Financial Planning for Retirement

A solid retirement plan is a crucial aspect of your financial preparedness, allowing you to ensure your future comfort and security. Given the aging population and the unforeseen character of the economic environment in the near future, having a financial plan is more important than ever. Regardless of where you are on your career path—whether you are just getting started or quickly approaching retirement—understanding some key concepts can help you work toward your long-term objectives and lead the life you want.

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

Why is Financial Planning for Retirement Important?

How can you maintain your lifestyle without planning for retirement? If you do not expect to work forever, or you know you cannot depend on Social Security benefits to sustain you into your golden years, proper planning can offer a lifetime of financial security, as well as peace of mind.

There are five steps that we consider important for efficiently planning retirement.

• Step 1: Decide when you should start saving—ideally, the answer is, “as soon as possible”—and planning for retirement.
• Step 2: Determine how much money you will need to live on during retirement, taking into account inflation, healthcare expenses, and life expectancy.
• Step 3. Clarify your financial priorities, in particular by defining how your immediate financial needs will change with long-term retirement.
• Step 4: Select the retirement accounts, such as 401(k)s and IRAs or Roth IRAs, that give you tax benefits and other perks. Then, you can select an appropriate investment strategy.

Taking these steps helps to ensure that you have a simple retirement plan that you can modify to match your changing requirements, constantly updating your plan to be sure of achieving your financial objectives.

When can you retire?

How soon you retire depends on more than just your aspirations and your financial readiness to replace your work income. Social Security benefits are often the deciding factor of when to retire.

You can begin receiving Social Security benefits as early as 62 years of age, but it permanently reduces your monthly benefits. If you were born in 1960 or later, your full retirement age (the age at which you can receive full Social Security benefits) is 67. Holding off beyond that age can also result in higher monthly payments, with retirement benefits maxing out for those who wait until age 70.

Choosing to retire is unique for everyone. Some retire early for personal reasons or because of health issues. On the flip side, many choose to retire later out of the necessity to keep earning money or a desire to stay at their job. More and more people realize that easing into retirement is a lot better than suddenly stopping their careers, which allows them to live a more balanced life.

With your goals and lifestyle desires established, along with an understanding of how Social Security benefits work, you are in a good position to decide when to retire. By maintaining your focus on your retirement plan and the need to update it or change direction from time to time, you can be prepared to live your golden years on your terms, with the financial security to support your desired lifestyle.

5 Steps for Retirement Planning

1. Know when to start retirement planning

At what age should I start thinking about retirement? Although it’s a personal choice, the earlier, the better, which gives your money time to grow. Compound interest is powerful; the longer you invest, the more your investments grow, linked to the power of time, allowing your investments to grow exponentially.

But rest assured, it’s NEVER too late to start looking into retirement planning. If you haven’t started, don’t despair—you can still accomplish a lot. Some intelligent savings can go a long way, and every penny that you save now, you will thank yourself for in the future. Plus, with intelligent investment decisions, you can fill the gap pretty fast and build a decent retirement kitty. If you’re in your 20s, 40s, or even 50s, starting your strategy now can position you to enjoy a secure, comfortable retirement.

Whatever your age, it always helps to start early; no matter how much money you have, it still contributes to having a great retirement.

2. Figure out how much money you need to retire

Start by taking your current income and expenses and projecting those expenses into retirement. You need to think about what costs will fall (the former) along with what costs will stay or rise (the latter). For example, although you can slash your spending on commuting, you still need to set money aside for holidays, going out to dinner, and occasional payments to maintain your car or house.

Columnist Michelle Singletree of the Washington Post goes so far as to suggest making a comprehensive retirement budget. This makes sure you have all the different categories covered and also helps you ensure that you still maintain the lifestyle that you want. Thus, financial gurus recommend (the percentage varies) that you try to replace 70% to 90% of your re-retirement annual income through a combination of savings and Social Security.

For example, a retired household that has had an average annual income of $63,000 pre-retirement plans to require between $44,000 and $57,000 per year in retirement. This figure is a starting point; each person’s needs will differ depending on a variety of factors. So, by examining all your retirement expenses, you can come up with a good savings goal and a way to get there.

