The Basics of Retirement Planning

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When planning your retirement, it is important to remember that the steps you take now in preparing for your financial future will most likely determine most of your retirement decisions. That’s why you shouldn’t delay asking yourself the questions: When will I be financially able to retire? What kind of future lifestyle do my family and I want to live during retirement? What will I choose to leave as a legacy to those I leave behind?

Don’t Fail to Plan for Retirement

When you fail to plan, you are planning to fail. Ok, so maybe Ben Frankilin’s statement is a bit overused, but it’s probably because it’s a simple way of stating truth. No one really plans to fail, and we certainly don’t plan to fail in our retirement years. Who doesn’t want to determine their own destiny (at least their financial destiny) and decide when they can stop work, and what they would like to do during retirement? Your journey in preparing for your financial future, always coincides with the path of self-determination. When you create and work on a retirement plan that can meet your needs and the needs of our family, you have a greater chance of taking care of your financial, physical, and emotional health. Making a plan now, puts you in the driver’s seat of your future to make your own decisions of how you choose to live and how you want to give.

At the very least, ongoing retirement planning opens your eyes to the financial demands of retirement so that you are not caught unprepared or with too little time remaining to change your financial course. It can empower you with the choice to allocate your resources now to meet the demands of an unforeseen future.

Evaluate Your Retirement Income Needs

How much money should you have at retirement? Financial advisors and government agencies have found that during retirement the average American needs around 80 percent of their pre-retirement income in order to maintain their previous standard of living. Almost everyone needs less money during retirement than they needed to live before leaving the workforce, however, much of what you need during retirement will be a function of your personal spending habits. Consider the following factors in estimating your retirement income needs:

  • You may be supporting children now who will be self-sufficient by the time you retire.
  • Your work-related expenses would be dramatically reduced, if not eliminated, once you retire (commuting costs, daily meal expenses, licensing fees, etc.).
  • Chances are, your mortgage will be paid off either by the time you retire, or within a matter of a few years after retirement, reducing housing expenses.
  • Once retired, you no longer have to contribute part of your monthly budget to “retirement savings.”
  • Many retirees find themselves in a lower income tax bracket. This is due, in part, to having their main sources of income change from fully taxable earned income to tax advantaged income sources.

Look at All Sources of Retirement Income

Once you have estimated your targeted retirement income, you are ready to evaluate what sources of income will be available to you to meet your monthly needs. Generally speaking, your sources of retirement income fall into these three categories:

Government Sources

The government created what is supposed to be a “safety net” for all retirees called Social Security. The intent of social security is to have it available to everyone at retirement, but the amount received is based on the amount you earned, and consequently contributed to social security through your working years. While the issue of having money intact for the payout of social security benefits is a volatile one, the Social Security website states there is enough money saved to pay benefits at the expected amounts until 2034. However, at that point, disbursements are projected to become depleted with benefits at 79% of what they were supposed to be. While this benefit can be considered a supplement for retirement income, it is important to have other revenue streams available. To help you determine your government benefits, use our calculator as a Social Security retirement estimator.

Company Sponsored Plans

Many employers offer company sponsored retirement plans. These plans come in many forms but generally can be broken into two categories. Defined Benefit Plans are normally funded entirely by the employer and guarantee a retirement benefit based on a combination of years of employment and employment earnings. A Defined Contribution Plan may be funded by the employer, employee or a combination of the two. The employee owns an account balance (subject to vesting) made up of contributions and earnings. At retirement, the employee decides how they will withdraw the balance they have accumulated. Examples of this plan include: 401(k) plans, profit-sharing plans, and employee stock ownership plans. Using our 401 k calculator can show you how quickly your retirement savings will grow by saving a small percentage of your salary each month.

Personal Savings

Often the most important and overlooked, source of retirement income is one’s own personal savings. Savings directed to IRA accounts, directly held assets, home equity, etc., can largely determine how financially secure your retirement years will be. That is why gaining the most knowledge you can early regarding investments, your mortgage and other assets can help you to make decisions with a future benefit in mind.

Start Now

While financial planning for retirement can feel overwhelming, the sooner you start the more time you will have to improve your retirement outlook. While your needs and desires will determine how much retirement income is enough, starting early will buy you the greatest value of compound interest – which is a young investor’s greatest friend. If you are wondering, “Are my current retirement savings sufficient?” spend some time crunching the numbers with our calculator.  If you feel a little late to the retirement planning game, don’t despair; contact an advisor to determine the best strategic short term investing plan for your situation. A sound financial plan and ongoing professional advice can help you obtain your retirement objectives.