Financial Planning For Retirement

Retirement is a major life event that requires much planning and goal setting.  It’s important that you have a retirement plan so you can enjoy those years in life that you worked so hard for.  A typical retirement plan focuses on ways to minimize the taxes you pay on your retirement funds and managing your savings and income.  Your first step is planning when you anticipate retiring. This can be influenced by many factors including: your personal desires, how much income you will have in retirement and possibly a need to retire based on your circumstances.  

How Much Do You Need To Retire?

Next, you should try to determine how much money you will need in retirement based on your planned retirement age.  This can be challenging, but you’ll need to ask yourself some questions.  Do I want to move locations? Will my lifestyle change? Should I downsize my home?  How will my expenses change? There are some general rules that can help you assess your needs.  The rule of 70% means that you’ll need about 70% of your pre-retirement net income to maintain a similar lifestyle.  It is just a starting point, as your individual circumstances might include any debt you still have, if you’re still paying off a mortgage and other factors, so the percent may be higher or lower for you. 

The $1,000 rule states that for every $240,000 you save, you can withdraw $1,000 per month if you plan to withdraw 5% annually.  To determine how much you’ll need, first determine your estimated monthly and annual expenses in retirement.  You can use your current expenses as a base and take into account any changes you anticipate such as medical costs, lifestyle changes and inflation.  Add some cushioning just to be conservative,  Then divide your annual expenses by .05 (assuming a 5% withdrawal rate) and this will tell you how much you need to save.  For example, if your anticipated monthly expenses are $3,500, your annual expenses are therefore $42,000 (3,500 x 12), you’ll need $840,000 (42,000 divided by .05) in order to withdraw $3,500 monthly. 

How To Build Your Nest Egg

The two sources of retirement funding are savings and income.  Let’s take a look at various savings/investing options.  For many people, the primary source of retirement savings is an employer sponsored 401(K) program.  This enables you to invest pre-tax salary for future withdrawal.  Company plans that have a matching component will contribute a specified percent in addition to your own, which is essentially free money.  Always invest the maximum amount to get the full company match, and more if you want to build your nest egg faster.  The advantages of 401(K) savings is that the money is automatically deducted from your paycheck, so you won’t miss a regular contribution, and that you’re able to invest pre-tax income.  A disadvantage is that you’re often limited to investments specified by your plan, typically a variety of mutual funds.  

You can also contribute to an IRA (Individual Retirement Account) if you’ve maxed out your 401(K) contributions or don’t have a 401(K) program.  An IRA is similar to a 401(K), except you are managing it on your own and your investment options are unlimited.  The two main types of IRAs are Traditional and Roth, each with different tax advantages.  A traditional IRA is taxed when you take out the money and a Roth IRA grows tax free because it’s funded  with after tax dollars.   Both have contribution limits annually and have different tax implications based on your income level.  Try to set up automatic payments to your IRA each month, so you will not miss a contribution.  

Regardless of the type of account you have, there are specific rules about when and how you can withdraw the money.  If you violate these rules, by withdrawing early, there are penalties, so be sure to understand the regulations behind your retirement accounts.  

Income In Retirement

In retirement, you may also have passive income streams.  Social Security is a primary source of income retirees have to supplement their retirement savings.  Dividends from stock investments can also provide income.  Remember, you will typically be in a lower tax bracket once you retire, so you will be keeping more of  your gross  income.  If your job has a pension program, you can also rely on that for income upon retirement.  

Another major consideration is managing your home.  Many retirees downsize their home by moving to another location and buying a smaller property.  This can generate additional savings from all the equity you have in the home.  Another option is a reverse mortgage, which enables you to convert your equity into cash while still owning the property.

Retirement planning can be challenging and many people seek the advice of a professional financial planner to help them navigate.  Start early – the sooner you start saving, the more your nest egg will grow using the power of compounding.

Disclaimer: we are not certified financial advisors and are not offering investment advice. All investments carry risk and you should seek the advice of a professional advisor it you are looking for help with your investment strategy.