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3. Prioritize your financial goals

Retirement may prolong some of the financial goals you already have. Many, even in retirement, strive to chip away at debt, like a credit card or loan balance, stash money away for a kid’s higher education, or start an emergency fund. Sometimes, these goals can conflict, making reaching equilibrium tricky, so it is essential to be clear on what you accept or don’t accept to ensure that, in the long run, your goals are advancing on all fronts.

The idea is to save for both retirement and your emergency fund, especially if you have an employer-sponsored retirement plan that will pay out cash (a.k.a. a 401 plan with employer matching). The fact that this is free money, in essence, makes it a potent catalyst for improving your overall retirement account balance over time. Take these steps into account:

1. Evaluate Your Debt: Concentrate on any high-interest debt, such as credit cards; this kind of debt can multiply fast and derail your financial goals.
2. Create an emergency fund: Save up to three to six months’ worth of living costs in a high-interest liquid account to use for unplanned charges or cash crises.
3. Save for retirement: Making consistent contributions, even starting small, to a retirement account like a 401(k) or IRA can significantly compound over time.
4. Decide on Other Goals: If buying a house or sending a child to college are other financial goals, be sure to include these in your big-picture plan.

With appropriate prioritization and balancing, you can have a strategy that encompasses current needs and future needs or goals. Taking the time to review and make changes to your plan periodically will ensure that you stay the course of financial stability and security in the future.

4. Choose the best retirement plan for you

Saving for retirement is about where you save and not only about how much you need to save. Bringing in the correct—or correct blend—of retirement plans can significantly help safeguard your financial future.

The classic example here is a 401(k) or similar employer-sponsored retirement plan, where your employer will put up some cash if you do (free money, so what do you have to spin as an excuse for not participating?). If there is no retirement account to enroll in through work, or your company does not offer a matching program or retirement account, an individual retirement account (IRA) is a great option—as it should be if you are also planning to invest in your retirement outside of a 401(k) plan.

There are different types of IRAs, and each one will be treated differently in terms of how it is taxed and how you should withdraw money.

You get a tax break when you contribute to any traditional or Roth account, and you might be eligible to take advantage of employer-matching contributions with a 401(k), 403(b), or similar plan. The benefits are what make a 401(k) with an employer match the way to go for most people. Yet, at the same time, it also means that broad segments of the working population are less likely to have direct savings invested in their workplace retirement plans, such as those reflected by Black, Latinx, and low-wage workers. For universal savings, the Secure 2.0 Act would automatically enroll all employees in a retirement plan.

In addition to a non-workplace saving alternative for those who are not covered by a retirement plan at work, IRAs offer everyone, even high earners with retirement accounts at work, a chance to plunk more retirement savings into their portfolios.

Tax-advantaged retirement accounts, like IRAs, are an essential part of your retirement program, and you can open up such an account with an online broker or other financial institution.

Here are seven types of retirement plans to consider:

• 401(k): Employer-sponsored plan with potential matching contributions.
• Roth IRA: Offers tax-free withdrawals in retirement.
• Traditional IRA: Provides tax-deductible contributions.
• Self-directed IRA: Invest in just about anything.
• Simple IRA: Designed for the self-employed or business with less than 100 employees.
• SEP IRA (Simplified Employee Pension): This is an account that works for small business owners and the self-employed.
• Solo 401(k): Best if you are the only one self-employed (without other employees).

There are arguments for one plan or several, and you should decide on a retirement plan that is right for you based on your financial goals.

5. Select your retirement investments

Although this will depend on the account provider, most retirement accounts allow you to buy individual stocks, bonds, or mutual funds. Your time horizon and risk tolerance will determine what combination of these investments is right for you.

Of course, as you age, you should make more cautious investment choices for a straightforward reason: the more seriously you lose, the more money is at risk. This leverages the stock market’s long-term growth potential but allows your investment to work through short-term market problems. In your younger years, you have time on your side. This means you can afford to take on this volatility and get higher long-term returns in your retirement account. In later years, as you approach retirement, capital preservation is everything but obvious, so you will include a broader range of investments that will protect you from a market crash and preserve the fruits of your capital-building.

Your first job, starting a family, the bullish meltdowns of the stock market roller coaster; as you evolve, your investment strategy will evolve, too. That way, your retirement plan can grow and change with you based on your current life situation and your financial goals.

