Retirement Planning 101: A Guide for A Secure Future After Work

Shari Rash
May 10, 2024
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Retirement is often seen as the golden years of one's life – a time to relax, travel, pursue hobbies, spend quality time with loved ones, and enjoy the fruits of one's labor. 

However, this ideal image of retirement can only be achieved with proper planning and preparation. With increasing life expectancy and rising costs of living, it is vital to start planning for retirement early on in our working lives.

Many people believe that saving for retirement is all that's needed to prepare for it. While setting aside funds for the future is indeed crucial, it's not sufficient on its own. Planning comprehensively for retirement is equally essential.

Retirement planning is a crucial element of financial planning, encompassing the careful consideration of factors such as income, expenses, future goals, and potential risks and uncertainties. It extends beyond mere financial considerations, involving personal decisions that pave the way for a comfortable lifestyle post-workforce. Additionally, retirement planning prompts you to take immediate steps to ensure a fulfilling retirement.

Transitioning into retirement introduces a new set of challenges, distinct from those encountered during working years. While the focus during employment is on accumulating money, retirement marks the shift to asset decumulation, meaning spending rather than saving.

In this article, we will explore the essential aspects of retirement planning, strategies for establishing realistic retirement goals and timelines, and tips for managing risks and uncertainties in the retirement phase.

Timing Your Retirement

The first step of retirement planning is often the most difficult. It is deciding when your retirement is going to start. We all know we want to retire, but we can often get cold feet when it becomes a reality. Retirement cold feet mainly happen because it is a fear of the unknown (financially and day-to-day). Retirement planning helps to eliminate the unknown. 

I always tell my clients that our plan isn’t set in stone; it can change as our needs and desires change, but it at least gives us a starting point. When you are retiring is an essential timeframe to establish. 

Once you have your retirement time frame established, we then know how many years left you have to work (and save) and how long you potentially will live in retirement. The earlier you retire, the longer your retirement savings need to last. Therefore, it is important to consider factors such as your health, life expectancy, and financial situation before deciding on a retirement age.

Calculating Your Retirement

Understanding the income you will need in retirement is a crucial next step. 

Consider what your life will look like after you retire. What activities do you want to fill your time with? The way you spend your time reflects how you spend your money, be it traveling, golfing, gardening, serving on boards, consulting, or volunteering. Reflect on your current expenses and how they might change upon retirement. Many expenses will remain constant, such as your mortgage, property insurance, food, household costs, car payments, gas, and cable/internet. However, some expenses will increase, including travel, dining out, leisure activities, and healthcare costs, while others may decrease.

You need to be realistic, and be sure to give yourself a buffer for unexpected expenses. And then all of these expenses will increase in cost over time, due to inflation. Something that costs $10 today, can easily cost $15 when you’re retired, due to inflation. Many people assume that they will need less money in retirement, but that is not always the case. Again, this doesn’t have to be set in stone, but gives you a starting point. 

Once you have a handle on your retirement income needs, you now need to figure out where your retirement income is coming from. Sources of income such as a pension and social security benefits are guaranteed, meaning you can always expect that money.  For most people, personal savings will be the main source of income in retirement.

Setting Achievable Retirement Goals

Based on your timeline and retirement income needs, the next step is to set realistic retirement goals. The key to setting achievable retirement goals is to be specific and realistic. For example, instead of setting a vague goal of 'saving more for retirement', set a specific goal such as 'increase retirement savings by 10% each year'. This can not only make your goals more achievable but also provide a clear direction for your retirement planning.

Additionally, it is important to set a realistic timeline for your retirement goals. Consider your current financial situation, retirement age, and expected post-retirement income in order to determine a feasible timeline to pursue your goals. If you have $100,000 saved for retirement and want to retire in 5 years at 62 with no pension, you may need to reconsider your timeline and your saving strategy. It is also important to regularly check in and adjust your goals as needed, taking into account any changes in your financial situation or goals.

One of the most effective strategies for retirement planning is starting early. The earlier you start saving for retirement, the longer your money has to grow and compound. This can significantly impact the size of your retirement savings. Additionally, starting early allows you to take advantage of retirement savings options such as employer-sponsored retirement plans and individual retirement accounts (IRAs).

