Your guide to retirement planning

Retirement planning can be boiled down to only five steps. And while you can complete much of the work up front, planning for retirement is a process that evolves over time. It’s important to occasionally revisit your plan to ensure you’re still on track to meet your goals. So what exactly is retirement planning and what does it entail?

What is retirement planning?

Retirement planning is the process of identifying your retirement goals and implementing financial strategies of saving, investing and ultimately distributing money to sustain yourself during retirement.

Plan for retirement in five steps

Planning for retirement can seem like a daunting task. You don’t want to fall short of your retirement goals, but you also have to consider your other savings goals as well. The following five steps will help you create a retirement plan to build, grow and manage your retirement savings.

1. Set a retirement age target

At what age would you realistically like to retire? By picking a target age, you’ll know not only how many years you have to save up for retirement but also how long you’ll need your money to last.
The earlier you start planning and saving, the more time your money has to grow. And the earlier you plan to retire, the longer you’ll need your money to last. The earliest you can start taking Social Security benefits is age 62, but you won’t be entitled to your full benefit amount until you reach your full retirement age. If you were born in 1960 or later, your full retirement age is 67. But if you can delay retirement up until age 70, your benefit will increase.
Some people retire early, while others want to work for as long as possible. Wherever you stand, knowing when you want to retire is an important first step.

2. Figure out how much money you’ll need to retire

With an average life expectancy in America of around 80 years old, if you want to retire at age 65, you’ll need enough money to sustain your retirement for at least 15 years.
But at what income would you like to retire? In other words, what does retirement look like for you? Do you want to travel the world? Will you dine out more often than you do now?
Having a clear picture of your life when you stop working will help you figure out how much money you’ll need to fund it. While there’s no precise formula, experts say you’ll need at least 80% of your pre-retirement income when you leave your job. Why 80%? Chances are you’ll be spending less than you are now. For starters, you won’t be shoveling money into a retirement account. You may no longer be paying a mortgage, and you’ll no longer be paying payroll taxes toward Social Security.
So if you earn, say, $65,000 per year before retirement, you should expect to need around $52,000 per year in retirement.

Implement the 4% withdrawal rule

First articulated by financial adviser William Bengen in 1994, the 4% withdrawal rule has been a milestone for determining how much money people need to save for a lasting retirement. The rule states that retirees should start retirement by withdrawing 4% of their assets annually, increasing the distribution each year by the inflation rate and rebalancing annually. According to Bengen, their portfolio would last at least 30 years by following this guideline.
This assumes a portfolio of only two asset classes — intermediate-term Treasury bonds and large-cap stocks. Bengen has since stated that by adding small-cap stocks as a third asset class, investors could safely withdraw as much as 4.5% annually.

3. Calculate how much money you need to save for retirement

Take stock of where you currently stand. As of right now, how much money do you have set aside for retirement? Based on your answer, calculate how much you need to save and how much your investments need to return to retire by the target age you decided on in the first step.
Experts recommend saving at least 15% of your pretax income for retirement. But this rule of thumb is for those who start saving by their mid-20s and retire at 65. If you wait until later in life to start saving or want to retire earlier, you’ll need to save more aggressively or push back your retirement date so that you have more time to build your nest egg.
Again, the earlier you start saving, the more time your money has to grow. For nearly the last century, the average stock market return is about 10% per year. Accounting for inflation, it’s more like 6% to 7%.

4. Choose the best retirement plan for you

You now have a retirement age in mind, and you’ve got an idea of how much money you’ll need to retire. You’ve taken inventory of what you have saved up so far and how much money you need yet to save to reach your goal. So where do you save it?
There are many types of assets you can use to fund your retirement. But start here:

• If you have a 401(k) through work and receive matching dollars, contribute at least the maximum amount to receive the full employer match. It’s free money — don’t leave it on the table.
• If you don’t have an employer-sponsored retirement plan, open your own retirement account.

