Retirement Planning

Retirement planning is a process that seeks to achieve a comfortable life after you stop working. Your retirement plan needs to take into account your estimated future expenses, liabilities, and life expectancy.

It begins with considering your ideal post-retirement lifestyle, and setting financial goals and making investments to secure that lifestyle. To do so, you must estimate your future expenses and then save and invest strategically whilst managing risks.

The process can begin any time during your working years, but the earlier, the better. This is because when you reach retirement age, you go from accumulating assets to what planners call the distribution phase. This is when you’re no longer paying into your retirement accounts but collecting the rewards of decades of savings.

Here’s a breakdown of how retirement planning works:

1. Set Retirement Goals

• Determine the ideal age at which you want to retire (for calculation purposes).
• Estimate your future expenses (housing, healthcare, travel, etc.).
• Consider your ideal retirement lifestyle.

2. Calculate How Much You Need

• Estimate your retirement duration (typically 20-30 years).
• Use the 4% rule (you can withdraw 4% annually from your retirement savings).
• Account for inflation and factor in a buffer for unexpected costs.

3. Build Retirement Savings

A key part of a retirement plan is taking advantage of a government-approved investment vehicle such as an individual retirement account (IRA) or a 401(k) account, which offers tax advantages to retirement savers.

• Employer-Sponsored Plans: Plans such as a 401(k) or 403(b). If an employer match is available, contribute enough to secure it.
• Pension Plans: If your job offers one, understand the benefits and contribute to it if the benefits are worthwhile.
• Individual Retirement Accounts (IRAs): Consider a Traditional or Roth IRA for tax advantages.

4. Invest Strategically

• Diversify your investments to minimize risk (stocks, bonds, real estate, etc.).
• Adjust your risk level based on your age (many people are more aggressive when younger, and safer as they approach retirement).
• Regularly review and rebalance your portfolio.

5. Minimize Taxes

• Use tax-advantaged accounts such as IRAs and 401(k)s.
• Consider tax-efficient withdrawal strategies in retirement – withdraw from taxable accounts first, then tax-deferred, then tax-free.
• Be aware of required minimum distributions (RMDs).

6. Plan for Healthcare & Insurance

Medical expenses tend to increase with age. You should consider government-sponsored Medicare coverage that is available at a modest cost; many people choose to supplement it with a Medicare Advantage or Medigap policy.

• Consider long-term care insurance.
• Enroll in Medicare and understand coverage options.
• Maintain a health savings account (HSA) if applicable.

Don’t neglect life insurance and disability insurance to ensure that your family can survive financially should something happen to you.

7. Create a Withdrawal Strategy

• Withdraw from taxable accounts first, then tax-deferred accounts, then tax-free accounts.
• Use annuities or dividend income to maintain stability.
• Remember your goal is to not outlive your savings.

8. Estate Planning

• Create a will and power of attorney.
• Plan for passing wealth to your heirs with minimal tax impact.

When you start out with creating a retirement plan, you may find it hard to come up with concrete figures, but a reasonable estimate will be helpful, because the idea is to revisit your plan on a regular basis to fine-tune it over time.

Without a solid retirement plan, you might struggle to cover your basic needs, medical expenses, and lifestyle costs after you stop working. Retirement planning ensures financial security and stability when you stop working.

Here are the 9 key reasons why retirement planning matters:

1. Financial Independence & Freedom

• A well-planned retirement means you get to control your financial future and enjoy the kind of retirement lifestyle you dream of and work so hard to achieve.
• With a retirement plan, you won’t have to rely on family, Social Security, or government benefits to meet your needs.

2. Rising Cost of Living & Inflation

• The cost of goods, services, healthcare, and housing are increasing over time.
• If you don’t account for inflation, your savings may lose purchasing power over the years ahead.

3. Longer Life Expectancy

People are living longer, and advances in medical science mean that they are able to live even in ill health. These factors have extended life expectancy and this may mean many more years to fund after you retire.

• Your retirement funds need to last 20-30+ years.
• Without proper savings, you could run out of money in old age and become a burden on your loved ones.

• Don’t neglect life insurance and disability insurance to ensure that your family can survive financially should something happen to you.

4. Rising Medical & Healthcare Costs

• As you age, your healthcare expenses will rise, and may include long-term care.
• Medicare may not cover everything, so additional savings or insurance is often necessary.

5. Maintaining Your Desired Lifestyle

• Retirement should be enjoyable and allow for travel, hobbies, and relaxation.
• A firm financial foundation lets you live comfortably without stress.

6. Avoiding Becoming a Burden on Your Family

• Without savings, you may need financial help from family members.
• Planning ahead helps ensure you remain self-sufficient and avoid reliance on your family.

7. Taking Advantage of Tax Benefits

• Investing in Retirement accounts like 401(k)s and IRAs offer tax advantages that help your savings grow.
• Proper tax planning and advice can reduce the amount you owe when withdrawing funds.

8. Protection Against Economic Uncertainty

• As the economy fluctuates, Social Security alone will not be enough.
• A diversified retirement plan helps provide stability even during market downturns.

