A Step by Step Guide to Retirement Planning

Retirement planning is unique for all individuals as the needs and requirements of every person differs. Some people may like to purchase an RV/motorhome and travel in retirement, while others prefer a quiet beach house and weekly golf games to relax as they grow old. Regardless of the life you foresee for yourself, it can be achieved by developing and following a foolproof retirement planning guide.

Retirement financial planning may seem like a straightforward process where you save and invest for the future, but it can entail some intricate details that decide the success or failure of your plan. For this reason, it is recommended that one hires a financial advisor in order to effectively prepare your finances for a comfortable and secure retirement. In simple terms, financial planning for retirement can be described as the process of preparing for your retirement expenses by saving and making investments that match your risk appetite and time horizon. But retirement planning is not limited to this alone. It also includes deciding the correct retirement age, calculating your tax liability in the present as well as the future, determining a withdrawal strategy, accounting for other present and future expenses, and ensuring you have an emergency fund to always rely on. In addition to this, you also need to account for medical expenses, long term care needs, and save enough for leisure activities, while factoring in inflation and the increasing life expectancy. All of this can be done by organized planning and preparation.

When it comes to retirement strategies, it is important to follow a step by step approach to ensure that no detail gets overlooked and that you carefully account for every need. The following retirement planning guide can ensure that you are able to enjoy a comfortable retirement regardless of your goals. Read on to know more.

How to plan for retirement?

Planning for retirement entails a checklist to make sure that you are fully prepared for any contingency in retirement. These steps help you plan efficiently so that you are able to cater to your present needs as well as save enough for the future.

Here is a step by step guide to retirement planning:

