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A Guide to Financial Planning for Retirement

When it comes to retirement, you can’t afford to be unprepared. Having a clear idea of how you want to spend your later years, and how you’ll pay for it, are key to ensuring that you can retire comfortably and securely. Financial planning and retirement go hand in hand, covering a variety of different tasks and topics. Whether your retirement is a few years away or you have several decades to get ready, there are certain things you’ll want to add to your financial planning to-do list. A financial advisor can also help optimize your plan to reach your retirement goals.

Start With Your Target Retirement Number

When mapping out your financial planning retirement strategy, it can help to work backward. That means figuring out how much money you’ll need to save for retirement first, then building your financial plan around actions that can get you to that number.

SmartAsset’s retirement calculator can help you narrow down how much you may realistically need to have saved and invested. When estimating a target savings number, it’s important to ask questions like:

  • What will your retirement lifestyle involve? (i.e. travel, new hobbies, starting a business, etc.)
  • How much will you need to meet your annual retirement budget?
  • Where will your retirement income primarily come from, in terms of Social Security, a 401(k), IRAs, etc.?
  • At what age will you begin taking Social Security benefits?
  • How many years do you anticipate spending in retirement?
  • Is working part-time in retirement or starting a business something you’re interested in?
  • How much debt do you anticipate having in retirement?
  • Will you be providing financial support for adult children or grandchildren?
  • Are you interested in creating a financial legacy of any kind?

These questions can help you set up accurate spending goals to ensure that you don’t run out of money in retirement.

Weigh Your Options for Saving and Investing

There’s more than one way to save and invest as you build wealth for the future. For example, you could save money for retirement using:

  • 401(k) plan or similar workplace retirement account
  • Traditional and Roth individual retirement accounts
  • SEP or SIMPLE IRA plans if you’re self-employed or run a business
  • Taxable brokerage accounts
  • Savings, money market and CD accounts
  • Health savings accounts (not a retirement account technically, but can be used to pay for healthcare expenses when you retire)

A 401(k) plan may be your first option for saving, owing to its tax advantages and the potential for employer matching. Contributions to a traditional 401(k) can reduce your taxable income, growth is tax-deferred and you pay taxes at your ordinary income tax rate on qualified withdrawals. The same rules apply to traditional IRAs as well as SIMPLE and SEP IRAs.

A Roth IRA, on the other hand, offers no tax deduction for contributions but you can make qualified withdrawals tax-free. With a taxable brokerage account, you’re subject to capital gains on earnings. Savings, money market and CD accounts are also taxable but they can be good to have for keeping some of your retirement savings liquid.

Health Savings Accounts (HSA) are not retirement accounts, but they can still be a part of your retirement plan. These accounts allow for tax-deductible contributions, tax-deferred growth and tax-free withdrawals when the money is used for qualified health care expenses, which can include long-term care.

Ideally, you’re able to save and invest through multiple avenues, maximizing the annual contribution limits for tax-advantaged retirement accounts. But if you have a limited amount to save and invest, start with your employer’s plan first and contribute at least enough to get the full company match if one is offered. Consider doing the same with your HSA if you have one at work and your employer matches contributions. Then look at how much you can allocate to an IRA, taxable accounts and savings accounts next.

Consider Supplementing Your Financial Resources

A Guide to Financial Planning for Retirement

In addition to saving and investing money for retirement, there are other financial tools you can add to your plan.

First, you could purchase an annuity. Annuities are insurance contracts that pay you back a set amount of money in exchange for a lump sum or monthly premium. An annuity can offer guaranteed, predictable income for retirement in addition to the money you’re withdrawing from savings and investments or Social Security benefits.

Annuities do have pros and cons, however. For example, an annuity can be a costly purchase if you need to pay a large lump sum premium upfront. And the quality of an annuity is only as good as the insurance company that issues it. If the insurer isn’t financially healthy, that could pose a risk if it’s not able to make your annuity payouts when the time comes.

Next up is life insurance. Life insurance primarily offers a financial benefit to your family when you pass away. But some policies, such as whole life and universal life insurance, can also allow you to accumulate cash value. That’s money you could borrow against during your lifetime as an additional retirement income stream.

Doing so can deplete the death benefit of your life insurance policy if you don’t pay back what you borrow. And permanent life insurance can carry more expensive premiums than term life insurance, which has no cash value. But it’s worth considering how a cash value policy could help round out your retirement plans.

One more tool to consider is long-term care insurance. Requiring long-term care in an assisted living facility or nursing home could easily drain your retirement savings. Long-term care policies are designed to help cover these costs. Then, you won’t have to wipe out your investments or savings to pay for care.

As a general rule, long-term care insurance is less expensive the younger you are when you buy it. You may pay one upfront premium or monthly premiums, depending on your policy’s structure.

Do the Math on Social Security

A Guide to Financial Planning for Retirement

Social Security benefits can add to your retirement income. However, it’s important to think ahead about when and how you plan to use them.

Technically, you can begin taking Social Security benefits at age 62. But doing so can reduce the amount of benefits you’re eligible to receive. Working while receiving Social Security benefits prior to reaching full retirement age, typically 66 or 67 depending on when you were born, can also shrink your benefit amount.

On the other hand, waiting until age 70 to take benefits could increase the amount you receive, up to 132% of your normal benefit amount. Whether it makes sense to take benefits earlier or later depends on the other sources of retirement income you already have and whether you plan to work at least part-time in retirement.

Work With a Financial Advisor

Many Americans falsely believe that they will be able to live on less income when they retire because their spending needs will go down. But unpaid mortgages, unexpected health expenses, relocating to a retirement community and even checking off bucket-list goals like travel and adult education can eat your retirement funds fast. That is why working with a financial advisor early can help you create a multi-stage retirement plan that optimizes your investments and savings for your retirement goals.

A financial advisor can help you break up your retirement plan into actionable steps, like these:

  • Grow your emergency fund to safeguard against unexpected setbacks
  • Maximize your retirement plan contributions
  • Implement a tax strategy for your investments and estate plan
  • Diversify your investment portfolio to support a comfortable retirement

When putting together a retirement plan, a financial advisor will guide you in setting up goals through a time horizon. This is how long you will want to hold on to investments. An advisor will also help you develop an asset allocation strategy to target different types of investments for your needs. For example, part of your strategy might be to include highly liquid assets that can convert easily into cash without losing value.

Searching for a financial advisor can be a long process. If you’re interested in working with an advisor, SmartAsset’s free matching tool can pair you with up to three advisors who serve your area.

Bottom Line

Planning for a financially secure retirement is an ongoing process and the sooner you start, the better. Your plan starts with knowing how much you’ll need to save for retirement, then deciding where to allocate your money to make the most of it. Checking in with your plan at least once a year can help you gauge whether you’re on track to reach your goal and what adjustments you may need to make, if any.

Tips for Retirement

  • If you pass on your assets to a loved one, you must consider the tax implications of doing so. A financial advisor who specializes in estate planning can help you optimize a tax strategy to protect your assets and property for a loved one.
  • Rebalancing your portfolio periodically is an efficient strategy to keep your retirement goals aligned. Here are five important factors to consider when rearranging your investments.

Photo credit: © Prasertthai, ©, ©

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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