 5:34 PM Report abuse rate up rate down Reply

Like most projections about how much money you need at retirement, Mr. Farrell's formula doesn't indicate whether the person has other income sources -- pension, Social Security, etc. But regardless of the income sources, the numbers just don't add up. I never claimed to be good at math, so correct me if my calculator led me astray: Assume someone is earning $125,000 at retirement. By Mr. Farrell's calculation, that person should have $1.5 million saved at retirement in order to retire at 80 percent of final salary -- $100,000. If you withdraw 4 percent of that nest egg annually (which most financial advisors say is as high as you should go to protect against outliving your savings), you get $60,000 -- less than half the salary at retirement. So let's assume this person also gets Social Security. For someone at that salary level, the benefit would likely be about $27,000 annually. So at best, this person has a retirement income of $87,000, or just under 70 percent of his final salary.

November 26 2013 at 11:45 AM Report abuse rate up rate down Reply
1 reply to strachanjohna's comment
Morgan Johnson

Geez 87k strikes me as a good deal of money to have even if you have a house full of kids and are just starting out!!

December 03 2013 at 11:18 PM Report abuse rate up rate down Reply

When the market collapses (probably sooner than later) 50% of Americans will not be able eo retire. Without a doubt the market will drop to 6000 and stay there a log time. You need to plan NOW before it is too late ! Diversify!

November 26 2013 at 11:23 AM Report abuse rate up rate down Reply

Think of retirement as a three legged stool. One leg is social security. Leg number two is the money you have in a pension plan or 401K. The third leg is personal savings. If all three legs
of the stool are in good shape, then you should be OK. In addition, when you are retired you should be debt free. Good luck

November 26 2013 at 10:39 AM Report abuse rate up rate down Reply

If you want to learn how to successfully plan your retirement, you need only know ONE rule... the 'Rule of 27' (Google it). Any financial planner who doesnt apply this for retirement, should never be listened to. Trust me... we all learn it as part of our licensing course. This author knows very little about Retirement Planning.

November 26 2013 at 9:33 AM Report abuse rate up rate down Reply

1. Democrate

2. Democrate


November 26 2013 at 6:45 AM Report abuse +1 rate up rate down Reply
1 reply to pdbliz's comment

Yup, and happily retired since 1996, and living on a wonder mid six figure income. My only complain, allowing my taxes to continue being sent to the hard working, but poor, Conservative Southern and Mid West States. The top ten States for entitlement usage are all Conservative, and its time for people, like you, to learn to read, and than start voting to ensure those folks begin to be weaned from the Federal teat.

November 26 2013 at 11:06 AM Report abuse +1 rate up rate down Reply