Easy Steps to Retirement Planning
Retirement planning is a type of financial planning. While it’s not rocket science, it does require some initial concentrated work and consistent follow up action.
For most people, it’s best to get some professional help if you can. That way, you have expertise to help you do it right, then you have someone who can help you stay accountable to your own goals.
If not, it’s still certainly doable, but it does require a commitment. But the rewards are significant…financial planning is how you can move from wondering if you can retire, to confidently planning to live the lifestyle you want in the future.
To get started, here’s a few general rules of thumb that you can do to “take your temperature” and see where you’re starting from. These can help give you an idea where you are as you work through the specifics.
Yes, there is…
Multiply your annual salary by 10 to 15 to estimate the total assets that will produce that level of income.
Because inflation will eat away at the value of your money, the total number you need always is usually larger than you might think. But inflation is real, and over the long term averages about 3% a year, so it’s important to factor it in.
There are some general checkpoints you can use to make sure you’re on the right track to hit that goal:
- By age 30: You should have saved the equivalent of your salary. So if you make $45,000 per year, you should have at least $45,000 in retirement savings.
- Age 35: You should have saved the equivalent of 2 times your salary.
- Age 40: You should have saved the equivalent of 3 times your salary.
- Age 45: You should have saved the equivalent of 4 times your salary.
- Age 50: You should have saved the equivalent of 6 times your salary.
- Age 55: You should have saved the equivalent of 7 times your salary.
- Age 60: You should have saved the equivalent of 8 times your salary.
- Age 67: You should have saved the equivalent of 10 times your salary.
If you’re below these numbers, that’s your cue to step up your savings so you can get back on track.
One big note of caution: these are just minimums that you will likely need to maintain a similar income in retirement. Whether it’s healthcare, expenses related to child or elder care, or other things, we don’t want to rely on the minimum when our future is at stake.
Also, please keep in mind that these are general guidelines only. These are not individual recommendations.
If you want to leave your future purely to chance, yes. But you don’t want to do that… so keep going with our easy steps. The next steps will start you on the way to building a personal plan that will allow you to define, then work toward, the exact type of future life you want.
A personalized plan will become your roadmap to reaching your goals. While it can seem like a huge task, it’s not that difficult. Really, you’ll simply be answering one question:
When you stop working, how will you replace your income?
Wes Moss, author of a book titled “You Can Retire Sooner Than You Think”, surveyed retirees to help identify the traits of those who were happiest with their retirements. One of his key findings was that the happy retirees had spent at least five hours a year planning for retirement. For most, that’s spending one hour every six months with a financial advisor, who helped keep them on track and helped them avoid expensive mistakes. Then the other 3 hours were just an hour on the weekend periodically to check in and make sure they were sticking to the plan and still on track.
Your employer may have negotiated discounted access to professional financial planning help for you. Or see the Better Investing section to find out how to find a good financial advisor. Or if you’re willing to commit to it, you can always make your own plan.
Whether you do this all yourself, or get help, the sooner you start, the more likely you are to reach your goals.
Like almost everything, there are apps that can help you get organized.
However, there are not currently free apps that do ALL of your planning. But by getting everything else in place, the planning itself can be much easier and faster.
Programs such as mint.com and hellowallet.com can help you get organized.
To figure out where you’re going, you have to be specific. Of course, you can change it later, but you have to start somewhere. So think about it….do I want my future similar to what my life is now, or totally different?
- Do you see yourself in the same place you live now, or somewhere different?
- Do you see yourself spending more, or less?
- Do you want to travel more, or less than you do now?
- Or maybe you want to continue working—but keep in mind that life may throw wrenches in that plan, so you can’t always rely on it.
But it is good to spend some time thinking. Envisioning your goals can also motivate you to save and invest more today to achieve those things you want.
Good point. Yes this plan is exactly what you need to make these things happen. Thinking about saving to start your own business? Or taking a year or two off to travel? Or buying a house?
These are all things easily handled in your plan. So write them down and incorporate them.
Don’t worry…even if you don’t know what you want yet—no law against that—just start with your current spending.
If you know what you want, even better…use that instead.
A lot of retirement calculators automatically assume that we spend less in retirement. Unfortunately, studies find that more often, people spend more in retirement, or about the same (in a 2007 study, 40% of retirees reported that their expenses went up after retirement, and another 28% reported expenses staying the same. Only 32% experienced expenses dropping after retirement).
Of course, your lifestyle controls some of your expenses. And things like health care are a bit more out of your control, but we can control much of those costs by keeping as healthy as we can.
You won’t be spending money on commuting, everyday lunches and all those expenses associated with earning a living. If you had a job where you had to wear specific work clothes or dress up every day, you’ll probably spend less on clothing. And if you have kids, they should be (hopefully) on their own by the time you are ready to retire, freeing up your resources.
Not so fast…unfortunately, things do not always go as planned.
So we have to realize that we may need more than the 60-70% of our current income in retirement. On top of that, we need to factor in inflation. As we all see when going shopping or paying for insurance, health club dues, etc., prices tend to go up over time. Even though inflation has been low lately on many things, inflation rates have averaged 3% per year over the long term, so we have to plan on that continuing.
Get these annual estimated expenses on paper. If you are working with (or plan to work with) a financial planner or advisor, accumulating this information will save time. Or if you’re doing it yourself, there are many online tools that you can use. This article in the Wall Street Journal reviews several options.
You can do this yourself or use an online program like mint.com or a free tool: Download Worksheet.
Right now you probably get a paycheck. Your paychecks will be different after you stop working.
Then, your income will come from a combination of sources: Social Security, possibly some type of pension plan, a retirement plan provided by your employer (401k, 403b, 457) or yourself (IRAs), then other additional savings (taxable savings and brokerage accounts).
