Understanding how age affects retirement readiness: 3 key retirement planning stages

Generally speaking, becoming retirement-ready means meeting several key milestones in your adult life, such as saving sufficient funds to cover your retirement expenses, completing key estate planning tasks and otherwise simplifying your life to account for the lifestyle changes as you enter your golden years.

In this article, we’ll explore several key topics you should know as you’re evaluating your own retirement readiness, with an emphasis on how to create a retirement readiness checklist and key benchmarks to look for as you progress through the different stages of life.

Make sure you understand the basics of retirement readiness

At its most basic level, retirement readiness means having a plan for how you’ll spend your retirement and enough savings to aid you in following through on that plan.

For example, someone with expected annual expenses of $20,000 in retirement could be retirement-ready with only $500,000 in their invested accounts (and likely even less once you factor in social security payments).

Meanwhile, individuals who are planning for a more extravagant lifestyle, such as those who wish to travel throughout their retirement, may need to save up additional funds to account for their increased expenses.

Leverage retirement readiness calculators and checklists to determine if you’re on track for retirement

As you plan out how much money you’ll need in retirement, you’ll generally want to start by making a checklist of key topics you’ll need to figure out along the way.

This checklist should include, but should not be limited to, the following:

• Determine how much money you’ll need to retire — One of the most important aspects to consider is how much money you’ll need in retirement, as determined by a combination of your expected expenses and how much money you’ll draw from Social Security. A key retirement readiness factor is whether your current retirement savings can sufficiently cover your expenses after you leave the workforce.
• Plan for when to start drawing Social Security — The total amount of benefits you’ll receive from Social Security will depend on when you choose to start drawing from the fund. Most Americans can begin taking payments at the age of 62, but many choose to wait until 65 or older to maximize their Social Security payments.
• Develop a strategy for paying off debts and freeing up income — As you approach retirement age, you should take steps to pay off as many debts as possible to free up your income and reduce your monthly expenses. This approach may involve, for example, leveraging funds into paying off a home or downsizing a vehicle to one with a lower monthly payment.
• Plan for taxes and unexpected costs — One aspect many retirees fail to consider as they approach retirement is the tax burden of drawing from retirement savings, as well as other unexpected costs that come with old age. For example, if your retirement savings are currently stored in a pre-tax Roth 401(k), you’ll have to pay income taxes on any distributions you take in retirement. Similarly, unexpected doctor visits or costs associated with renovating your home may also drive up your expenses.

As you approach retirement, you’ll want to discuss these factors and more with an experienced professional who can help you check key topics off your retirement readiness list.

Additionally, it may be worthwhile reviewing various savings and retirement readiness calculators and tools to determine whether you are currently on track toward your savings goals.

As a few key resources to keep in mind:

• At Associated Bank, we offer a variety of savings calculators and other tools to help you determine how much money you’ll need for retirement, alongside other savings goals. We’ve also written extensively on topics such as how much money you’ll need in retirement and the importance of investing early and often.
• Fidelity offers a Retirement Readiness Score calculator that can help you determine how ready you are to retire and discusses a few different savings accelerators that can help you reach your goals.
• Vanguard offers a variety of tools and resources for determining how long your retirement nest egg will last you in a variety of scenarios, as well as detailed reports that break down the retirement readiness of Americans across the country.

Review retirement benchmarks and strategies by age group and life stage

Everyone’s path to retirement is different and wholly dependent on the circumstances of daily life, whether that’s the birth of a child, a sudden move for work or any other major life event.

However, there are still patterns in how Americans can and should plan for retirement, as broken down into different age groups and life stages.

These patterns appear in most retirement journeys because the best and most reliable way to save for retirement is to make steady contributions over your working life.

This consistent pattern in saving leads many Americans to follow the same common retirement planning trajectory as they invest a portion of their income each month or year.

As a few basic benchmarks to consider, Fidelity recommends saving 15% of your income each year beginning at age 25, a strategy that will naturally lead to a few key savings milestones as you contribute to your accounts over time:

However, it’s important to note that these are benchmarks only exist as a general guideline for helping you determine whether you’re on-track for meeting your income needs come retirement.

Instead of trying to meet a specific savings number by a specific age, it may be beneficial to look at your retirement journey and retirement readiness as a progression of three life stages, each with its own individual impact on how prepared you are to retire.

Accumulation Phase: Ages 21 through 50

The accumulation phase of your life generally centers on your core working years, where your primary goal should be to save as much money as you can in an investment account to take advantage of the effects of compounding interest.

Compounding interest is a financial term for when you reinvest any interest gained on an account back into the account, leading to a cycle of growth over time.

Put another way, a dollar saved in your 20s or 30s could be worth several times its original value by the time you retire due to the interest it gains over time.

During your accumulation phase, you’ll generally want to explore the benefits of different growth strategies such as investing in an IRA or taking advantage of your employer’s retirement plan, such as a 401(k).

As you move out of your 20s and 30s and into midlife, you may start balancing these retirement goals with other, more personal goals such as home ownership or raising a family.

