Broadly speaking, all of our retirement goals are broken into two financial phases - the accumulation phase, or the distribution phase.
Generally, accumulators, or those of us in the accumulation phase, are those of us who are more than 10 years out from retirement.
Once you are within roughly 10 years of retirement, you transition into the distribution phase, where you face a whole new set of decisions, behaviors, and risks that you will plan for.
This guide is for those of you in the accumulation phase of your financial life.
For those of you that are in or near the distribution phase, you can read our financial planning guide for distributors here.
You can also watch our free masterclass on how to increase your retirement income by up to 38% for best practices during the distribution phase.
In this article we will cover these two primary retirement planning considerations in great detail.
As an accumulator, all your senses should be attuned towards maximizing how much you can save for retirement.
The more total dollars you can funnel away towards retirement saving, the more "investable" dollars you create.
By being a great saver, you earn yourself a range of privileges including:
1) Being able to be particular (choosy) about your retirement age.
2) The ability to take on less risk with your investments.
3) Increasing the probability that you will hit your retirement savings goal.
4) Lowering the probability that you will run out of money in retirement.
Savings always precedes investing because you cannot invest dollars that you don't have!
On top of that, it is an unfortunate fact that you cannot "out invest" bad savings habits.
But you can "out save" bad investment returns!
When it comes to saving, there are three scenarios that accumulators slot into.
In the accumulating debt scenario you spend more than you make, causing you to accumulate debt.
Unfortunately, this is the most common retirement saving scenario in the United States, so it's no surprise that so many of us are unprepared for retirement.
Not only are you not saving for retirement, you are also going into debt which racks up interest expense and requires difficult lifestyle changes to pay off.
If you've been stuck in the accumulating debt scenario, you should be immediately doing everything in your power to work towards scenario 2.
I highly recommend beginning your get out of debt journey by signing up for Dave Ramsey's "Financial Peace University" course.
*Disclaimer: I have no affiliation with Dave Ramsey or his products other than believing in them. I don't receive any compensation for recommending this course.
The image above depicts the "break-even" scenario.
This is when your income and expenses match perfectly (or nearly perfectly).
You don't go into debt (which is great).
But you don't make much progress saving for retirement (not so great).
Once you hit the break-even scenario, you'll want to move to scenario three.
If you want to accumulate significant retirement savings and feel confident that you can achieve your retirement goals, you need to start saving early, and save substantial amounts of money.
If the "save early" option is off the table, the second-best option is to focus on saving more.
To do so, you need after tax income that is in excess of your annual spending.
While this is easier said than done, this guide is designed to show you how to shift gear into the saver/super saver scenario.
But first, let me illustrate the power of increasing savings rate over increasing investment returns...
Let's say you had $100,000 to invest over 10 years.
Each year you save an additional $5,000, and you obtain a 7% rate of return on that investment.
At the end of the 10th year, your $100,000 would become $265,797.
That's an increase of roughly $165,000 over ten years - not bad!
What happens in that same scenario if we can somehow increase your investment rate of return to 9% (lets ignore the fact that to squeeze out that extra 2% of return we would have to take on a whole LOT more risk...).
That same $100,000, with $5,000 saved per year, at 9% would become $312,701 by the end of the tenth year.
That's an increase of roughly $212,000 over ten years - even better!
When we compare the two scenarios, we see that increasing your rate of return from 7% to 9% yields you an extra $46,000 over ten years.
Now let's flip the scenario...
You still have $100,000 to invest. But in this second scenario you decide that instead of trying to take on a whole lot more risk to squeeze out 2% greater rate of return, you'll change some behaviors and increase how much money you save each year...
In this scenario, you get 7% returns over ten years, but each year you save an additional $20,000 (compared to only $5,000 in the first scenario).
By the end of the 10 years, your $100,000 turns into $473,044!
When we compare the super saver scenario ($20,000 per year) to the higher rate of return scenario (squeezing out 9%/yr), we see that in the super saving scenario you end up with $160,000 greater portfolio value at the end of the 10 year period.
Increasing savings rate is simply more powerful than increasing investment rates of return.
Until your portfolio hits a certain size that is...
Admittedly, there is a point at which investment rate of return will win out against savings capability...
But most of us are not starting out our retirement savings journey with a trust fund or huge inheritance that allows us to bypass the early stages of accumulating substantial investable dollars.
To be clear, I am not advocating that you do not optimize for investment rate of return as well.
It has just been my experience that as a population we focus too much on our investment rate of return in the hopes that somehow, we just might hit the jackpot and never need to focus on savings.