1. Pick a retirement age and fix a time horizon:
   The time horizon plays a crucial role as it can help you pick the best investments for retirement. If you have a long time horizon, you can take more risks and potentially earn more money. However, if you have a short time horizon, it may be advised to limit your risk and opt for safer bets to focus on capital preservation rather than profit creation. If you are in your 30s and planning to retire in your 60s, you can consider investing in stocks. Stocks can offer better returns over other securities in the long term but can be extremely volatile in the short time. But if you start planning for retirement in your 40s and plan to retire by your late 50s or early 60s, you may not have such a long term. In such a case, sticking to an Individual Retirement Account (IRA), bonds, etc., or fixed income instruments like Certificates of Deposit (CDs), can offer you more stability.Understanding your time horizon will also help you pick a retirement age for yourself that can help you plan your withdrawals. For instance, if you plan to retire at 62, you will be able to withdraw your Social Security benefits right away, but if you delay the same till the age of 70, you can increase your Social Security check substantially. Hence, retiring later than 62 or simply postponing withdrawing your benefits till the age of 70 can offer you more liquidity in retirement.Picking a retirement age also helps you understand how long your retirement is likely to last. For instance, for a person retiring at the age of 62, retirement can last for as long as 30 to 35 years on average. This translates to 30 to 35 years of expenses, financial emergencies, medical needs, etc. However, a person who retires at a later age will shorten their retirement and require fewer funds.
2. Create a budget:
   A budget can help you in many ways. Budgets help you plan for your present as well as future expenses and eliminate any doubt or inconsistencies in your finances. Create a budget for every month and stick to it as much as you can. This will ensure that you allocate enough funds for all your needs and never have insufficient funds. You can follow the 50:30:20 rule where 50% of your salary is spent on essential items like groceries, rent, loan repayments, etc., 30% of your salary is spent on wants like clothes, travel, dining out, etc., and lastly, 20% of your salary is spent on saving for the future.While creating a budget, you should also ensure that the 20% allocated to savings is contributed towards specific goals before you spend your money on other expenses. A lot of people first spend their money on essential and discretionary heads and save whatever is left in their bank account towards the end of the month. However, if you want to follow a foolproof retirement financial planning guide, you must ensure that you first save or invest the 20% and then use the rest of your income for your essential and discretionary expenses.
3. Diversify your portfolio and try different investments:While 401(k) retirement accounts/ 403(b) plans/ 457(b) plans offered by your employer are some of the best retirement plans out there, you should not limit your savings to an employer sponsored plan alone. It is important to include different investments in your portfolio to earn lucrative returns. Depending on when you start investing and what your income and risk appetite are, you can invest in stocks, bonds, real estate, exchange traded funds, money market accounts, mutual funds, and more. A balance of equity investments along with debt funds can offer high returns and moderate volatility. Real estate can offer a hedge against inflation. Likewise, bonds can offer stability and liquidity. Having a well-diversified blend of investments can ensure that you are able to ride out market fluctuations and earn adequate profits.The decision to pick the right investments largely depends on your post-retirement needs. For instance, if you foresee paying for your children’s higher education needs after you retire, you may have to invest in instruments that can offer you high returns with minimal tax liabilities and inflation appropriate returns. A 529 education savings plan can be the ideal option here. This tax-advantaged plan allows you to save money for higher education expenses without any tax liabilities, provided the money is used for qualified educational expenses.
4. Plan your taxes well:
   State and federal taxes can considerably reduce your retirement corpus if not planned beforehand. Hence, it is important to understand and be up to date about the taxability of your retirement accounts. For instance, the type of IRA you choose is based on taxability. A Roth IRA uses your after tax dollars for contributions so you do not pay tax on the withdrawals you make in retirement. On the other hand, a traditional IRA uses your pre-tax dollars for contributions, so you pay taxes on the money you withdraw in retirement. The type of IRA you choose can substantially alter your tax output and hence should be chosen after careful evaluation. If you foresee a larger tax output in retirement, you can consider opting for a Roth IRA as you will not pay any tax on it on withdrawals. However, if you foresee a small tax output in retirement than now, you can opt for a traditional IRA.While calculating your tax liabilities in retirement, you must also consider other retirement instruments and how they are likely to affect you in the future. If the cumulative sum of all your incomes in retirement puts you in a higher tax bracket, you may end up paying more than the returns you earned.
5. Plan your withdrawals:
   Every retirement account has a unique set of rules and regulations for withdrawals. You can make penalty free withdrawals from a 401(k) retirement account only after the age of 59.5. Withdrawals before this age can result in a 10% penalty by the Internal Revenue Services (IRS). Similarly, retirement accounts also mandate making withdrawals after the age of 72. Required Minimum Distributions (RMDs) are mandatory withdrawals that you must take from your retirement accounts from the age of 72 to avoid paying tax on your money.There are certain exceptions to these rules. For instance, certain qualified expenses do not trigger a 10% penalty on early withdrawals. These can include a loss of job, permanent or total disability, paying for higher education costs, covering medical expenses, etc. Hence, you must know of these rules to ensure that you do not waste your money in penalties and taxes and are able to effectively use them for your needs.Financial experts also recommend not using retirement plans to cover your other goals. For instance, while a lot of people use an IRA to cover higher education expenses for their children, they can end up living a compromised lifestyle in retirement if they do not have sufficient funds. Therefore, it may be best to opt for different investment instruments for varied needs and not club two needs under the same instrument unless absolutely necessary. As a rule of thumb, you should invest in retirement plans and then forget about them until you retire. Do not touch or withdraw from them before maturity and let them grow to their full potential.
6. Always be prepared for an emergency:
   Having an emergency account is an important part of any financial plan. If there is anything to learn from the events of 2020 it is that a financial emergency can strike when you least expect it. A lot of people lost their jobs or received reduced salaries as the whole world came to a standstill due to COVID 19. The markets plummeted and people lost their money. As times turned grim, emergency savings helped people stay afloat and survive the pandemic.Having an emergency is an important component of a retirement planning guide. A lot of people wrongly assume that they would not require an emergency fund in retirement. The common notion is that when you are working, the loss of your job can be a financial setback. But when you are retired, you already have a fixed pool of money in your retirement fund. How you use it depends on you but no one can take away this money from you and hence you do not need an emergency fund. But it is important to understand that such a mindset can be dangerous for your financial well-being. Retirement does not offer any protection from financial setbacks. You could suffer from a medical condition, have your car stolen, suffer house damages from a natural calamity, or may be compelled to help a child or grandchild in need. While insurance and savings can help you accommodate some of these costs, you may end up spending a substantial chunk from your own pocket and mess up your retirement calculations and future planning. Hence, make sure to add an emergency fund to your retirement strategies and save accordingly for a rainy day.

To conclude

Financial planning for retirement is essential to make sure that your older, non-working years are spent in comfort. The more detailed your plan is, the lower are the chances of anything going against your wishes or needs. Hence, try to leave as little room as possible for any errors or doubts and plan every head with a lot of attention and detail. Also, remember to plan for other associated aspects, such as estate planning and succession planning as they are an integral component of your retirement too. Moreover, keep in mind that since retirement planning is a long-term goal, you should start saving for it from an early age in life. This allows you to take more risks, benefit from the power of compounding, and save enough for your retirement without putting too much pressure on you.
You can also consult with a professional financial advisor to devise suitable strategies and pick the best investments for retirement.