But you’ll maximize your cash flow if you use a mix:

• Social Security. Start collecting Social Security as early as age 62, but your monthly payout increases if you delay taking your benefits up to age 70.
• Retirement accounts. Save for retirement using tax-deferred plans like 401(k)s, 403(b)s, 457s and traditional IRAs. Or open a tax-exempt account, such as a Roth IRA.
• Investment accounts. Invest in stocks, bonds, mutual funds and more through a taxable investment account and use the money to fund your retirement.
• Health savings account (HSAs). These are for more than medical expenses. Once you reach age 65, you can use this account for anything — from everyday living expenses to vacations. Though withdrawals for anything other than qualified medical expenses are subject to regular income tax.
• Annuities. These are a type of insurance that turns a lump sum of money into a consistent stream of income for a set period.
• Pensions. These retirement plans offer guaranteed income, but they’re quickly being replaced with 401(k)s and other employer-sponsored plans.
• Home equities. Take out a home equity line of credit and borrow the funds all at once or over time.
• Reverse mortgages. Retirees over age 62 can pull equity out of their current homes and use it for cash flow.

There’s no single best retirement plan for everyone. Prioritize free money, such as matching dollars through a 401(k), and tax-advantaged accounts first.

5. Invest away, balancing your risk tolerance with need for return

When choosing investments, consider your age and how much time you have on your side. If you’re younger, you can tolerate more risk because you have more time to make up for any potential losses.
There are many unexpected risks that threaten your retirement savings. Put a plan in place to protect your assets from any curveballs life may throw your way:

• Inflation. With a retirement that could last 20 to 30 years, inflation remains a major threat to your nest egg. Make sure your investment strategy balances protection and growth.
• Unexpected medical bills. Consider buying long-term care insurance to help cover the rising costs of assisted-living facilities, home health aides, nursing homes and more.
• Creditors. Protect your savings from creditors by maximizing out 401(k) and pension plans, which are often protected from general creditors.
• Lawsuits. If you lose a lawsuit, a creditor can’t go after any employer-sponsored retirement plans because they’re protected by the Employee Retirement Income Security Act (ERISA).
• Taxes. You’ll minimize your tax burden by creating a tax-efficient withdrawal strategy that balances a mix of tax-deferred and tax-exempt accounts each year.

As you get closer to retirement, you’ll likely want to take greater precaution to protect your savings. This may mean investing less in volatile assets like stocks and in more stable assets, such as bonds.

Revisit and revise your retirement plan over time

Your retirement planning needs shift as you get older. Saving for retirement and investing in your 20s will probably look different than investing in your 30s. In your 20s, you’re starting your career and planting the seeds of what will hopefully become a fruitful nest egg. In your 30s, you may be trying to pay down debt or you may consider expanding into different investment opportunities.
Likewise, investing in your 40s might entail ramping up your investing and locking in your goals in preparation for retirement.
Revisit and revise your retirement plan over time so that you ensure you’re still on track to reach your goals.

Do I need a financial adviser?

With complex financial situations, it may be best to hire a financial adviser who can provide professional retirement planning and specific investment advice to your unique situation. Studies show that people who work with an adviser see an average 1% to 3% increase in their portfolio’s value than those who don’t.
The cost of a financial adviser varies. Some charge flat fees ranging from $1,000 to $5,000 a year. Others charge a 1.25% to 1.75% fee based on your total assets under management.
Robo-advisors are a new and cheaper alternative to human advisers. Some don’t charge any fees at all, while others charge 0.30% and beyond. But the experience isn’t the same. For starters, robo-advisors recommend portfolios based on your answers to a handful of questions about your investing experience and financials. While this may be enough for some people, you may prefer dealing with a human who will provide a more tailored approach to building your investment portfolio.
Before you decide to hire someone, weigh the complexities of doing it yourself against the fees and expertise of an adviser or robo-advisor. Billionaire investor Warren Buffet recommends investing in low-cost index funds, which is something you can do on your own.

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Bottom line

Proper planning is key to saving enough money to sustain yourself during retirement. And don’t think of retirement planning as a one-time deal. It’s important to check in on your progress over time to ensure you’re still on track to hit your goals. If you’re looking for expert guidance on how to prepare for your ideal retirement lifestyle, consider hiring a reputable financial adviser.