We should certainly be optimizing for both - but if you are not optimizing how much you save for retirement BEFORE you optimize your investment rate of return, you are doing your future financial situation a disservice.
Becoming a super saver starts with bookkeeping - tracking your income and expenses.
If you want to increase your savings power, and therefore your retirement fund, you have to pay attention to how much income you make, and how much you spend.
Once you have a system in place that helps you stay aware of your earning and spending habits, you can increase your retirement savings by doing one or all of the following things:
A trustworthy, fee only fiduciary financial planner or financial advisor can be a great help with these activities. You can watch our free masterclass training video for help qualifying a financial advisor.
Being a great saver is clearly the most powerful wealth building behavior.
But that doesn't mean you should not also optimize your investments and investment accounts.
Investment decisions should be done in the right order - beginning with learning about the types of investment and retirement accounts that are available to you.
The list below shares basic info about the most common tax advantaged retirement account options.
Employer sponsored retirement plans are special retirement accounts that give you tax benefits for saving for retirement.
The type of employer you work for will generally determine what type of employer sponsored retirement plan you have available to you.
Private companies offer 401(k) plans, the federal government offers a thrift savings plan, municipal governments offer 457 plans, hospitals and schools offer 403(b) plans.
At the end of they day, all these different employer sponsored retirement plan options share most of the same qualities.
All these account types will allow you to contribute pre tax income to the plan which can be invested and offer tax deferred growth, while also reducing your current years taxable income.
Most of these accounts will have two separate contribution sources - employee contributions and employer contributions.
All of these account types have contribution limits capping how much can be saved into these plans.
If you are over 50 years of age, they also offer an opportunity for catch up contributions if you did not have the ability to save substantially during your younger years.
Individual Retirement Accounts, also known as IRAs, are retirement savings accounts that are not offered through your employer.
These accounts function in much the same way as employer sponsored retirement accounts when it comes to tax benefits.
IRA's however have much lower contribution limits and will also sometimes be disallowed or limited if you or your spouse have an employer sponsored retirement plan that you could be contributing to.
IRA's can be a great retirement savings vehicle, but there are many rules governing them - and since you will not have an HR department facilitating these accounts for you, I generally advise seeking the counsel of a fiduciary, fee only financial advisor to assist you.
Self employed retirement accounts offer small business owners the opportunity to save substantial amounts in lieu of having a traditional 401k or 401k type retirement plan.
Small business owners have the option to choose between Individual 401(k) plans, SEP IRA, or Simple IRA plans.
Again, they function much the same as the employer sponsored retirement options, but do have some particular advantages and limitations, the nuances of which you should discuss with a certified financial planner.
A taxable brokerage account is not a retirement savings account per se - it is however an additional investment account option for investors with significant surplus savings.
They do not face contribution limits and are taxed quite differently than retirement savings accounts.
Taxable brokerage accounts are extremely valuable investment accounts for super savers who have the ability to contribute above the contribution limits of an employer retirement account or an individual retirement account.
Once you are comfortable and familiar with the different retirement saving accounts, it's time to dive into the hierarchy of "retirement investing".
(PS: if you don't feel fully comfortable understanding the nuances between these types of accounts, I recommend seeking out fee only fiduciary financial advisors to speak to. You can watch this free video to learn more.)
Investing for retirement should be done in a carefully calculated and thoughtful manner.
Too often we impatiently skip steps that cause us financial harm in the long run.
We invest into the wrong types of accounts, or in the wrong amounts, or we simply don't know enough about what we are doing and don't even know the possible risks that poses.
That's why I always recommend following these 6 steps as you save for retirement.
If you work for a company, begin by finding out what kinds of retirement accounts they offer and reading up on them.
You can read our guides to common employer sponsored retirement plans such as 401ks, 403bs, 457s, and TSPs.
If you're self-employed, you should begin by finding out what kinds of retirement accounts you can open on behalf of yourself.
Those would be things like Solo 401(k), Sep IRA, SIMPLE IRA, Traditional IRA, or ROTH IRA accounts.
If you are a super saver with annual savings above $30,000 per year, you may also want to consider learning about taxable brokerage accounts.
If you'd like to speed up the process and save yourself many hours of research, you can also communicate with a fee only fiduciary financial advisor who can help guide you in this process.
If you have a workplace retirement plan, you should check if your employer offers matching contributions.
If they do, you should begin to save for retirement by contributing to that employer account up to the amount your employer will match.
Matching contributions are essentially free money.
After you reach your employer match, you'll need to take stock of how much additional savings you can set aside each month or each year.
Where you should invest or save next will be based on how much savings your budget allows.
