Retirement Planning

Retirement planning is the ongoing process of setting financial goals and strategies to ensure you have enough income and savings for a comfortable life after you stop working.  The sooner you start, the more time your investments have to grow through compounding.

Steps for creating a retirement plan 

1.  Define your retirement vision

First, consider what you want your retirement lifestyle to look like.  This can include:  

Where you will live:  Do you plan to stay in your current home, downsize, or move to a new location? 

How you'll spend your time:  Will you travel, pursue hobbies, or work part-time? 

Potential expenses:  Consider how your spending will change.  Some costs, like commuting, may decrease, while others, like travel and healthcare, may increase.  

2.  Estimate how much you need to save 

Some suggest you will need to replace 70% to 90% of your pre-retirement income to maintain your standard of living.  While rules of thumb can be a starting point, it is important to take account of your situation as you build your personal expectations.   Variables such as your anticipated expenses, income sources, and expected longevity should be kept in mind.

3.  Prioritize your financial goals 

Retirement is likely not your only financial goal.  Decide how to balance saving for retirement with other priorities, such as maintaining an emergency fund, paying down a home mortgage and covering other family responsibilities.

4.  Choose your savings accounts 

Employer-sponsored plans:  If your employer offers a 401(k) (or 403(b) for non-profits), start there, especially if they offer a matching contribution.  Not contributing enough to get the full match is like leaving free money on the table.

Individual Retirement Accounts (IRAs):  A Traditional IRA may allow for tax-deductible contributions, potentially lowering your taxable income now, but then in retirement withdrawals are taxable.  Roth-IRA contributions are made with after-tax dollars, with qualified retirement withdrawals being tax-free.  Both account types can be considered for your retirement savings, however there are additional IRS rules surrounding your annual income and workplace plan contributions that need to be observed. 

Regular Investment Accounts:  This account type may also be used.  While not a tax-deferred account type it does offer some potential tax savings on qualified dividends and long-term gains.  Also, some gains are not taxed until actually realized through liquidation.

5.  Select your investments 

The right investment mix depends on how long you have until retirement and your level of comfort with risk. 

Early career investors:  Having a longer time horizon, you can typically afford to be more growth oriented, with a higher investment allocation in stocks and stock funds. 

Investors closer to Retirement:  As retirement nears, you can shift toward a more conservative allocation including a mix of bonds and less-volatile investments. 

6.  Factor in Social Security 

Your Social Security benefits will depend on your earnings history and the age at which you begin collecting them.  While you can start as early as age 62, your monthly payment will be permanently reduced.  The payment increases for every year you wait, up to age 70.  You can check your estimated benefits by creating an online account login with social security at www.ssa.gov

7.  Plan for healthcare costs 

Medical costs tend to increase with age.  If you retire before Medicare eligibility (age 65), you'll need to account for private health insurance costs.  Monthly health insurance premiums can be relatively high, particularly in the years leading up to age 65. Some employers may cover health insurance expenses for pre-Medicare retirees.  This type of benefit is sometimes offered by larger employers to employees with a multi-decade tenure.  If this pre-65 benefit is not available to you then it is usually best to plan retirement beginning at the age of 65 at the earliest. Once a retiree is eligible for Medicare and also carefully selects either Supplement or Advantage plans their health-related costs can be more manageable.

8.  Stay organized and flexible 

A retirement plan is not a static document.  You should review and adjust your plan regularly, especially after major life events such as a marriage, birth of a child, or job change.  Regularly reviewing your plan and checking on your investments with a qualified financial advisor helps you stay on track toward your goals.