Retirement Planning Guide

A comfortable retirement is what everyone aims for, but not everyone puts in the effort to build those golden years. As per a 2020 TD Ameritrade report, approximately two-thirds of people in their 40s have less than $100,000 in their retirement savings. Additionally, 28% of those in their 60s have lower than $50,000 in their savings. With this level of savings, a person’s retirement years are likely to be less pleasant than expected. However, having a holistic proposal in place, along with proper planning, can be the right approach.
Here is an exhaustive retirement planning guide to help you save and plan efficiently for the retirement dreams of your future:
Do a pre-check
Before getting involved in the planning details of retirement, it is advisable to conduct a rational pre-check. This will involve assessing if you already have an emergency fund for uncertain times ahead. If not, you can work towards building a contingency fund first. Ideally, this should be equal to 3-6 months of your living expenses. As per the 2019 consumer expenditure statistics, the average annual expenditure of an American household was close to $60,060 in 2017. Regardless of whether your household expenses are lower or higher, saving at least this much or more can help in keeping your finances afloat in vulnerable times.
It is beneficial to set aside this money in high interest-paying accounts so that your wealth grows. The funds should not be used for an ordinary purpose. Instead, they should be deployed only for circumstances that qualify as an emergency.
Know your time horizon
A critical element of retirement planning is the time horizon to reach your goals. Your current age and the expected age of retirement are two aspects that define your planning period. For instance, if you are in your 40s and expect to retire from work at the age of 65, your retirement planning period is 25 years (65-40). Hence, all your plans need to be centered around this time horizon. This will include your savings rate, risk-ability, portfolio investments, asset choices, insurance plans, estate planning, etc. Generally, it helps to start planning at a young age. But it is never too late to begin. However, all approaches should then be applied to the plan, considering your time horizon. Typically, for a planner who has a shorter period at hand, a more conservative approach is advised rather than indulging in risky endeavors. The portfolio distribution can also involve more fixed-income assets, bonds, and less of equity-based funds. Even though the latter offers higher returns, time can restrict the ability of a late bloomer to take risks. Additionally, the maturity of funds should be simultaneously changed. Such as, for a person who is 35 years old and wants to retire at the age of 67, investing in resources with maturity in 2050 or before is more pragmatic. For this purpose, you can choose target-date funds, where the fund allocations are altered with each life-stage.
Assess your retirement spending requirements
This stage requires you to be more realistic. You have to make a near-to-real assessment of the future. Typically, you may need to keep in mind your expenses and the standard of living that you expect in your non-working years. It is beneficial to reach an estimate that is as close to reality as possible. Overstating your expenses in the future can have you compromise on your present. There can also be some leftover savings. On the other hand, understating your future expenditure can risk you outliving your funds and then facing a crisis in the most demanding years of your life. Hence, it is important to understand the criticality of this measure. Most people think that saving almost 70-80% of their current income should be sufficient for later years. But this plan can backfire in many areas. Generally, the costs in those years are higher. You have more time for leisure activities, travelling, etc. In addition to this, unexpected medical expenses can cause a strain on your funds. Moreover, with the increasing cost of living and the steeply rising healthcare prices, it is not advised to save a share that is less than your current income. Instead, your savings should be 100% or more of your existing income. This helps ensure that your golden years maintain their charm for as long as you need. Realistically ascertaining your future expenses will help you take strong steps today for a comfortable and secure retirement.
Plan your investments and retirement saving accounts
The basic sources of income in retired years are returns from investments and the withdrawals from retirement accounts. Hence, it is advisable to calculate the expected returns on investments and create a beneficial withdrawal strategy (that minimizes taxes and penalties). This helps you to enjoy an adequately-funded retirement. Your investments can change according to your risk-taking approach. With age, a more conservative choice of assets – more equity and fewer bonds – is the recommended way forward. The returns from these investments should be able to match the expected future expenditure as defined in the step above.
Additionally, it is vital to assess all your retirement plan options and select the ones that provide security, help your money grow, and offer tax-advantages. You can evaluate options, such as an individual retirement account (IRAs), a health savings account (HSAs), a 401(K) account, a 403(b) plan, etc. It would be helpful to contribute to an employer-sponsored retirement plan. Essentially, these reduce the taxable income and simultaneously allow savings to grow tax-deferred until withdrawn. Hence, to build a strong retirement plan, it is advisable to max out all these options of savings. The contribution limit for IRAs for the financial year 2019-2020 is $6000 + $1000 (catch-up contributions) for investors aged 50 or more. For a 401(K) account, the upper limit is $19,500 + $6,500 for people aged 50 and above. Another vital thing to follow is to not depend a lot on Social Security benefits to support your non-working years. In January 2020, the average annual Social Security benefit was only $1,503 per month. This is inadequate to support an average lifestyle post-retirement. So, be sure to base your incomes more on reliable investments and retirement saving accounts and minimize your dependence on Social Security.
Stay updated on your estate plan
As part of the retirement planning process, you should also stay on top of your estate plan. Estate planning includes many financial aspects. This comprises wills, trusts, assets, portfolios, life insurance policies, healthcare covers, inheritance, etc. As a prudent planner, you may want to review these aspects from time-to-time to ensure that they meet your present goals and can support a happy after-work life. For example, a person in their 60s would want to have secure returns and a more conservative approach of investment. Moreover, an insurance plan with an exhaustive health cover would be a priority. Ideally, the age will also demand a will and a trust, if needed. A holistic estate plan can help you meet your current requirements and also create a solid retirement nest.
To sum it up
By following these simple measures, you can build a well-funded, structured, and strong foundation for your golden years. As per some reports, saving for retirement is a top priority for only 57% of Americans. This can be made more achievable by following a comprehensive retirement guide. You can also seek expert advice from professional financial planners to help you build the life you desire.