9. Confidence in the Future

• Knowing you have a financial plan in place reduces stress about the future.
• It allows you to focus on enjoying life rather than worrying about money.

If you – like most people – believe that starting retirement planning can feel overwhelming, you’re not alone. But breaking it into 8 simple steps makes it manageable.

Here’s where to begin:

1. Set Your Retirement Goals

• At what age do you want to retire (for calculation purposes)?
• What kind of lifestyle do you want (travel, hobbies, part-time work, etc.)?
• Where do you plan to live (stay in your current home, sell your home and downsize, move to another city or country)?

2. Estimate Your Retirement Expenses

• List your current expenses: rent/mortgage, food, travel, healthcare, entertainment.
• List your future expenses: factor in inflation, medical costs, travel, mortgage, home repairs, etc…
• As a rule of thumb, you should plan to replace 70-80% of your pre-retirement income to live on every year.

3. Assess Your Current Financial Situation

• Calculate your net worth (assets – liabilities / debts).
• Review your savings and investments (401(k), IRA, pension, stocks and real estate).
• Estimate your expected income in retirement (Social Security, rental income, pension, dividends, withdrawals, side business revenue).

4. Start Saving & Investing Strategically

• Make sure you are taking advantage of any employer-sponsored plans: If available, contribute to a 401(k) or 403(b) (always aim to contribute enough to get your employer match).
• IRAs: Open a Roth IRA (for future tax-free withdrawals) or a Traditional IRA (for tax-deferred growth).
• Invest strategically: Diversify in stocks, bonds, and other assets based on your age and risk tolerance. Adjust your risk level depending on your age (you can generally be more aggressive when younger, and safer as you approach retirement).

5. Minimize Debt & Expenses

• Pay off high-interest debts (credit cards, loans) and stop buying on credit.
• Reduce unnecessary expenses and save consistently for retirement.
• Consider selling your home, downsizing or refinancing if needed.

6. Plan for Healthcare Costs

• Do your research – learn about Medicare & supplemental insurance.
• Consider a Health Savings Account (HSA) if you qualify.
• Plan for long-term care needs (consider insurance, savings, or Medicaid options).

7. Create a Withdrawal Strategy

• Know when to take Social Security (waiting longer increases pay-outs).
• Plan how to withdraw from 401(k), IRA, and taxable accounts tax-efficiently. Withdraw from taxable accounts first, then tax-deferred accounts, then tax-free accounts.
• Follow the 4% rule (withdraw 4% per year for a steady income).

8. Review & Adjust Regularly

• Check progress every year and adjust your contributions if needed.
• Rebalance your investment portfolio as you get closer to retirement. The idea is to revisit your plan on a regular basis to fine-tune it over time.
• Stay informed about tax laws, inflation, markets and investment trends.

It stands to reason that the amount you need to retire comfortably is highly personalized. It is your “Magic Number” and nobody else’s. Opinions around this question vary, but there are rules of thumb that can give you an idea of how much to save.

• Many people say that you need around $1 million to retire comfortably in today’s terms. But life is getting longer, and inflation is driving costs up.
• Many financial professionals use the 80% rule. The rule states that you need 80% of your current income to live comfortably after retiring. So if you make $100,000 per year, you would need savings that produce $80,000 per year for roughly 20 years of retirement, or (in other words) a total of $1.6 million.
• Other financial commentators say most of us aren’t saving near enough to meet those numbers and will need to adjust our lifestyles accordingly in retirement to make our retirement provision last longer than we do.

Estimating Your Expenses

Your post-retirement expenses largely determine your “magic number.”

For this reason, it’s a great idea to create a retirement budget, calculating your estimated costs or living expenses across the many aspects of your desired lifestyle: housing, health insurance, food, clothing, hobbies, travel, entertainment, transportation, etc.

While it may be hard to come up with concrete figures, a reasonable estimate will be helpful as a starting point for your retirement planning. This figure should be revisited annually as your life unfolds and your needs change.

There are several key steps that apply to almost everyone during their retirement planning regardless of where they are in life.

These are some of the most common steps:

1. Come up with a plan. This plan should include deciding when you want to start saving (the earlier the better) when you want to retire, and how much you’d like to save for your ultimate goal – your desired retirement lifestyle.
2. Decide how much you’ll be able to set aside each month (the more, the better). Use automatic deductions wherever possible to take away the guesswork, to keep on track, and to take away the temptation to stop or forget to deposit money into your retirement accounts.
3. Choose the right accounts for you. You should have access to one or more of the following plans depending on how you earn a living. Each has its own rules and regulations.
   • Invest in a 401(k) or similar account if your employer offers that option. If the company offers an employer match and you don’t sign up, you’re giving away free money. Either way, with a 401(k) you’re getting a good deal tax-wise.
   • If you can’t contribute to a 401(k) then open a Roth IRA (for future tax-free withdrawals) or a Traditional IRA (for tax-deferred growth).
4. Check on your investments from time to time and make adjustments. This is especially important after a big event, like marriage or a baby.

Note: Tax-advantaged retirement savings plans (like those mentioned above) have become the keystone of long-term savings for Americans.