The reality is that retirement investments do not have to be micromanaged. Many low-cost mutual funds provide a diversified and easy portfolio for those who want to DIY. If you prefer, you could consult with a financial advisor who can offer a customized analysis with strategies tailored to you and your goals.

Ultimately, whether you take it on solo or go with a pro, the point is to make sure that you have a plan to suit your needs for growth and security in the long run; hopefully, that retirement you imagine will become a reality. Developing an investment plan is not a one-and-done; it is something that needs to be regularly evaluated and modified if necessary to ensure you are on track for your retirement.

Types of Retirement

Retirement can mean different things depending on your interests and circumstances. Some views on retirement are the following:

Traditional Retirement

In the old days, retirement was either yes or no, and you could spend 100% of your time doing what you loved. This is when you begin to pursue hobbies, travel, volunteer, and spend time with family. Conventional retirement aims toward having a slow-moving life without the responsibilities and hassles of a job. Without money earned from paid employment, during this stage, financial stability will usually rely on savings, pensions, Social Security benefits, and (in some cases) investment income. This means that with traditional retirement, you would be able to live as you already have but be done with work—forever.

Planning Strategy:

• Structured Savings Plan: Save as much as you can in your retirement accounts (401(k), IRA, and other investment vehicles).
• Healthcare costs: When planning, be sure to factor in costs for premiums, benefits, related copays, deductibles, long-term care, and other significant expenses.
• Retirement Drawing Account: Projection of how much money you would need throughout your retirement to live to your ideal age, based on how you want to live.
• Different Investments: Own a selection of financial investments that balance growth and income generation.
• Estate Planning: Create an estate plan with wills, trusts, and power of attorney to make decisions concerning your affairs and health care.

Semi-Retirement

Semi-retirement gives a softer ramp-down from working life. Instead of retiring early, you work less, or in a lower-stress position. This may consist of working part-time, consulting, freelancing, or developing a passion project that pays. It offers the best of both worlds for those who still love their job or need a steady income as well as free time. It eases you into full retirement, balancing work commitments with a lifestyle of free time and personal expression. Semi-retirement can also keep you from having to fall back on your retirement savings, giving you a lengthier retirement period with the potential for better financial security.

Planning Strategy:

• Income Estimation: Know what you have to earn vs. what would be suitable income for part-time work.
• Your Strategy: As you get closer to retirement, you should move your investments from growth to income.
• Employment: Find part-time work or consulting that suits your proficiency.
• Social Security: Strategize when you will collect to maximize your benefits.
• Flexible Budgeting: Tailor a budget that changes according to fluctuations in your work status and income levels.

Temporary Retirement

Sabbatical—An extended break from work, as well as a time away from one’s regular job or a rest from one’s career to acquire new skills and work experience. It can range from a few months to a year and is usually taken up by travel, pursuing new hobbies, or spending time with family. You go back to work at the end of your sabbatical, returning to what you were doing before you left or with a pivot. Most people are able to take these breaks because they have diligently saved for them to ensure that they have enough money to cover the expenses of these long breaks without losing too much steam in hitting their retirement goals. It’s a great way to recharge and try new things without leaving the work experience forever.

Planning Strategy:

• You should organize your savings and maintain three buckets: Cover your sabbatical from the mid-term savings category, while the long-term savings category is for retirement, and the rescue fund is for emergencies.
• Re-Entry Planning: As you consider when to rejoin the workforce, anticipate the types of re-certifications, updated skills, and career shifts you may need to do so successfully.
• Insurance Package: Make sure you have adequate health and other insurance/benefits before your sabbatical.
• Money Management: Draw up a plan to cover the costs of living and entertainment during the sabbatical.
• Emergency Fund: An adequately funded emergency fund will prepare you well for your time off and is the ideal way to be prepared for any expenses you may not have considered.

Comprehensive Retirement Planning

Integrating all of these insights into a cohesive retirement plan requires:

• Evaluating your Financial Goals: List your short-term and long-term financial objectives like retirement, debt payment, and emergency savings.
• Personal Finance Bucket List: Tips for saving for a rainy day: Save for tomorrow, juggling with the needs of today.
• Employer Benefits Are a Friend: In particular when it comes to employer-sponsored retirement plans, especially those with matching contributions.
• Customize your investments: You can control risk and maximize your returns by tailoring your portfolio to your retirement horizon.
• Need for Regular Reviews: You should check and update your retirement plan regularly as time progresses.

