The retirement equation: What’s within, somewhat within and outside of your control
- Important factors like personal spending, your portfolio’s asset allocation and when you choose to start taking Social Security (eligibility begins at age 62) are all within your control.
- While market returns, inflation rates and your retirement age aren’t entirely in your control, you can devise an investment and/or savings strategy to hedge against any potential fallout.
- Some things, like tax law and market volatility, are out of your hands.
- Focusing on what you can control, and preparing as best you can for what you can’t, are among the keys to success.
By Suzanne Walker
Planning for retirement can feel overwhelming. Add in the fact that much of it feels out of your control, and the task can seem even more daunting. Things like market volatility, inflation and rising health care costs are just the tip of the iceberg when it comes to the unknowns.
The good news is that there’s probably a lot more within your control than you may realize. By divvying up your retirement planning into three categories – what’s within your control, what’s somewhat within your control and what’s out of your control – you can take a more confident approach to retirement planning.
What’s within your control
Spending habits
Your current spending habits directly affect how much you can save. In retirement, your spending affects how long your money lasts. Building a realistic budget and regularly reviewing it can help ensure that you’re living within your means now and preparing adequately for the future. Living within your means and avoiding debt accumulation can give you a great head start!
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How much you save
A significant contributor to retirement success is how much you save. A consistent savings habit, especially starting early, allows compounding to work in your favor. Aim to save at least 15% of your pre-tax income. If you participate in an employer-sponsored retirement savings plan that allows for employee deferrals, consider contributing enough to receive the full contribution match offered by your employer (if there is one) to start, and progressively increase your contributions over time.
Opening an individual retirement account (IRA)
The types of tax-deferred retirement accounts you select matter, and the following IRAs are two common options to consider for your personal retirement savings strategy. Both accounts can be great for those without access to an employer-sponsored plan or as a supplemental account, but there are some key differences between the two that are worth noting:
Traditional IRAs
Traditional IRAs offer tax-deferred growth, and contributions may be tax-deductible, though the deduction may be limited if you or your spouse contribute to a retirement plan at work and your income exceeds certain levels. One possible drawback to consider is that traditional IRA withdrawals are subject to taxes.
Roth IRAs
Roth IRAs provide tax-free withdrawals for “qualified distributions” (as defined by the Internal Revenue Code). While withdrawals from Roth IRAs can be tax exempt, contributions are not tax-deductible, and you are eligible to contribute only if your adjusted gross income (AGI) does not exceed a certain amount.
Opening an individual investment account
Non-tax-advantaged individual brokerage accounts are another investment vehicle that can be used in conjunction with tax-advantaged retirement accounts as part of your personal retirement savings strategy.
Non-retirement brokerage accounts
Pros: No contribution limits and full flexibility with investment choices, enables you to invest however aligns best with your personal strategy and supports your financial goals.
Cons: No tax advantages – capital gains, dividends and interest may be taxed annually.
Using a mix of tax-advantaged retirement accounts and non-tax-advantaged brokerage accounts can help you manage taxes and access funds strategically across different life stages.
Asset allocation and rebalancing
Your asset allocation, or how you divide your investments among stocks, bonds and other asset classes, is fully within your control. Ideally, it should align with your age, risk tolerance and projected retirement timeline.
Rebalancing ensures your portfolio doesn’t drift too far from your target allocation due to market fluctuations. For example, if a booming stock market increases your stock exposure beyond your comfort zone, rebalancing helps lock in gains and reduces risk. This becomes increasingly important as retirement nears, because you’ll want to protect your assets from downturns when you start making withdrawals.
While you can't control how the market performs, you can control how you respond. Sticking to a well-diversified, low-cost portfolio and resisting emotional reactions during downturns can help you stay on track. Regularly rebalancing is part of this discipline.
What’s somewhat within your control
Social Security timing
You can begin claiming Social Security at age 62, but waiting until full retirement age (66–67, depending on when you were born) or even age 70 can significantly increase your monthly benefits. For instance, someone entitled to $1,000/month at 62 could receive over $1,300 at full retirement age – or around $1,750 by waiting until 70, based on Social Security benefit formulas.
However, claiming earlier may make sense if:
- You have health concerns or a shorter life expectancy.
- You need the income now due to job loss or other financial strains.