Why Diversifying Your Portfolio Is Key

Another important aspect of retirement planning is diversification. It is recommended to have a diverse portfolio that includes a mix of stocks, bonds, and other investments. This can help mitigate risk and provide potential for growth over time. It is also important to regularly review and adjust your investments as needed.

Saving and Lifestyle Considerations

In addition to starting early and diversifying your investments, it is essential to consistently save for retirement. Set a monthly or annual target for your retirement savings and make it a priority to manage that goal. This may require making certain lifestyle adjustments, but the long-term benefits are worth it.

Apart from financial planning, it is also important to consider other factors that can impact your retirement years. This can include maintaining a healthy lifestyle, having a strong support system, and staying mentally active. These aspects can contribute to a happy and fulfilling retirement.

Investment Options for Retirement

There are several investment options available for retirement planning, each with its own advantages and risks. Here are some of the most common retirement investment options:

Individual Retirement Accounts (IRAs)

Individual retirement accounts or IRAs are tax-advantaged accounts specifically designed for retirement savings. There are two main types of IRAs – traditional and Roth. Traditional IRAs allow contributions to be made with pre-tax income, and the funds are subject to taxes when withdrawn during retirement. On the other hand, Roth IRAs are funded with post-tax income, and the withdrawals during retirement are tax-free.

401(k)/403(b) Plans

401(k) and 403(b) plans are employer-sponsored retirement accounts that enable employees to allocate a portion of their salary to a retirement fund. Many employers enhance these savings by matching contributions, which can substantially increase retirement funds. These plans provide the advantage of tax-deferred growth, with contributions and earnings not taxed until they are withdrawn. Increasingly, companies are offering both traditional and Roth 401(k) options.

Self-employed individuals have the option to set up and contribute to a SEP IRA, facilitating their retirement savings.

Potential Returns from Retirement Investments

The potential returns from retirement investments vary depending on the chosen investment vehicle and underlying assets. For instance, bonds may have a lower return rate compared to mutual funds and stocks, but they also come with lower risks. On the other hand, stocks and mutual funds may offer higher returns but can also be subject to market fluctuations and other risks.

When it comes to retirement planning, it is crucial to strike a balance between risk and return. A diversified portfolio that includes a mix of low-risk and high-risk investments is recommended to mitigate risks while still enjoying potential returns.

Managing Risks and Uncertainties During Retirement

Retirement is a phase of life that comes with its own set of risks and uncertainties. While we may have planned for a certain lifestyle during retirement, unforeseen circumstances such as health issues or economic downturns can significantly impact our financial stability. Therefore, it is vital to have a contingency plan in case of emergencies.

Here are some tips for managing risks and uncertainties during the retirement phase:

1. Have an Emergency Fund

An emergency fund is a separate savings account that is specifically designated for unexpected expenses. A rule of thumb is to have three to six months' worth of living expenses saved in this fund. This can provide a safety net in case of any unforeseen circumstances, without having to dip into retirement savings.

2. Consider Long-Term Care Insurance

Long-term care insurance is important for covering costs related to assisted living or nursing home care due to disability or chronic illness. This insurance can protect retirement savings and secure assets for heirs and dependents.

3. Plan for Inflation

Inflation can significantly erode the purchasing power of retirement savings over time. Inflation affects everyone and everything. In short, inflation means you’re paying more for the same good or service than what you paid in the past. Therefore, it is essential to factor in inflation when planning for retirement. Investing in assets that offer protection against inflation can help mitigate this risk.

4. Stay Involved in Financial Planning

Retirement planning is an ongoing process, and it is essential to stay involved in managing finances during retirement. Regularly reviewing investments, adjusting for changing circumstances, and seeking professional advice can help ensure a secure financial future.

Preparing financially for retirement is more than just saving for retirement. When you plan for retirement, you are painting a picture of what you want your retirement to look like and making financial decisions based on that. 

Your retirement is unique to you and no one else, so you need to make sure you are taking your needs and goals into mind when making financial decisions. By understanding the different retirement investment options, potential returns and risks, and implementing a plan to manage uncertainties, one can ensure a secure and comfortable future after work.

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