Almost half of American households reportedly have no retirement savings at all, and only about a quarter (26%) have saved more than $100,000. Awareness about the need to plan for retirement has been growing in the past few decades as the structure of pension plans has changed. Younger workers are worried about having to work longer as they age, and they are concerned about Social Security remaining viable.
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Even though most of us know our retirement plan is important, it's easy to get lost in overwhelming options and a mountain of financial advice. So, while planning for retirement can feel daunting, having a clear set of guidelines can make a huge difference. Here are 14 essential "retirement rules" from experts to help you navigate your retirement strategy.
"Avoid beating yourself up over missed opportunities or past financial decisions," said financial advisor Chad Gammon, CFP, owner of Custom Fit Financial. "Instead, focus on what you can do today to improve your financial situation."
Positive steps now, including saving more, adjusting your budget or seeking professional advice, will allow you to create a secure retirement.
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It's crucial to prioritize saving for your future self. "Paying yourself first means setting aside money for the long-term before you do any other spending," said professor Robert R. Johnson, PhD, CFA, CAIA of Creighton University.
Too often, we give in to lifestyle creep, increasing spending with every raise or bonus. Johnson advised adding retirement savings to your regular monthly budget along with your car payment, house payment, medical expenses or food.
In Warren Buffett's words: "Do not save what is left after spending; instead spend what is left after saving."
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The power of compounding interest cannot be overstated. Gammon said, "The earlier you start saving for retirement, the more time your money has to grow. Even small, consistent contributions can accumulate significantly over time."
There are no substitutes for time and consistency. Start saving now, no matter how small the amount, and make it automatic so you don't have to remember to do it each pay period.
According to Johnson, the stock market is the surest way to build long-term wealth. A large capitalization stock index (like the S&P 500) has historical average returns of 10.3%, meaning you could earn 10 times your original investment in 23 years.
"Counterintuitively, the biggest mistake many people make in investing is not taking enough risk," said Johnson.
Only saving in low-risk investments like money markets or treasury bills can limit your fund's growth and make it hard to beat inflation. He also warned, however, that "fortune doesn't favor the stupid. Taking risk in unproven assets, like cryptocurrencies or meme stocks, is popular," but "investing in speculative assets is not prudent risk-taking."
Market timing is "fool's gold," said Dr. Johnson. He cited JP Morgan's Retirement Guide, which says that if you had invested $10,000 20 years ago and stayed put, you would have amassed $64,844. But if you missed the market's 10 best days, you'd only have half of that. If you missed the best 30 days, your balance would be only $11,701.
Johnson stressed that continuity is better. "Dollar-cost averaging into an index mutual fund or ETF is a terrific lifelong strategy. Dollar-cost averaging is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time."
Asher Rogovy, chief investment officer at Magnifina, agreed with this strategy. "By investing at consistent intervals, investors can avoid the risk of overpaying. If stock prices decline, they buy in at a lower average cost. If instead, the market goes up, they won't have overpaid."
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If your employer offers a 401(k) match, make sure you contribute enough to get the full match. Rogovy explained, "This is free money and is almost always more impactful than any other retirement investing decision."
Think about what your retirement will look like and write down all your likely fixed and discretionary expenses. Chris Urban, CFP, RICP, founder at Discovery Wealth Planning, recommended planning what you'll do in retirement and with whom. "Be sure you are retiring to something rather than just from something," he said.
As for how much you'll need to save to cover those expenses, Rogovy referred to the 4% rule. "Aim to be able to fund your retirement by withdrawing only 4% from your nest egg per year." This retirement calculator can help model different scenarios.
Real estate isn't the foolproof investment many believe it to be. Johnson cautioned against overextending on a large home and advised renting or buying a smaller home and investing the savings in financial assets.
Property taxes can rise at any time due to budget shortfalls or political shifts, and some of tax benefits of homebuying can also be changed by new legislation.
Urban stressed the importance of tax planning, saying, "Have a comprehensive strategy to reduce/minimize the amount of taxes you will pay throughout your lifetime." This can help you preserve more of your savings.
Johnson added, "Contributing the max to your 401(k) also reduces your tax bill. Investors should do whatever it takes to participate in your company's 401(k) plan to the level to get your full employer match."
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As you approach retirement, gradually shift to more conservative investments. Gammon advised regularly reviewing asset allocation to protect against market downturns while still maintaining some growth potential.
Johnson emphasized the importance of staying disciplined. "None other than Vanguard founder Jack Bogle said on market timing, 'I do not know of anybody who has done it successfully and consistently.'"
A solid plan helps you weather market ups and downs without making costly, emotional decisions.
Many people mistakenly believe Social Security will fully cover their retirement needs, and some worry that it will disappear altogether. Johnson warned that relying solely on it may lead to a lower standard of living than expected, or on having to work longer. "While there is very little likelihood that Social Security will disappear in the future, reduced payments or means testing certainly could be a consideration for future Social Security beneficiaries."
Rogovy added that it's important to, "Estimate your Social Security income. By understanding what income you will have, you can then figure out what you need to make up for by saving and investing."
The Social Security Administration provides this benefit estimate calculator.
Many plan to work longer if their savings fall short, but this is often unrealistic due to health or other life circumstances. Include room in your plan for retiring early if necessary to prevent future financial stress.
At the same time, Urban said, "Do not retire just to stop working. If you have not given a significant amount of thought to what you will do when you aren't working anymore, you may find yourself lost, depressed, or unfulfilled."
Planning for the personal life changes that come with retirement are as important as the financial planning.
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As life changes, so should your retirement strategy. Gammon pointed out that major events like divorce or health issues require adjustments to ensure your plan remains aligned with your goals. "With advancements in technology and financial tools, it's now easier to create tailored retirement strategies that consider individual goals, risk tolerance, and life expectancy," Gammon said.
Along with refreshing your plan, review your current retirement savings and contributions. "If possible, increase your retirement account contributions, even if by a small amount," said Gammon. As you get closer to your retirement age target, it is also important to shift to a more conservative strategy to protect against market volatility. Regularly review your asset allocation and adjust it according to your age and risk tolerance.
Feeling overwhelmed? Don't hesitate to reach out to a financial advisor, just as you would a medical or legal professional. Johnson explained that an advisor can help you create an investment policy statement (IPS), which "sets out the ground rules of the investment process -- it is the document that guides the investment plan."
The IPS will include a path for how your plan should change as you get closer to retirement age, and it considers liquidity needs and tax circumstances. Trusted advisors can also continue to provide value beyond the wealth accumulation stage and into retirement itself, offering guidance to retirees who may feel reluctant to spend their money after a lifetime of working and saving.