How to Rule the World When You're Retired

How to Make a Retirement Game Plan

Planning your retirement should feel like planning for an incredible weekend ... only the “weekend” lasts for the rest of your life, and the planning starts way in advance. Like now.

You know that feeling on a Friday, on or around the 15th of the month, when your direct deposit hits, your bills are auto-paid, and you’re looking forward to a weekend with zero work and 100% good times? That’s what getting ready for retirement should feel like, only the “weekend” lasts for the rest of your life, and the planning starts way in advance. Like now.

If you’re thinking about retirement at all, you’re not imagining a rocking chair.

We’ve learned in our research that, if you’re thinking about retirement at all, you’re not imagining a rocking chair on a front porch. Chalk it up to our longer lifespans than guys’, healthier lifestyles than ever, and our collective feminist strides — we plan to continue ruling the world even when the official “work” days are over.

Before you say, “I’m too young to think about retirement,” remember the last time you were at work having one of those “How is it only Tuesday?” moments. That 30-second daydream you had about living at an ashram or sitting by the fire at your beach house — whatever your deal is — that’s your retirement dream. Now you can make it a goal and plan for it. How?

With the help of these six steps, below.

1. Know how much you need.

Here’s one of the ways we can help, whether you decide to invest with us or not. When you make a free retirement plan with Ellevest, we recommend a goal number for retirement, down to the dollar. We calculate your pre-retirement salary (that’s what we project you’ll earn in the year before you retire based on your salary curve), which is based on your gender and education level. We then target getting you to 90% of that pre-retirement income, after taxes and retirement savings.

Beyond that, we give you a personal monthly investing goal based on what you’ve told us about yourself and how much you’ve saved so far in your existing retirement accounts. And that’s all before you’ve invested a dollar with us.

We estimate you’ll spend less than you do before you retire (think: no commuting costs, or expensive work clothes), but not too much less (after all, many of you tell us you plan on traveling like crazy when you retire). While some others forecast this at a lower percentage of your salary, in this case, in our opinion, more is better.

Not to get morbid on you, but we also calculate how long you’re going to live, based on gender-specific mortality tables. Most women today can expect to live to age 87. (Proof that you can be bad-a$$ at any age: Dame Judi Dench got a “Carpe Diem” tattoo on her 81st birthday.)

2. Save like it’s your job.

How much should you save? Well, it depends on when you start. The bottom line is the earlier you start, the less dough you need to sock away. That’s because of compounding, which Einstein is said to have called “the most powerful force in the universe.” Your money starts working for you right away, and even small amounts can grow to large amounts over a long investing horizon.

If you’re not currently saving, going from 0% to 10% or 15% might sound daunting. Kind of like going from couch potato to barre class expert. It’s OK to start off slowly. Take a close look at your budget and see how much you can afford to comfortably save now. Then increase that number a little bit at a time.

3. Invest like a boss.

The sooner you start investing what you’re saving, the more time you’ll give your money to grow.

A lot of people, particularly women, make the mistake of putting off investing. Maybe you think you don’t know enough yet or have enough money yet to get started or don’t have enough time. But every day that you’re not investing, it can cost you money, on average. To be exact, if you’re currently making $85,000 a year and saving — not investing — 20% of that income, it can cost you an estimated $100 a day*.

The first place you should save for retirement is your employer-sponsored 401(k) plan. This money comes directly out of your paycheck before it hits your bank account, so you may hardly notice. A major advantage to investing here is your contributions are made pre-tax. That means you are investing your money before it’s taxed, which reduces your tax liability for the year you contribute and allows you to stretch your savings further. The money is taxed when you withdraw in retirement.

If you’re already investing in your company 401(k), fantastic. An important question to ask yourself is “How am I investing?” Ellevest will give you (complimentary) recommendations on how to allocate your “outside” retirement accounts, so you can get a more comprehensive investment approach and the best chance for success.

4. Get that company match.

If your employer offers to match your contribution to a 401(k) or similar retirement plan, definitely take advantage of that benefit — it’s basically free money.