Through an understanding of the varying retirements and specialized planning strategies, you can design a retirement plan that both fits your lifestyle long term and your financial short-term goals. Whether you choose to take Social Security, an early retirement, semi-retirement, or temporary retirement, a well-planned and adaptable strategy can make it easier for you to enjoy a future with work that has a purpose and a financially stable exit strategy.

Consider Retirement Planning by Your Life Stage

A practical method for effective retirement financial planning is to customize your approach based on your current life stage. This means identifying and implementing the specific retirement planning steps that are most appropriate for each phase of your life.

Here are some definitive rules for life-stage-based retirement planning that will, hopefully, make your journey slightly more palatable. With these personalized playbook strategies, you can be confident you are making the correct money moves at the right time, setting yourself up for retirement with peace of mind.

Late Adolescence (Approximately ages 21 through 35)

Those in their twenties (10–15% saving rate) are starting their careers and do not have hundreds of thousands to allocate to retirement savings—the one thing they have in abundance is time. Young adults can experience the magic of compounding first-hand by starting to save for retirement early. They have decades before retirement and can afford to assume more risk in their investments. For example, someone in their early 20s typically would see a balanced asset allocation of 80% stocks, 10% bonds, and 10% alternatives to leverage higher-risk investments that may yield greater returns. At the same time, creating a habit of saving from an early age can lay an outstanding financial foundation for the future, as saving does not become easier as time passes.

Young Middle Age (Around 36–50)

As they reach early middle age, most individuals begin making more money and advancing in their careers. However, this is also the time in which they tend to take on more financial commitments, such as starting a family, acquiring a mortgage, and investing in life insurance premiums, car payments, and kids’ school fees. If your paycheck is pulled in several financial directions, establishing particular savings goals is imperative. Juggling these conflicting priorities requires a lot of planning and disciplined saving to stay on track with retirement aspirations.

Old Middle Age (Ages 51–65)

For many households, middle age is the stage where earnings climb, and that short window provides a good opportunity to bump up their retirement savings. At this stage, they can gain the most through contributions to retirement saving plans and apply for maximum catch-up contributions. If you are 50 or over, this number jumps to $7,500 for those contributing to a 401(k), 403(b), or 457 plan and $1,000 per year for an IRA.

You have to watch your asset allocation in the years leading up to retirement. Adding less volatile investments such as bonds and cash alternatives to your portfolio can lower volatility and preserve your nest egg, especially with less time to recover from any potential market declines. Making this shift slowly is vital for anyone, but this transition allows for additional financial security as an employee nears retirement.

Determine Retirement Spending Needs

Set Realistic Spending Expectations

Having the right plan for spending expectations will ensure you have the money to cover your retirement expenses. The most common rule of thumb estimates that you need about 70% to 80% of your pre-retirement annual income. Naturally, this amount will differ depending on your lifestyle – some might need more, others might need less.

Account for Rising Costs

The advice of shooting for 80% of your pre-retirement expenses is generally good, but to be on the safe side for the types of rising costs that can come in retirement, go for closer to 100%. This assumes that at some point, your healthcare costs will rise, and you may start to engage more in hobbies because it’s an excellent way to stay active. You might make over your house or even pay for your child’s college education. This means that you need accurate retirement spending targets, saving a lot today to have more in the future as future costs creep higher.

Consider Your Lifestyle and Longevity

Finally, you must look to balance your withdrawal rate and your probability of outliving your portfolio so that you do not take too much to live on today and too little to sustain you for the rest of your life. The more precisely you predict your retirement bills, the better you can plan your annual withdrawal amount. A few rule-adhering retirees follow the 4% rule (spending no more than 4% of their retirement savings annually to ensure a comfortable retirement). This withdrawal rate is sustainable, depending on your portfolio allocation, and might potentially be different for different retirement plans.

Make a Long-Term Financial Security Plan

As life expectancy continue to increase, consider how living longer could impact your retirement. How much should you save to make sure you will not outlive your savings? How much would you need to cover unanticipated late-retirement healthcare costs? How does life insurance fit into the equation of your estate planning?

Update Your Retirement Plan Regularly

Retirement planning is an iterative process. Incorporating early, mid, and late retirement expenses and actions, it makes good sense to evaluate your retirement strategy yearly to ensure it reflects your changing circumstances. Frequent periodic reviews of your plan can help protect your financial future and keep pace with needed adjustments as your life and needs change throughout the real-time working of your retirement plan.

