Retirement Planning Basics

PUBLISHED October 26, 2022

A carefully constructed retirement plan is your best road map for financial stability in your golden years. Retirement goals should be established now along with the methods you’ll use to meet them. How much money you’ll need and where to put it both influence the growth of your retirement savings. Just as important is how your portfolio is balanced. You need to find the level between investment goals and risk preparation. And considerations for taxes and estate planning will remove headaches for you and your beneficiaries in the future.

Planning for retirement can be overwhelming. We’ve compiled some basic steps to take now when planning for your retirement.


How much will you need?

Many of us are living healthy, active lives longer into our golden years. A large number of people have no other retirement plan outside of Social Security. Unfortunately, Social Security was designed to cover just 40% of the salary of the average worker. This explains why almost half of retired people today cut back on their spending. It’s because they don’t have enough resources to cover their budgets. Know before you start your planning that you will need other income resources besides Social Security.

When will you retire?

Will you retire at 65 or older? Or are you wanting to retire early? Each option requires different strategies. The older you are upon retiring allows your money to work longer for you.

Where will you retire?

Your location has a large influence on how long your retirement savings will last. Moving to a different area when you retire comes with a different cost of living than you may be used to.  

Decide on your retirement age 

The further your retirement date, the higher risk you can place on your portfolio. You should factor in your projected retirement age with how old you are now. A younger retirement planner can assign more risk to the portfolio, like stocks. More time until retirement allows more time for a portfolio to bounce back from market ups and downs. This is a good strategy to use if your retirement age is more than ten years away.

Plan for inflation

If not accounted for, inflation can take the wind out of your retirement savings’ sails. Even a small 3% rate of inflation spanning twenty-four years can devalue your savings by half. This is why older planners should move the bulk of their portfolio to securities with less risk. 


Spending doesn’t decrease much

Social Security won’t cover everything. But how do you figure out how much to set aside? Many people unrealistically believe their retirement spending will drop. Some retirees mistakenly plan on spending 20-30% less than when they were working. This is especially misleading if a mortgage exists, or a catastrophic illness occurs. You may have big-ticket retirement expenses in your plans that you need to make room for.

In reality, spending takes a gradual decrease in the first few years of retirement. Spending drops an average of 5.5% in the first 2 years. Spending reduces further by 12.5% in the 3rd or 4th year. After that, the reduction slows down. This is why many financial advisors urge you to plan your spending using your present expenses.

Plan for unexpected surprises

Financial surprises spring up during our entire life. Retirement brings no relief from unplanned expenses. You may want to buy a new home or send a grandkid to college. Pad your nest egg to account for some rainy retirement days.

Set aside 10% of your income now

Don’t be so laser-focused on what to invest in that you neglect the investing amount. Younger people can get away with contributing 10-15% on a regular basis. The older you start the higher that figure should be. Start now with a comfortable amount. Then gradually increase until you reach your target number.

Decide where to put your retirement money

You have many tools to prepare your retirement nest egg. It’s important to remember that you aren’t limited to participating in just one plan. They are categorized into 4 groups: Employer-Sponsored | Pension Plans | IRAs | Self-Employed Retirement Plans.

Consider how much your investment returns will be affected by the tax rate

Most investment choices are taxed upon withdrawal. You need to plan correctly for this prior to withdrawing your money. Otherwise, your savings figure could skew in the wrong direction. Starting your savings plan early is so important. An early start allows for a better rate of return. 


Risk preparation

Having the right balance of returns and risk is one of the most important considerations in planning your retirement savings. Remember, retirement planning is a long-term process. Some compare it to a journey rather than a destination. The rule of thumb is not to react and jump at every market influence. If you are early in your retirement journey, you may have up to 40 years to manage your portfolio. That gives you a comfortable period to make up for market adjustments. A younger investor can invest more money into stocks. This grows their portfolio quicker than the rate of inflation. Even with more time to make up losses, a portion should still be invested in bonds. This helps the portfolio to steady when stock prices fall. Maybe 80 percent of your portfolio is in stocks during your twenties.

The further you are in your retirement journey, the more you should shift your portfolio. The majority should consist of more stable and safe dealings like bonds and bond funds. Your risk tolerance (how much of a loss you’re willing to live with) should decrease closer to retirement.

Start now

The best piece of retirement savings is to start right now. No matter your present situation, you can find a way to regularly plan and contribute to your future needs. Take the time today to determine how much you’ll need to live on later in life. Deciding your retirement age allows you to formulate a game plan for how much you’ll need to sock away. Decisions about future expenses also influence your nest egg amount. You have many options to start retirement savings and can participate in more than one. Tax rates, goals, and risk preparation calculations ensure your retirement savings will be the correct amount when you need it.

What started out as confusing and overwhelming can be calming and productive planning. You only need to take the first step toward your retirement planning journey.


Average Retirement Spending: Will You Spend a Lot More or Less Once You Retire? | NewRetirementBenefits | SSA

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