The Full Guide to Retirement Planning in Seattle
By Sapling Wealth Management
Are you planning for retirement in Seattle?
You’ve come to the right place.
Retirement planning is important – and complex. Even if you’ve saved a significant amount of wealth, the prospect of navigating retirement can still be intimidating, because there are so many factors and considerations that are all too often obscured in financial jargon.
With that in mind, let’s tackle some of the most common issues and questions that Seattle residents face in retirement planning.
Here are the questions we’ll answer (or provide a framework for answering, at least):
- What is retirement planning?
- What are the different approaches to retirement planning?
- How should you set goals for retirement planning?
- What are the most common retirement savings accounts?
- What’s the difference between a Roth IRA and a traditional IRA?
- How should I use my 401K?
- How much should I put into my retirement accounts?
- How much do I need to save to retire in Seattle?
- When should I take Social Security?
- When should I start withdrawing from retirement accounts?
- How much should I pay for life insurance in Seattle?
- How much should I plan to spend in retirement?
- How can I take the first step in retirement planning in Seattle?
One final disclaimer that will quickly become a recurring refrain as we move through these questions: retirement planning is only possible at a personal level. While broad numbers and local averages are helpful, they can’t speak directly into your own financial situation and the goals you and your family have. So, while we’ll frequently reference baselines when discussing data, take them with a grain of salt.
That said, these are the questions you’ll need to consider as you move into retirement planning in Seattle.
Here we go.
What is retirement planning?
To start, let’s define our term: what exactly is retirement planning? While the general purpose is implied in its name, retirement planning is a broad topic, spanning a broad range of strategies and activities across a variety of life stages.
Let’s narrow it down a bit.
Here’s Investopedia’s definition: “Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. [It] includes identifying sources of income, estimating expenses, implementing a savings program and managing assets.”
Inc. outlines it this way: “Retirement planning describes the financial strategies individuals employ during their working years to ensure that they will be able to meet their goals for financial security upon retirement.”
Taken together, these definitions hit most of the key points. Retirement planning takes place during working years, includes saving, income planning, and expense planning, and is purposed toward the end goal of financial security upon retirement.
Okay – with that in mind, let’s move into what strategies retirement planning will entail.
What are the different approaches to retirement planning?
There are three commonly-recognized approaches to retirement income planning. Each involves a portfolio structure (or perspective) that supports different goals.
Time Segmentation (The Buckets Approach)
This approach assumes that your spending goals will differ over time – for instance, you may spend more in the early stages of retirement on things like travel, and less in the later stages of retirement. Accordingly, your assets are broken up into buckets, each with its own specific goals, time horizon, and portfolio.
The first bucket (generally intended for ages 50-60) has a short time horizon. It will likely only hold money markets, CDs, bonds. The second bucket (ages 60-70) will likely hold a mix of bonds and stocks. Finally, the third bucket will usually consist of mostly stocks (as it’s designed to be long-term in nature).
Total Return (Systematic Withdrawals)
This approach forgoes buckets and consolidates things into one portfolio, with withdrawals based on a percentage (often 4%). Although this approach utilizes a single portfolio, that portfolio is still diversified across a range of assets to minimize risks. All income used, as opposed to specific returns being put toward specific expenses.
Essential / Discretionary
Finally, this approach divides the retirement portfolio into two categories: essential spending and discretionary spending. Essential spending includes things like food, a mortgage, clothing, etc., while discretionary spending may include vacations or gifts. Low-risk assets are put toward essential spending, while high-ceiling assets are grouped toward discretionary spending.
How should you set goals for retirement planning?
First, it’s worth noting: goal setting is one of the most critical pieces of retirement planning. It’s absolutely foundational to any retirement plan, because without objectives there’s nothing to plan toward. Goals give your planning efforts direction.
So, how should you set your goals? The answer is simple but complex – identify what you want.
And do so in detail. Don’t settle for nondescript goals like “maintain a comfortable lifestyle.” Get specific.
For example, do you want to travel internationally twice a year? Do you want to buy a vacation home in five years? Do you want to pay off your current home in three years? Do you want to move closer to your family?
Note your objectives and the costs associated with them. This will give you an idea of what to work toward that’s tailored toward your desires, not some general concept.
What are the most common retirement savings accounts?
Once you’ve taken the time to reflect on your goals, it’s time to begin considering the tactics and strategies that will allow you to reach them. The most common tools are typically retirement savings accounts.
Common retirement savings accounts include:
These are offered by employers via deductions from employee paychecks, where a tax deferment is received for the amounts contributed. Commonly, employers offer a matching amount up to a certain percentage of employee salary – typically between one and eight percent.
These function similarly to 401(k)s, but they’re purposed for nonprofit companies, religious groups, school districts, and government organizations and generally require fewer administrative costs.
These are uncommon, but they’re similar to 401(k)s and are offered by state or local government organizations.
Traditional IRAs are most commonly opened by individuals (so there’s obviously no employer matching). Contributions are made with pre-tax dollars and income is taxed on withdrawal.
Roth IRAs are similar to the Traditional versions, but contributions are made after tax and income on withdrawal is not taxed.
These are opened by small companies (fewer than 100 employees) on behalf of their employees, and the employer can contribute to the account.
How should I use my 401K?
I believe that 401(k)s can be foundational to many retirement plans – so let’s take a brief look at how you can use a 401(k) when the time comes.
First of all, it’s far better if you use it when the time comes: any distribution you take from your account before reaching age 59.5 is subject to an additional 10% tax (although this can be waived if you’re permanently disabled or unable to work).
