Retirement planning is a crucial component of responsible long-term financial planning. By assessing your current financial situation and what you want retirement to look like, you can create a roadmap toward your destination. There are multiple steps to retirement planning, several of which a financial advisor can provide expertise on.
Understanding the Basics of Retirement Planning
Retirement planning requires a comprehensive approach that includes setting specific retirement goals, calculating necessary retirement income, determining savings rates, and choosing the best retirement savings plans. There are many details to consider, but most fit into one of these three categories: goals, income, savings, and accounts.
Key Elements of a Successful Retirement Plan
Setting Retirement Goals
The first step in retirement planning is the most fun. Think about what you’d like retirement to look like, and then more concretely define your vision as specific goals. You’ll want to set retirement goals such as:
- Target Retirement Age: There’s no longer a set retirement age. Decide at what age you want to retire at, and then work with a financial advisor to develop a savings and investing strategy based on your target age.
- Desired Retirement Lifestyle: Visualize how you want to spend your retirement years. Whether it’s traveling, pursuing hobbies, or moving to a new location, your aspirations will dictate how much money you’ll need.
- Estimating Retirement Expenses: List your expected expenses in retirement, including known and unknown costs. Keep in mind that changes in lifestyle, housing, healthcare, and other aspects of life will impact expenses. A financial advisor can help with the numbers (including estimated inflation).
Certain expenses can seem daunting. A financial advisor can help you determine how to mitigate healthcare costs and general inflation, however. There’s almost always a solution.
Get matched with a financial advisor who can help.
Calculating Your Retirement Income Needs
With goals and corresponding expenses estimated, you can then focus on your retirement income.
Work with an advisor to determine your income needs based on your expenses. Once your income needs are known, you can strategize about how your monthly or annual income needs might be met. Some of the main income sources seniors frequently rely on are:
- Social Security Benefits: Estimate your benefits based on your earnings history, using tools provided by the Social Security Administration. Don’t expect Social Security to be too high, but it’s something almost everyone who works gets — and no income source should be ignored.
- Expected Pension Income: If you have a traditional pension plan, determine what your payments might look like. Pension plans are less common than they used to be. They’re still a component of some workers’ total pay, though, and may be near-certain income.
- Personal Savings and Investments: Calculate the expected income from your retirement accounts, investments, and other savings. Determine where you’ll need to get your savings in order to fulfill the remaining gap between income needs, and Social Security/pension income payments.
When evaluating your personal savings, there’s a broad source of potential income sources that you might have. Whole life insurance policies, real estate investments, dividend stocks and funds, and savings bonds are just some of the sources you might draw upon.
Types of Retirement Plans
At this point, it’s time to evaluate which retirement accounts will best help you meet your savings and investment goals. You can determine these goals based on the personal savings and investment income that’s needed, and a financial advisor can assist with the numbers. Use our free financial advisor tool to find someone who’ll understand your goals and retirement plan needs.
There are several retirement plans that might be available to you, depending on your current situation. The following are some of the most common ones.
Employee-Sponsored Plans
Employee-sponsored savings plans are offered by many employers, although not all have these plans. You can only participate in an employee-sponsored plan if you’re working for an employer who has this benefit. Your employer might offer any of a few plans:
- Traditional 401(k) Plans: Allow employees to save a portion of their salary before taxes. Many employers also offer matching contributions. These plans can be highly advantageous if they have an employer match, and they have comparatively high contribution limits.
- Roth 401(k) Plans: Largely the same as Traditional 401(k)s, except with a major difference in how funds are taxed. Contributions are taxed when made, but taxes generally aren’t paid on gains or withdrawals when the funds are used during retirement (See IRAs). These are a newer option that not many employers offer yet.
- 403(b) Plans: Similar to 401(k)s, these are offered by non-profit organizations and certain public institutions. They can have similar features to 401(k)s, but sometimes these are a bit more limited. They’re still often a good option if you work for a nonprofit, school, religious organization, or other employer who offers one.
- Pension Plans: Provide a guaranteed income stream in retirement based on your salary and years of service. Even if the returns aren’t as high as what you might expect in other investments, having a certain amount of guaranteed income can provide great peace of mind.
Individual Retirement Accounts (IRAs)
Most people with earned income can contribute to an individual retirement account (IRA). These are self-directed accounts. They have somewhat lower contribution limits than employee-sponsored plans, but the tax advantages are significant. There are two main types of IRAs:
- Traditional IRA: Contributions are often tax-deductible, and earnings growth is tax-deferred until you begin withdrawing, which are then taxed as income. This may provide a larger starting balance when you begin investing, allowing you to potentially see higher earnings than what a smaller balance invested in the same way would generate.
- Roth IRA: Contributions are made with after-tax dollars, which means you pay income tax on contributions at your current tax rate. Investments can grow tax-free, however, and withdrawals are tax-free in retirement. The savings on potential investment gains may be a major bonus to your retirement savings.
Other IRAs include the SEP IRA and SIMPLE IRA, which might be useful if you’re self-employed or a small business owner.
(Investment involves risk, and gains in these or other accounts aren’t necessarily guaranteed.)
Other Retirement Savings Options
Along with these, there are a couple of other retirement plans that might supplement your income and savings:
- Annuities: Insurance products that provide regular payments later on, in exchange for a lump sum or series of payments that you make. These can provide a guaranteed income stream during retirement.
- Health Savings Accounts (HSAs): Savings and/or investment account that provide tax savings when funds are used for medical costs. Funds can usually be used at any time for eligible medical expenses, and the tax savings are some of the best offered by any retirement plan. Withdrawals might be used for non-medical costs later in retirement.
Additional Retirement Planning Considerations
In addition to calculating income needs, evaluating income sources, and choosing which accounts to use, there are other items depending on your situation. Make sure to evaluate these additional retirement planning considerations:
Debt Management
Paying off debt helps improve your cash flow during retirement. Strive to at least pay off all high-interest debt (e.g. credit cards), and evaluate what other debt you want to pay off before no longer working. Some people find being completely debt-free much less stressful when they’re retired.
Healthcare Costs in Retirement
Healthcare costs can be one of the biggest expenses during your senior years.
Work with a financial advisor who’s familiar with health insurance and healthcare costs. They can walk you through potential Medicare coverage, potential other supplemental health insurance options, and how an HSA might be used.
Long-Term Care Planning
Long-term care is different from healthcare, at least with regard to financial planning. Long-term care can be costly, and it could be needed for a long time. Work with a financial advisor to evaluate long-term care (LTC) insurance options, and other financial strategies to mitigate this potential.
Estate Planning
The final part of retirement planning is planning for after your retirement. Consider how you want your financial legacy, whether that’s investments, family property, or other assets, passed on.
It’s broadly recommended that you create a will or trust to ensure your assets are distributed according to your wishes. You may also want a trust, power of attorney, healthcare proxy, and other legal documents in place. An advisor and/or estate planning attorney can help sort through these matters.
How a Financial Advisor Can Help You with Retirement Planning
Many of the retirement planning details that should be taken into account require financial expertise. This is where a financial advisor can help. A financial advisor who specializes in retirement planning can help you:
- Estimate costs, taking into account inflation, rising healthcare costs, and other factors.
- Evaluate current and potential income sources
- Determine appropriate savings goals and possible investment growth
- Choose retirement plans and income sources to invest in
- Manage your investment portfolio with your goals in mind
If you’d like tailored assistance from a financial advisor who understands retirement planning, you can use our contacts to find a qualified financial advisor who’ll help you. We at Invested Better can connect you with someone who’ll provide expert knowledge and personalized guidance, so you can be in control of retirement.