Be sure to save enough to capture the company match. For example, if your employer offers to add 50 cents to your account for every dollar you contribute up to 6% of your salary (a commonly offered formula for this benefit), you should defer at least 6% of your pay to capture the full match.

In 2020, you can contribute up to $19,500 to a 401(k) or similar employer-sponsored retirement plan. If you’re age 50 or older, you can contribute an extra $6,500 this year.

5. Open an IRA.

The next stop for saving for retirement is an Individual Retirement Account — aka, an IRA. Anyone with earned income can open an IRA. That’s great news, especially if you’re a freelancer, or work at a place without a 401(k) plan. Once you open an IRA, it stays in the same place, even when you switch jobs; it’s not housed with your employer. Pretty cool.

IRAs come in flavors: There’s the traditional IRA, a Roth IRA (which comes with income limits), and — if you’re a literal boss and are self-employed — you may want to open a Simplified Employee Pension IRA (SEP IRA). The basic rule with IRAs is you’re going to pay the US government taxes at some point. The question is when. With a traditional IRA, the government postpones your taxes. You contribute pre-tax earnings, reduce your tax liability for the year, and watch that money grow on a tax-deferred basis year over year. You don’t pay the piper until you withdraw your money in retirement.

With a Roth IRA, you pay taxes on the amount you contribute first. You don’t reduce your current tax liability, but once you pay those taxes, you don’t have to pay them again. What does that mean? It means you’re not paying taxes on the growth of your investments. When you make withdrawals, every last penny is yours to keep.

While anyone can contribute to a traditional IRA, eligibility for a Roth IRA is based on your income level. You can open an IRA at Ellevest, or at another financial services provider. Whether you go with a traditional or Roth account, the bottom line is an IRA lets you add thousands of dollars a year to your retirement savings. In 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000 ($7,000 if you’re age 50 or older).

Then there's the Simplified Employee Pension IRA (SEP IRA) for people who are self-employed or small business owners. It’s kind of like a traditional IRA: Your contributions are tax-deductible and your earnings grow tax-deferred, so you only pay taxes on the money when you withdraw it. But you can contribute waaaaaay more money to a SEP IRA. The maximum for 2020 is 25% of your earnings, up to $57,000.

6. Put yourself on autopilot.

Automation is the easiest way to save. When you choose how much to put toward your 401(k) — whether it’s a dollar amount or a percentage of your pay — the money goes into your account before it’s taxed, and before you even get a chance to think about spending it. You can replicate that process for an IRA or other investment account by setting up automatic monthly payments through your bank. Doing this removes the temptation of spending instead of saving.

So yeah, retirement may seem a far way off — but there was a time when the age you are now was also unthinkable. Following these six steps will help make your retirement less “daydream” and more “plan.”


Source Ellevest. To calculate “an estimated $100,” we compared the wealth outcomes for a woman who begins investing at age 30 with one who began investing at age 40 after having saved in a bank for 10 years. Both women begin with an $85,000 salary at age 30 and all salaries were projected using a women-specific salary curve from Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc., which includes the impact of inflation. We assume savings of 20% of salary each year. The bank savings account assumes an average annual yield of 1% and a 22% tax rate on the interest earned, with no account fees. The investment account assumes an investment with Ellevest using a low-cost diversified portfolio of ETFs beginning at 91% equity and gradually becoming more conservative during the last 20 years, settling at 56% equity by the end of the 50-year horizon. These results are determined using a Monte Carlo simulation—a forward-looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results reflect a 70% likelihood of achieving the amounts shown or better, and include the impact of Ellevest fees, inflation, and taxes on interest, dividends, and realized capital gains. We divided the calculated cost of waiting 10 years to invest, $341,181, by 3,650 (the number of days in 10 years). The resulting cost per day is about $93.47.

The results presented are hypothetical, and do not reflect actual investment results, the performance of any Ellevest product, or any account of any Ellevest client, which may vary materially from the results portrayed for various reasons.

© 2018 Ellevest, Inc. All Rights Reserved.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Certain information was obtained from third party sources, which we believe to be reliable but is not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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