However, it’s critical for you to continue accumulating savings throughout this period to ensure your retirement readiness plan stays on track.

During the later stages of your accumulation phase, you’ll generally want to start educating yourself on the benefits of transitioning your investments into a more stable strategy (such as a bond-heavy portfolio or government-backed securities such as treasury bills).

Similarly, you’ll want to start exploring additional retirement readiness topics such as estate planning, life insurance and alternative income sources to ensure your family can survive financially without pulling from your retirement savings in the event you suddenly find yourself unable to work or in poor health.

Planning and Preservation Phase: Ages 50 through 65

While those in their younger years can enjoy the benefits that compounding interest will have on their retirement accounts, individuals nearing retirement may have a more difficult time growing their savings to a point where it can sustain them once they leave the workforce.

Because of this, the U.S. Tax Code allows for catch-up contributions to certain retirement accounts to make it easier for those in their 50s and 60s to save more for retirement.

For example, as of 2024 individual retirement accounts (IRAs) have a contribution limit of $7,000 per year. However, those over the age of 50 can contribute an additional $1,000 to their accounts each year as a catch-up contribution, allowing them to enjoy the tax benefits of an IRA for a greater portion of their income.

Similarly, 401(k) plan participants have a $23,000 limit on their plan contributions for the 2024 tax year, with an additional catch-up contribution limit of $7,500.

In this way, individuals in this planning and preservation phase will want to balance two key goals as they approach retirement:

• Continued accumulation — First, they should take advantage of catch-up contributions and other similar saving methods to accelerate their saving rate going into retirement as a means of counteracting the lower time horizon they have to save.
• Planning and preservation — Second, this is the stage of life where planning for retirement readiness and reallocating funds into safer investments becomes key. Ensuring you have a retirement plan and lowering your risk in the event of a market downturn is critical for making sure you can land safely in retirement without experiencing a sudden loss of funds or a significantly decreased quality of life.

Finally, it’s important to note that this is the time when you should start considering when you will begin to draw Social Security benefits, as well as whether you’ll need to invest in strategies such as long-term care insurance or an annuity.

In conjunction with the unique circumstances that come with determining whether you’re retirement-ready, this is often the point at which it makes sense to sit down with a financial advisor to figure out a specific plan for how you’ll check off the final few points on your retirement readiness checklist.

Distribution Phase: Ages 65+

As you approach the age of 62 (the earliest possible date you can begin to draw from Social Security), it’s generally wise to start looking at the different considerations for when you plan to retire.

Specifically, most Americans draw their income in retirement from a combination of Social Security payments, personal savings and alternative sources of income such as real estate or pensions.

With Social Security benefits replacing about 37% of past earnings, on average, and many retirees planning to spend around 80% of their pre-retirement expenses, there are two key decisions that individuals in their golden years need to make about their retirement finances:

• At what age should I begin drawing from Social Security? As a general rule, drawing your Social Security benefits starting at the age of 62 will result in about a 30% reduction in how much you receive each month when compared to starting distributions at the full retirement age of 66 or 67 (depending on your birth year). For this reason, you’ll need to balance how long you plan to work with how much Social Security income is needed to supplement your budget in retirement.
• What’s the optimal strategy for drawing from my retirement savings? Once you figure out when to draw Social Security benefits, you’ll want to look at efficient strategies for distributing any funds currently present in retirement accounts to help supplement your income. Often, this will mean making a plan to withdraw around 4% of your total retirement savings each year.

Importantly, however, you should remember that retirement is primarily a product of finance, not of age.

If the amount of money you have coming in each month from Social Security, retirement withdrawals and other sources fails to cover your monthly expenses (or draws too heavily from your retirement accounts), you may need to explore other options for ensuring your savings can go the distance.

For example, many potential retirees choose to downsize their lives come retirement to further lower their expenses, while others choose to take on part-time jobs to keep themselves active and supplement their monthly income.

Still, others may find that moving in with friends or family is the only way to make their budgets work outside of returning to the workforce and trying to save more money to retire later.

In any event, the distribution phase of your retirement planning journey will largely involve ensuring you have sufficient money coming in to cover your living expenses, while also making sure you have enough freedom to enjoy your hard-earned retirement years.

Work with a financial planner to chart out a path toward retirement

There are numerous considerations that go into retirement planning, from the tax efficiencies of your investment accounts to the age at which you begin to draw from Social Security.

However, it’s important to remember that you aren’t alone in your journey.

Everyone must take a look at their retirement readiness eventually, and there are numerous resources, strategies and tactics available for ensuring you’re on-track toward your savings goals.

Your first step, in most cases, should be to speak with a financial planner or another professional who can help you chart out a path toward a long and happy retirement.

At Associated Bank, our retirement professionals have decades of experience in helping members of our community build the strategies they need to successfully save for retirement.

If you have any questions about saving for retirement or investing in general, please don’t hesitate to give us a call at 800-236-8866, schedule an appointment or visit us at any of our Associated Bank locations.

Our retirement planning professionals would be happy to walk you through your options for determining your retirement readiness and working toward your golden years.