Preparing for Retirement

26.08.2020 |

Episode #7 of the course Personal financial literacy: Take control of your future by Riley Burger


Welcome back!

Retirement—the golden years we all look forward to. While it’s easy to think of retirement as something to think about later, only when you’re in the consolidating stage of wealth building, starting early can only help you in the long run.

Below are some steps you can take at each stage of wealth building to help you prepare for a prosperous retirement. Then, I’ll walk us through the two most used retirement account types: 401(k)s and Roth IRAs.


Wealth-Building Stages and Retirement Planning

Stability building:

1. Once you’ve funded your emergency fund, start building healthy saving habits. One trick, if your employer offers the ability to split the direct deposit into multiple accounts, is to deposit most of your paycheck in your checking account, and have the rest automatically routed to your savings and retirement accounts.

2. When starting a new job, ask about the benefits. If your employer offers 401k plans, set yours up right away, and choose a set amount of your paycheck to contribute. If your employer offers contribution matching, even better! This means that whatever you put into your 401k, your employer will match it. That is free money for retirement.

3. If you don’t have an employer that offers 401k plans, consider getting a Roth IRA. Details in the next section!

Wealth building:

1. Once you have both of the stability building steps taken care of, you can focus on increasing contributions to your retirement accounts. Thanks to compounding returns, the earlier you invest in these accounts, the better.

2. Think about speaking to a financial advisor, even if you don’t want a long term financial advisor, a few initial meetings can be beneficial. A financial advisor helps layout your financial goals and the steps you should take to accomplish them.

3. If you’d rather do it the DIY way, serve as your own financial advisor by making a document with your financial goals:

a. What age do you want to retire at? How much money will you be comfortable retiring with?

b. A very high-level technique is to subtract the age you want to retire from 99 (many financial advisors base financial projections on a lifetime of 99 years), and multiply your current annual expenses by that many years. If you expect a current health issue to worsen, or plan on making large purchases (a retirement house, more vacations, etc.), add those expenses in. Your total is the amount you should aim to have saved by retirement.

c. If your estimate looks unattainable, this is a great time to work on cutting expenses and/or increasing savings.

4. Putting together an investment portfolio, while less retirement-specific, will help supplement your wealth. More on this in the next lesson!


1. At this point, you should be relatively comfortable with the amount you have saved. This is not age-specific, but rather goal-specific; everyone reaches this stage at their own pace! To find out if you’ve saved enough for your expected retirement lifestyle, use steps two and three of the wealth-building stages.

2. You may be looking at large purchases, moving homes, and even giving back in the form of charitable giving or writing a will. For these steps, a financial advisor can be a great consultant. If you’d rather do it yourself, estimate the cost of these endeavors, and make sure your savings can cover them without negatively impacting your future quality of life.


Financial instruments for retirement: 401k vs Roth IRA

A 401k can only be acquired through an employer, and contributions can be matched if they offer it. You can divert part of your paycheck directly into a 401k, so contributions are pre-tax, and are only taxed when you withdraw from the account later in life. Contributions are also tax-deductible, meaning you can decrease what you owe to the IRS by making contributions to this account.

If you withdraw money from a 401k before you’re 59 ½ years old, you’re subject to early withdrawal fees. If you don’t start withdrawing from the account before you are 72, Required Minimum Distributions (RMDs) begin at age 72 and are taxed as ordinary income. Keep in mind that the exact ages for these steps can change every year as tax laws change.

401ks often have limited investment strategy options, and fees on these accounts are usually higher than for Roth IRAs. However, contribution limits are much higher on 401k accounts.

A Roth IRA is set up directly with an investment firm, not through an employer. Contributions are from post-tax income and are not taxed again when you withdraw from the account. There is not a penalty to withdraw your contributions from a Roth IRA, but any earnings on the account can only be withdrawn without penalty after age 59 and a half.

Roth IRAs are self-directed, with more investment options than 401k accounts. Roth IRAs also generally have lower fees. However, there is no opportunity for an employer match, and contributions are capped far lower. In addition, contributions for high-income earners can be reduced or eliminated.

Now that our path to retirement has been formed, we’ll move on to investing: asset types, building a portfolio, and making money!

Until tomorrow,



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