Manage Your Taxes in Retirement

Understand Tax Liability

You need to understand just how much you will owe in taxes when you retire. Of course, the most common retirement income sources all provide different ways to potentially shave something off your taxes: Social Security benefits, pensions, withdrawals from retirement accounts, and investment earnings. You should plan your distributions in a way that helps manage what you own in taxes on your income from all sources.

Take Advantage of Tax Deductions

Often, deductibles are a great place to start, as you can reduce your taxable income while in retirement. Some contributions to conventional retirement accounts are tax-deductible, so they have the bonus of reducing your current tax liability. When possible, you should maximize these write-offs to minimize your general tax liability.

Utilize After-Tax Money

Roth IRAs and Roth 401(k)s make up after-tax money (meaning you do not receive a tax deduction when you contribute). The significant benefit of these accounts, though, is that you make tax-free withdrawals in retirement (so long as you follow some specific rules). This may be a valuable option to manage your tax burden and to give yourself tax-free cash when you are in retirement.

Pay Taxes Strategically

Strategic tax planning refers to when and how to withdraw from your retirement accounts to reduce your taxes. That may mean liquidating taxable accounts before tapping into tax-deferred accounts so they can continue to grow; or executing a strategic, partial IRA-to-Roth conversion in years when your tax rate is lower. When you know how your retirement income sources are taxed, you can develop a tax-efficient withdrawal strategy that will yield higher value on savings.

Incorporating tax planning into your broader retirement plan can provide you with more control over your taxes, help you better predict your tax due, maximize tax savings, and enjoy a more financially rewarding retirement.

Choose the Best Retirement Savings Accounts for You

Choosing the proper retirement savings account is critical for a solid financial future. Commonly, an employer-sponsored 401(k) plan is the top option for most, if available. Given that these savings are contributions from the employee’s salary through a pension with automatic payroll deductions, they facilitate safe savings in the long run. Not to mention that the vast majority of employers will match your contributions—meaning even more in savings. An employer might match 50% of employee contributions to the plan, up to 50 cents for every dollar contributed—and they could cap the percentage of applicable employee total earnings.

For those without an employer-sponsored 401(k), an individual retirement account (IRA) could be an attractive alternative. In 2024, the limits are $7,000 if you are in a traditional or Roth IRA, up to $8,000 if you are 50 or older. While contributions to a traditional IRA are immediately tax-deductible and reduce the current year’s taxable income, money withdrawn in retirement is tax-free with a Roth IRA.

Learning what you need to contribute is critical to maximizing your retirement savings. Until the IRS gets itself straightened out, you need to be looking at saving 15% of your pretax income into your accounts (your 401(k) or an IRA, mostly). If that percentage isn’t possible at present, begin with what you can and raise your contributions as your finances allow over time.

With smart choices and by regularly contributing to suitable retirement-savings vehicles, you can ensure that your golden years are not tarnished by financial worries.

Use Technology to Plan for Retirement Efficiently

Leveraging technology to improve retirement planning can make your retirement plan more holistic and fluid, which effectively caters to individual needs, resulting in a financially peaceful retirement. There are a number of online resources that can help you create and maintain your retirement plan. For example, the Empower Retirement Planner tool offers features/logs such as:

• Single-page Scenario Analysis: View different retirement scenarios on one page so you can see how different financial choices could play out.
• Expenditure impact review: Check out the effect of vital outgoings; for instance, healthcare and household buying could affect your retirement reserve and your overall financial wellness.
• Integration of Income: Include your pensions, Social Security, and investment returns into your retirement planning so you have a comprehensive understanding of your financial future.
• Stress Testing: Test your retirement plan in the face of each of a dozen historical bear markets and possibly put some things in perspective regarding how much undue stress you may be imagining there to be.
• Create A Retirement Budget: Create a retirement budget specific to your anticipated new lifestyle, and ensure your retirement life is organized and affordable.

By accessing these high-level tools, you can make informed decisions, adjust your plan accordingly, and remain on target to reach your retirement goals. Using technology to help you in your retirement planning will likely lead you to a less bumpy road in managing your finances to make your retirement more stable and comfortable.

 

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