Amid all the controversy, Social Security still serves as an income source for our country’s retired population. Regardless of what the future holds for the program, it certainly can add to your future income stream. The important thing is that you not consider it the primary source of retirement income.
Well, the maximum social security benefit paid currently is around $2,687 per month. And the average payment is about half that. Obviously you can’t usually live on these monthly amounts, but it’s fine as a secondary source of income.
And if you’re younger, no one knows what will happen in the future to the Social Security system. Later, there will probably be reductions needed. Therefore, it’s vital that it be viewed as a secondary source and that you are constantly developing other sources that you can rely on in retirement.
Now, simply make a list of each of the sources of income you may have. Be sure to include anything else like income from a rental property or other sources you may have identified.
Either enter these in the software program of your choice, work with a planner to do this, or use a retirement income worksheet.
At this point, you’ve identified potential sources of income. You know how much you currently have in your retirement plan, savings and other sources. You can go to the Social Security website to estimate what you’ll get from them, and if you have a pension, you can find out your payments too. Now it’s time to plug all these numbers into some models to see what you come up with. Then you’ll also need to calculate what you’ll need. Then your goal is to make up the difference before you hit retirement.
This is a complicated calculation, so it’s ideal to sit down with a financial planner at some point to double-check everything. But with a little effort, you can certainly estimate it yourself, too. Here are some free (and some paid) tools out there to do the calculations yourself:
You’ll want to preplan quick checkups every month. You want to make sure you are still on track. Are you moving closer to your goals? Has anything changed? This can be done with or without the help of a financial advisor, but let’s make sure we do it regardless.
Once you know the number you need to working towards, there are still a few things to do:
Make sure your retirement savings is invested appropriately. According to 200 years of history, stocks are the only asset that consistently beat inflation. So everyone needs to have at least a portion of their retirement savings in stocks. The younger you are, the more you should usually have.
It’s vital to make sure your account is invested correctly. Either learn to do it yourself, use a Managed Accounts option as long as it has reasonable fees, or hire an outside professional to help. There’s a lot at stake, so it’s important to either do it right yourself or have professionals handle it for you.
Regardless, don’t overlook this. A big problem some people have is not taking enough risk. They are afraid of losing and instead stash it all in a money market or balanced fund and leave it there. Strangely, that can end up being the riskiest move of all! See our Better Investing section, and spend the time taking our convenient online Investing 101 course.
Great idea—yes! We all know that life can get in the way of executing plans. So putting your retirement savings on auto-pilot is the best.
- For your retirement plan, use auto-contributions so the money is automatically deducted.
- You can also use auto-increases so the amount increases each year.
- If you get a raise, you can raise your contribution so all or part of it goes straight into your retirement account. Out of sight, out of mind.
- For IRAs and taxable accounts, most providers also allow you to set up auto deductions.
“You must gain control over your money or the lack of it will forever control you.”
– Dave Ramsey
Do's and Don'ts
If you’re one of the many who is in catch-up mode with retirement planning, don’t lose hope. Use these tips to help get back on track.
If you can wait until age 70, you’ll collect something called “Delayed Retirement Credits”. Doing this provides a unique opportunity to increase your payments by 8% for each year that you wait, up to age 70. You’ll then collect that increased amount every month for the rest of your life.
So if you can hold off, by all means, do! This is essentially free money. If you can do without it, take advantage of this rare opportunity.
After 50, most plans allow extra annual contributions. IRAs and Health Savings accounts also offer opportunities to sock away additional amounts after a certain age.
You’ve never had it, so you won’t miss it. Ideally, put it directly into your company retirement plan, but if you’ve maxed that out, put it in a Roth IRA if eligible, or into a taxable savings account elsewhere with automatic monthly withdrawals.
Worst case, allow yourself 10% of it as a reward, and save the rest.
Keep saving during this time.
Also, hold off on applying for Social Security, which can increase your benefit further.
The “Saver’s Credit” is not well-known, but if you qualify, it can put some money in your pocket! Unfortunately, most people don’t know it exists, and you have to claim it to get credit, so an estimated 75% of the people eligible miss out on this free money.
The Saver’s Credit is available to those with an adjusted gross income up to $30,500 (or $61,000 if you file jointly with your spouse). It provides a credit up to $1,000 (or $2,000 for joint filers) for contributions to an IRA or to your company retirement plan.
This is a tax credit. This is far more valuable than a deduction, which just reduces your taxable income. A credit directly reduces your tax liability. So if you owe $2,000 for taxes and get a $1,000 savers credit, you just saved $1,000!
To determine your credit, see IRS Form 8880 found here: https://www.irs.gov/pub/irs-pdf/f8880.pdf
Most everyone starts too late. The key is to start NOW and invest as much as you can, consistently, going forward, to take advantage of compounding. You can invest through your retirement plan, or if not, through an IRA or through a regular taxable account.
See our Better Investing section for details.
Like it or not, we are all living longer. We may all live far longer than we think and we need to prepare financially.
But many people brush it off and think the future will take care of itself. However, a recent survey from the Transamerica Center for Retirement Studies (TCRS) shares a different picture:
- Three in four retirees wish they had saved more on a consistent basis
- 68% wish they had been more knowledgeable about investments
- Almost half (48%) said they waited too long to get involved in their own financial security.
Small amounts invested can grow very large using the power of time. Even investing an extra $3 per day can add up to tens of thousands of dollars later—or more, depending upon your age. See the Better Investing section for more information and get going!
Your tax-advantaged retirement accounts are your lifeline to a comfortable retirement. Taking a loan, or cashing out an account can be catastrophic to your future. Instead, leave the money in there working for you on a tax-advantaged basis at all times.
Financial education and website provided by Wavelength Financial Content Inc.