- You’re coordinating benefits with a spouse.
Inflation planning
Inflation erodes purchasing power over time, which can be particularly concerning considering most retirees live on a fixed income. For example, a $50,000 annual expense today could cost over $90,000 in 25 years at just 2.5% inflation. This means your savings need to not only last but also grow enough to keep pace with rising costs. If your retirement portfolio is too conservative – heavily weighted in cash or low-yield investments – it may fail to outpace inflation, effectively shrinking the real value of your nest egg. You can combat this by:
- Investing in equities and inflation-protected securities (like TIPS), which historically outpace inflation
- Avoiding too much cash sitting idle – even savings accounts with high interest rates often lag behind inflation
- Planning for higher costs in areas like housing, groceries and health care
Health care and long-term care planning
Health care costs are a notable retirement expense – potentially hundreds of thousands of dollars over the course of retirement. While you can’t prevent medical inflation, you can plan for it:
- Health savings accounts (HSAs): If you’re eligible, HSAs offer triple tax benefits and can be a great tool to save for future medical costs.
- Long-term care insurance: This can protect your retirement assets in case you require extended care in a nursing home or at home.
- Medicare planning: Understanding when to enroll and what it covers can help you avoid penalties and unexpected expenses.
Retirement age
While some people dream of early retirement, others may need or want to work longer. However, it’s important to note that retirement age isn’t always a personal choice – health issues, layoffs or caregiving responsibilities can all derail a planned-upon retirement timeline.
That said, delaying retirement even by a few years can have a huge impact. It gives your savings more time to grow, shortens the withdrawal period and can increase your Social Security benefits. If you have the flexibility and it makes sense for your situation, consider working longer or easing into retirement with part-time work.
What’s out of your control
Employer-sponsored-plans
While you can’t control the retirement plan option(s) provided by your employer, understanding the advantages and disadvantages of common employer-sponsored retirement plan types can help you determine how and if to incorporate an employer-sponsored plan into your personal retirement savings strategy.
401(k)s
Pros: These accounts allow higher annual contributions than IRAs and may include a valuable employer match. Maximizing a pre-tax payroll deduction decreases taxable income and can enhance long term tax deferred savings and growth.
Cons: 401(k)s may have potentially higher administrative fees than other retirement savings plans. Most plans require an event for penalty-free access to the plan’s assets, such as retirement, separation from the company or termination of the plan by the employer.
403(b)s
Pros: 403(b) plans are typically offered by employers like public schools and certain charities. Employers may make contributions to employees’ accounts.
Cons: These accounts may have fewer low-cost investment choices, and like 401(k)s, may have high administrative costs.
Changing tax laws
Tax regulations change often, affecting everything from contribution limits to required minimum distributions (RMDs). While you can’t control these shifts, you can hedge by:
- Diversifying across taxable, tax-deferred and tax-exempt accounts
- Staying informed and adjusting your strategy with a financial and tax advisor if laws change
- Considering Roth conversions during low-income years to manage future tax liability
Social Security uncertainty
Many of those planning for retirement worry about the future of Social Security. Rather than rely on it as your main source of income, you may want to treat it as a supplement.
For example, if you estimate needing $60,000 per year in retirement, and Social Security will only provide $20,000, you’ll need to bridge that $40,000 gap with savings, pensions, or other retirement income sources like a 401(k) or Roth IRA. Planning this way ensures you’re not overly reliant on a benefit that may be reduced or restructured in the future.
Interest rate fluctuations
Interest rates, largely set by the Federal Reserve, affect everything from bond yields to mortgage and annuity rates, making them an important factor in retirement planning. While you can’t predict rate changes, you can plan for them. Avoid locking too much into long-term fixed-income products when rates are low, as rising rates can reduce their value. Instead, consider strategies like bond or CD laddering to reinvest gradually at better rates over time. Choosing options like shorter-term bonds or inflation-protected investments can help you stay more flexible and reduce the risk of losing money if rates go up.
The bottom line
The road to retirement is filled with many variables and unknowns, but some of the most important aspects are well within your control. Focusing on those things, and planning for the rest as best you can, can be a helpful way to prepare for your retirement. Saving more, investing wisely, and sticking to your budget and investment plan are the hallmark of a successful retirement.
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