Money in retirement accounts can be hard to access, because when you want to withdraw money from a retirement account you may be required to pay income taxes AND penalties on the withdrawals if you are under age 59 1/2 (with some exceptions).
Thus, if you have short term savings goals such as a car or home, you will want to keep some funds more liquid (more accessible) - which typically means leaving it in a brokerage account or savings account.
If you don't have clear short term savings goals, OR you simply have enough savable dollars that you are not limited, you will also want to consider saving into a ROTH IRA or ROTH 401(k).
ROTH IRAs and 401(k)s are extremely powerful savings tools at all points in your financial life.
There are, however, some complexities around them that you should understand - for that reason I recommend seeking out the help of a fee only fiduciary financial advisor to find out how you can include them in your financial plan.
A financial advisor AND financial plan will help you identify the amount savings you should apply to your short-term goals without sacrificing your retirement savings goals.
Split your remaining savings dollars into slices - apply some to ROTH contributions, apply some to short term savings goals.
The ROTH contributions can be made to a ROTH employer account (if they offer one), or to a ROTH IRA (if your employer does not offer a ROTH option).
One thing to note - there is an order of operations to which accounts and in which orders and in what amount you should contribute to.
Having a vision of your financial future and how you'd like to apply your savings, whether its pre-retirement or in retirement, will be critical in allowing you to make the best decisions possible regarding WHERE to save for retirement.
Next, you'll need to evaluate how much risk you need to take on in order to achieve your retirement goals, or financial goals in general.
The amount of risk you need to take on is determined by when you will need the money, how much money you need, your savings rate, and your risk tolerance (or comfort level with risk).
This is a complicated formula - but extremely important.
You should only ever take on as much risk as is needed in order to achieve your outcome - not more.
Unfortunately most of us have no idea how to quantify risk, how to understand the risk-reward trade off, and that leads to making bad investment decisions and potentially losing significant amounts of money in the process.
Figuring out how much risk is appropriate for you is something that should be done by a professional who spends the time getting to know you.
There is no cookie cutter one size fits all method - and the common refrain of using your age as a way to quantify your risk is bogus.
Your age tells us nothing about when you'll need the money, how much money you can save each year, how much money you have saved up to now, or your level of experience or education when it comes to investing.
The model, or asset allocation, should be the high level strategy that determines what category of investments you focus on, and in what amounts.
This is a highly technical process that should be matched to your risk level, savings rate, total wealth, comfort with risk, and experience with investing.
Broadly speaking, it is a way for you to categorize your retirement savings or wealth, into buckets that provide guidelines and guardrails when it comes to your investment strategy.
Only after you have completed the 4 prior steps should you begin researching individual investments.
Too often we start the process here, at step 5.
We have limited or no strategy when it comes to saving.
We have limited understanding of which account types and locations we should save into.
We either have NO asset allocation model, or some cookie cutter allocation that we found on the internet (most often based on our age) that is not unique to our individual situation.
Yet we immediately dive into investing and buying stocks, bonds, and funds that we know little to nothing about other than what we hear in the news, or from a friend, or from a few minutes reading articles on line.
The point is - do your due diligence before reaching this step.
If you cannot, or will not, that is fine - than find a qualified, trustworthy, fee only financial planner that can help execute on this process for you...
Finally, after all the research is done, only now should you begin purchasing the appropriate investments in the appropriate accounts.
Not much to say on this subject other than....
Mistakes will destroy your financial planning and retirement savings efforts...
I cannot stress it enough - but you simply do not get do overs when it comes to finances...
If you don't focus on saving enough when you are young, you'll struggle to catch up later...
If you invest in the wrong account types, or withdraw money from accounts that incur penalties, you will have to face the consequences...
If you make an unwise investment decision due to lack of experience, you cannot plead with the brokerage company to reverse the transaction.
If I haven't made it clear enough from all the above entreaties that investors work with a professional, fee only, fiduciary financial planner or advisor, let me say it again...
I always recommend working with a fee only fiduciary financial planner or advisor.
Here at Peak Financial Planning we have created quite a few resources that help explain:
a) What a fee only fiduciary financial advisor or financial planner is
b) How to qualify a fee only fiduciary financial advisor
c) How to understand how financial advisors are paid
d) What questions to ask a fee only fiduciary financial advisor
e) And how to research fee only fidcuciary financial advisors that you are speaking to using public databases
You can also watch this free masterclass video where we cover all those subjects in one succinct presentation.
If you'd like to have a conversation about working with Peak Financial Planning to create the right Accumulator plan for you, you can:
Or schedule a free consultation directly to my calendar here
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