Retirement Planning is an ongoing process that helps you ensure you have enough income to last throughout your post-work years. It includes setting a savings goal, finding potential sources of income, and monitoring your progress toward that goal.
For people in early middle age, it can also include juggling multiple retirement accounts and prioritizing saving as you near retirement.
The age at which you retire will significantly impact your retirement planning. It will determine how much of your retirement expenses are covered by guaranteed sources like Social Security and pensions and how much will be from non-guaranteed sources like investment accounts. Then, there are tax considerations. Typically, savings and investment vehicles are placed into one of three categories: fully taxable, tax-deferred, or tax-free. Your advisor can help you analyze your potential income from each and plan accordingly.
For example, if you start Social Security at the earliest eligible age of 62, your monthly benefit will be reduced by about 75%. The Social Security website allows you to estimate your future benefits by entering your birth date and a number of variables.
Delaying your retirement past the normal age of 66 or 67 can help you get a higher monthly check. But this can be a risky move. Each year you delay, your accumulated retirement fund will have to stretch further to cover your expected lifespan.
It is also important to consider your healthcare needs and how they will be paid for in retirement. These expenses can be a large part of your overall spending and may require substantial adjustments in your planned lifestyle. Creating an emergency savings account to deal with financial setbacks is also wise. Typically, these accounts will hold your annual salary for three to six months. HavingHaving this money available helps keep your retirement plan on track if you encounter a hiccup. This can include a job loss, a market downturn, or a major health issue.
Current Expenses
Current expenses are those that keep a business operating and producing products or services. Examples include rent and electricity bills. These are contrasted with capital expenses, such as the purchase of office furniture or a franchise car, that create lasting assets.
One of the first things to consider in preparing for retirement is your estimated current expenses. You can use an online calculator to help with this. You can also ask a trusted friend or family member to provide an estimate for you. Be sure to account for inflation as well, since prices have a tendency to rise over time.
Other day-to-day costs to factor in are those related to housing, food, health care and transportation. You can estimate these costs based on your budget from your current job, although you may want to adjust the estimates if you plan to move to a different part of the country or downsize your home during retirement. Also, consider the impact of taxes, which are another cost to think about. Depending on how your savings and investments are structured, they may be fully taxable, tax-deferred or tax-free.
It’s also a good idea to plan for unexpected events. For example, a major health issue or a financial crisis can easily derail your retirement plan. That’s why it’s important to set aside an emergency fund.
It’s also a good idea to determine what you need from guaranteed sources like Social Security, annuities and pensions. Then figure out how much you will need to save to reach your goal. It’s best to save regularly and consistently over a long period of time. This will give you a better chance of reaching your target retirement income.
Future Expenses
When you’re planning for retirement, it is also important to consider future expenses. As the working part of your life draws to a close, you will likely see increases in some spending areas, such as food, healthcare and housing costs. You may even have additional expenses, such as a new car or travel plans. These costs need to be accounted for, especially considering the impact of inflation.
It’s helpful to keep these expenses in a separate savings account from the funds you have set aside for normal living and emergency purposes. This will help you be more deliberate as you save for future expenses and will prevent these funds from getting mixed in with the money you have set aside for retirement.
Once you have a good idea of your current expenses, you can start to estimate what your future ones might look like. Begin by reviewing your budget, taking a closer look at receipts and credit card statements. Then calculate how much you expect your annual expenses to be at retirement, assuming that you will live for the rest of your life (although this is not necessarily true).
Once you’ve done this, subtract your planned annual retirement income from the amount you think you will need to save in order to maintain your desired lifestyle. This will give you an idea of how much you need to save from non-portfolio sources, such as Social Security, pensions and the proceeds of a sale of your home. This will also help you determine how much of your savings you can allocate to more growth-oriented investments, which is usually desirable at this stage in the investment cycle.
Investment Approach
Whether you’re nearing retirement or have already retired, the goal is to have a sustainable plan. This will likely involve multiple income sources, including Social Security, pension funds and investment withdrawals. But the biggest challenge is generating enough income to cover current expenses and future inflation, all while not depleting your savings.
To help with this, many advisors have adopted a method known as the “bucket” approach. This strategy divides your savings into separate pools, or buckets, to fund specific goals during retirement. The number of buckets and what they represent may vary from advisor to advisor, but the concept is simple: It helps you compartmentalize your investments so that you can focus on meeting your short-term needs without worrying about how the markets are doing.
Another way to approach retirement planning is to manage your portfolio for a total return, which combines the income from interest, dividends and capital gains with the growth in your investment principal over time. This method typically focuses on a diverse mix of stocks and bonds that’s adjusted for your risk tolerance.
Of course, your strategy will evolve over the years as you change jobs, grow a family, endure stock market downturns and get closer to your retirement date. For example, you may shift from an aggressive allocation of stocks to a more conservative one as you get older, but this is just a natural part of the process. The important thing is to have a sustainable plan that’s designed for your specific needs and goals. This will ensure you’re not only prepared for the unexpected but also have enough money to meet your expectations in a long and happy retirement.
Time Away From Retirement
If you’re a new public servant or nearing retirement, it is never too late to develop a sound financial plan. This booklet provides a simple approach to help you figure out approximately how much money you may need in retirement, as well as worksheets to help you track your progress toward that goal.
In the early middle age, many people’s incomes increase as they move into their peak earning years, but at the same time, financial obligations may rise with home mortgages, life insurance policies and multiple cars payments, to name just a few. It is essential that these individuals consider how their expenses will change in retirement, and a robust digital planning tool or financial advisor can help.
Then, at the end of their working lives, retirees can focus on what really matters. This often means spending time with family and friends. But it can also mean moving from a high-tax area to a lower-cost one, or downsizing from a large house to an apartment. And it can mean focusing on health-related expenses that will likely be higher in retirement.
In addition, many retirees find that the transition from saver to spender is more difficult than they expected. Having been diligent savers for decades, they are not used to spending their own funds and it can take some discipline to get a hang of it. The good news is that many retirees can find ways to control their costs. By making smart choices and being consistent, they can reduce their required minimum distributions, thereby increasing their remaining investment portfolio for a longer retirement. They can also make sure that any money they do withdraw from their investments is put back to work by reinvesting it.