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A Comprehensive Guide to Planning for Retirement


When you plan for retirement, you’re preparing to one day leave the workforce. And you’ll need to decide how you’re going to pay for your living expenses after you’re no longer receiving a salary. It’s typically a decades-long process that begins with envisioning a desirable retirement, estimating what that will cost, and then amassing the financial resources to sustain it. These are the key elements of retirement planning, but there are other things you’ll need to take into consideration. Retirement planning also has to address concerns such as investment returns, taxes, life expectancy, healthcare and long-term care costs. You could take the first step towards a secure retirement by working with a financial advisor.

How to Plan for Retirement: An Overview

Retirement planning is a lengthy, complex process that calls for making estimates and assumptions years into the future, ones that could turn out to be incorrect. In spite of these challenges, a successful financial planner still has to make significant and sometimes difficult decisions in the present.

Planning and preparing for retirement involves going through a number of phases. It doesn’t always occur in a strictly linear fashion – it sometimes involves going step by step, and sometimes involves going out of order and checking off boxes. A retirement planner might need to revisit previous decisions and modify them to reflect changed realities. A retirement plan is always subject to revision, even after retirement arrives.

Seven Retirement Planning Steps

Just as every individual is unique, every retirement plan is distinct. The interplay of different income levels, lifestyle goals, living costs, health status and other factors means that retirement planning is not a one-size-fits-all endeavor. Everyone has to plan for their own retirement.

Keeping in mind that every retirement is different and flexibility is essential, there are some key steps in a typical retirement plan:

1. Envision the Future

Start by asking yourself what kind of retirement you want. Key questions to address include the planned age at retirement, where the retiree will live, whether the lifestyle will be modest, whether part-time work in retirement is a possibility, and so on. The answers to these questions will impact later steps. For instance, deciding to retire before Medicare eligibility at 65 means having to pay for private health insurance. Similarly, funds taken from tax-deferred retirement savings accounts before age 59 ½ are generally subject to an early withdrawal penalty. So these decisions need to be thought through carefully and may need to be revised as time goes by.

2. Estimate Expenses

Retirement planners can assess their likely expenses in retirement by basing estimates on their current spending on major items such as taxes, housing, food, healthcare, transportation, and entertainment. And when retirement is decades away, it’s necessary to consider the effects of inflation on future purchasing power. Also, because retirees tend to spend less than people who are still working, planners generally discount the figures for current expenses when estimating retirement costs.

Rather than gathering and adjusting current spending data, planners may choose to use results from surveys about average retirement budgets. Another approach is to peg retirement spending as a percentage of pre-retirement income. The percentage used may range from 55% to 90%. This variance is largely dependent on income level, with higher earners spending a smaller percentage of their pre-retirement income after they stop working.

3. Remember Healthcare

Most expenses go down after retiring, but healthcare costs in retirement tend to go up. As noted, someone who retires before Medicare eligibility at 65 will have to find a way to pay for private health insurance. Planners also have to pay careful attention to life expectancy. That’s because the longer someone lives after retirement, the longer they’ll have to pay expenses with something other than a paycheck. A solid plan will also consider how the retiree will pay for long-term care if it’s needed, such as with long-term care insurance.

4. Project Income

A husband and wife setting up a plan for retirement.

After developing an idea of what retirement will cost, it’s time to find a way to pay for it. Retirement calculators can help with this. The vast majority of retirees will likely be able to count on Social Security benefits to help bolster income. Someone who has worked for a government employer is likely to have pension benefits, as well. Other likely sources of income include interest and dividends on investments, and withdrawals from retirement savings accounts such as 401(k) plans and Individual Retirement Accounts (IRAs).

Before retirement savings can provide withdrawals, it’s necessary to build up a balance in the accounts. The most effective way by far to accumulate retirement savings is with the help of automatic contributions including paycheck deductions. Another high-impact move is to always be sure to contribute the maximum allowed to tax-advantaged retirement saving plans. That’s doubly true if the plan features employer matching of employee contributions.

Managing current expenses is essential to meeting savings goals. To that end, basic personal finance practices such as budgeting, avoiding of paying off high-interest debts and building up emergency savings are also part of retirement planning.

5. Invest for Success

The way savings are invested can have a decisive effect on how much money a retiree will have to pay for retirement. While there are many major and endless minor themes of investment management, at the heart of most is a specific approach to asset allocation. Many retirement savers early on allocate assets by putting a majority of their funds into equities, including mutual funds and exchange-traded funds (EFTs), as well as individual stocks. Over time, they gradually transition to a portfolio more evenly balanced with fixed-income investments, again often through funds. Alternative investments such as real estate may also play a role, and some savers purchase annuities for reliable income in retirement.

6. Account for Taxes

Saving with tax-deferred retirement accounts puts off, but does not eliminate, taxes. Savers can deduct contributions from current income for tax purposes, but withdrawals in retirement are taxed as ordinary income. Furthermore, savers can’t leave funds in tax-deferred accounts forever, because rules on Required Minimum Distributions (RMDs) mandate taxable annual withdrawals starting age 73. One way to avoid RMDs is to convert IRA or 401(k) funds to a Roth IRA. This avoids RMDs and allows for future tax-free withdrawals, but means paying taxes on converted funds immediately.

7. Review and Adjust

Few retirees enter retirement with their original retirement plans intact. Much of the heavy lifting on preparing for retirement occurs early, when habits and systems like contributing to savings plans via automatic payroll deductions are being set up. But it’s still essential to guard against potentially retirement-wrecking errors such as taking on too much high-interest debt, while also tracking progress toward retirement goals.

It’s also often the case that retirement goals change, due to major life events such as marriage, childbirth, divorce, remarriage, job loss and death. This means that retirement planning is not something to be done once and then set aside. Anyone planning for a comfortable and secure retirement is well-advised to keep a close eye on changing circumstances and be prepared to execute changes that may include saving more, taking a different approach to investing, or deciding to pursue a less costly retirement lifestyle through downsizing, moving to a less costly location, or another modification.

Bottom Line

A husband and wife enjoying their golden years, having created a plan for retirement.

A retirement plan helps you prepare for life after leaving the workforce. Most plans include a description of the planned retirement lifestyle, estimates of what it will cost, potential sources of retirement income and ways of accumulating assets to generate the necessary income. Other major issues that a solid retirement plan will address include paying for healthcare, accounting for inflation, managing taxes and structuring an investment portfolio. Retirement saving tools such as IRAs, 401(k) plans and Roth accounts play central roles in many retirement plans. Equally important are strategies to maintain consistent contributions to retirement savings, keeping current expenses from becoming excessive, and managing risk with the help of emergency savings and health and other types of insurance.

Retirement Planning Tips

  • A financial advisor can help you create a financial plan for your needs and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s retirement calculator can quickly and accurately perform the calculations necessary to give you an idea of how much you’ll need to save in order to have the retirement lifestyle you envision.

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