Once you’ve reached retirement age, there are a variety of potential options for using the funds in your 401(k). You may, for instance, opt to take regularly-recurring payments on a monthly basis, essentially using the account as a replacement for a paycheck. Many plans allow this, although some don’t – in which case you’d likely want to consider rolling your plan over to another account like an IRA.
Administrative costs are another consideration. Put simply, if you’re paying high administrative fees (or only have access to a limited number of investment choices within a plan), you may also want to switch over to an IRA.
How much should you withdraw?
So, how much should you withdraw from your account when the time comes? In general, the standard rule has been to withdraw 4% from savings account in the first year with adjustments for inflation in the subsequent years – but the number that best works for you will depend upon a variety of factors, which notably include your income and expenses.
How much should I put into my retirement accounts?
Okay – we’ve covered how accounts should be used. Now, we’ve reached another important question that’s highly personal and hard to answer broadly: how much should you be putting in?
In all honesty, areas like these are where the guidance of a financial advisor can be helpful. Before you begin planning, remember that you’ll need detailed goals to have an idea of what it will take financially to attain them; specific savings numbers will develop from there. But there are general guidelines that can provide reference points.
First, you should certainly be maxing out employer matching on your 401(k) if you can afford to do so. Next, you should likely max out your IRAs, as well. From there, you may want to build out additional assets – whether that’s real estate or other investments – based on your goals.
What percentage of your income should you be saving?
Keep in mind that your number will be personal, but here are a few guidelines. Many people consider 10% a baseline, while 25% is commonly accepted as a “healthy” amount. Once again, this will depend on your context and your goals. For some people, saving 10% may be a hard-won stretch; for others, 50% may not be incredibly difficult.
The obvious and general rule is that the more you save, the better.
How much do I need to save to retire in Seattle?
Again, we’ll revert to baseline numbers to provide reference points.
Based on data derived from several public sites (including home listings on Zillow), this post expects the monthly cost of living for Seattle homeowners to be $4,736.37, then extrapolates that if you’re following the 4% rule, you’d need to save $1,420,911 to cover expenses throughout a 25-year retirement.
Take this result with a grain of salt, because it doesn’t factor in things like inflation or changes to cost of living over time – not to mention any unique personal considerations you almost certainly have.
That said, the number is useful as a starting point as you think about planning for your retirement in Seattle.
When should I start withdrawing from retirement accounts?
The obvious answer is when you retire!
But this comes with more than a few caveats. First, Traditional IRAs typically incur a 10% early withdrawal penalty if you withdraw money before age 59.5 – although there are several penalty-free exceptions, such as using withdrawals to cover higher education costs or to pay for a first-time home. 401(k)s also function under a 10% early-withdrawal penalty. Roth IRAs, though, do not – you can withdraw your principal contributions to a Roth IRA at any time, for any reason, although the same isn’t true of your earnings.
Secondly, you will actually be required to start minimum distributions in a Traditional IRA when you turn 70.5. This is true for 401(k)s as well (with some caveats, such as if you’re still employed at the company that operates your account).
You’ll also want to balance your withdrawals against your retirement goals, as we’ve discussed previously.
How much should I pay for life insurance in Seattle?
Life insurance can be vital for surviving spouses and families, but it can sometimes feel difficult to justify as an expense. How much you pay for life insurance in Seattle will, like everything else, come down to your personal preferences and goals.
Here are the factors that’ll influence cost:
- Length of term. Obviously, the longer the policy term, the more expensive the plan (or you may opt away from terms at all and go for a Whole Life policy).
- Your age. As you age, purchasing life insurance becomes more expensive.
- Your health. Are you a smoker? Are you healthy?
While the exact price points will vary on these factors, ValuePenguin puts the average monthly cost of life insurance for a 65-year-old non-smoker at $443.17 and the average monthly cost for a smoker of the same age at $1,376.08. These numbers are helpful as a baseline.
How much should I plan to spend in retirement?
It’s a tired refrain at this point, but we’ll wear it out one final time: the amount you should plan to spend in retirement in Seattle will vary depending upon your context and goals.
But, again, let’s look at a few numbers to approximate a baseline.
One common rule of thumb is that, once retired, you’ll need to replace from 70% to 90% of your income to maintain your standard of living. So, if your household income is $200,000, you’ll likely be spending at least $140,000 annually to maintain your current state.
The good news inherent in that is that your expenses will probably decrease in retirement – at least a little bit. Data from the Bureau of Labor Statistics shows that older households (those run by someone 65 or older) spend about $3,800 a month, or $1,000 less per month than the average US household.
So, take those numbers for what they’re worth – but take a harder look at your goals and personal context than at generalized data.
What Seattle areas do you serve with retirement planning services?
At Sapling Wealth, I offer financial planning services throughout the Seattle region, including within the following areas:
Downtown Commercial Core
North Rainier / Mount Baker
South Lake Union
West Seattle Junction
Westwood Village / Roxhill-Highland Park
23rd & Union/Jackson
And more. In other words, if you’re within the Seattle region and you’re looking for a retirement planner, let’s talk.
How can I take the first step
in retirement planning in Seattle?
I hope that the information above has been helpful as you’ve considered what retirement planning in Seattle might look like for you.
If you’re looking for additional guidance, I’m here to help.
At Sapling Wealth Management, I craft financial solutions
that work for small businesses and individuals and deliver them with honesty and integrity.
My ideal client has successfully accumulated assets and wants to manage them wisely,
and so values personal investment advice and service and wants to live better by making more thoughtful financial decisions.
Want to learn more about retirement planning?
All it takes is a quick call. Take the first steps toward a solution that meets your goals by getting in touch today.