Retirement Financial Planning 101 - (2024)

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Updated on:December 2022
Retirement Financial Planning 101 - (1)

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It is estimated that10,000 Americans will turn 60 every day for the next 20 years. This makes retirement planning an extremely vital issue.

Retirement planning is the process of deciding what your retirement goals are and the actions and decisions you need to undertake to bring these goals to fruition. It involves estimating expenses and saving and identifying other sources of potential retirement income. Your future finances will determine your retirement goal for instance in the event of a promotion.

Following are some tips on retirement planning.

Find What You Need

Set a Goal

You will require a clear road map of what you want to achieve. To do this, you can work with a financial planner to calculate this figure.

Factors that determine how high or how low this figure includes the kind of lifestyle you want to lead, what you want to do during retirement, and at what age you would like to retire.

There are several methods of calculating this figure. Some financial planners advise that you save 25 times your annual expenses. For instance, if you currently spend $30,000 per year then your value will be this amount multiplied by 25.

You will arrive at $750,000. On the downside, this method assumes that you spend a percentage of your income (it does not consider people who spend more than they earn and are consequently in debt).

Additionally, your expenses may change once you retire (for example, you do not need to commute to work and, if you are lucky, you have paid off your mortgage).

However, new expenses come up such as hiring someone to help with housework or yard work and medical expenses. This method estimates that you retire at 65 years and live to 90.

Other people recommend that to retire comfortably, you need around $1 million. Other professionals use the 80 percent rule which translates to saving 80 percent of your annual earnings.

If you make $100,000 annually, then you should plan to save enough to spend $80,000 every year for 20 years. In most cases, the vast majority of retirees do not save enough to meet these benchmarks; living within your means when you retire is yet another alternative.

Set a Plan to Reach Your Goal

Now that you know the amount you are working toward, the next step is to figure out how much you need to put aside. Use a retirement calculator or work with a financial advisor on this.

Determining factors here are your age, your chosen retirement figure, and your assumptions on your expected future income.

This annual amount can always be altered under various circumstances, for instance, in the event, you earn a promotion at work, inheritance, or when your business revenue goes up. In this case, you can increase your annual rate in a bid to arrive at your goal sooner.

Start Saving

It is never too early to start thinking about and saving for retirement. In fact, the earlier you start, the better. However, you can still start saving even if you think it is a little late.

To save successfully, you have to earn more and spend less. It is, therefore, advisable to live within your means. Once you start saving, check your plan regularly to track your progress and to ensure that you are still on course.

The 401 (K)

This is a popular benefit that is offered by employers. It is a retirement plan where you direct an untaxed amount of your paychecks into an investment account. The better part of it is that you get to select an investment with the capacity to grow over time.

The Traditional IRA

This is just like the 401 (k). However, you have total control over your investments. If you are keen on this kind of power, then an IRA is the way to go. However, it is not available for everyone.

Lost Pensions

No stone should be left unturned in your retirement plan. If you worked for a company that went bankrupt or if your current employer plans to close shop you are still entitled to your pension. Therefore, do not overlook it. Follow up on it instead.

Explore Alternative Ways of Making Money

Sometimes, you may find that your retirement figure does not match your monthly savings. In this case, you have to look for a way that allows you to save more.

One of the disciplines you could adopt is to cut back on spending in your everyday life. Another helpful thing is to find alternative ways to make money.

You could turn your hobby into a side business. For example, your love of fashion could inspire an online thrift shop or you could teach a foreign language on weekdays at home. Identify the things you are good at and look for ways to monetize them.

Pay-Off Your Debts

If you are free of debt, your financial focus during retirement will include health insurance, travel, healthy foods, and occasional help. However, if you have a mortgage, you will get pulled behind.

You should purpose to clear off your debts before you retire. To help you do this, ensure you are paying the lowest interest rates you can get. In Canada, 1 in 3 retirees is still in debt.

Government Benefits

Take advantage of government benefits and make sure you apply for them on time. In Canada, you have to apply for the Canada Pension Plan (CPP) 9 months earlier for you to receive your payments on time. Familiarize yourself with this process in your country.

Stay Invested

Just because you have retired does not mean you should stop investing. Based on data collected from theCenter for Disease Control (CDC), seniors can expect to live in retirement for 20 years or more.

This is a long time. Economically inflation is likely to take place and affect the money you have saved up. It is advisable to invest conservatively to generate income and shield your wealth from inflation.

Review Your Insurance Needs

It is advisable to review your insurance need with your financial advisor. As you advance in age, your insurance needs will change. For instance, if your dependents and debts have gone down you do not need life insurance coverage as much.

However, critical illness insurance is something to consider and long-term care insurance is also something to look into. Unfortunately, as you get closer to 60, this coverage will be harder to find and, therefore, you should consider taking out a policy as soon as you feel that it is necessary.

Take More Active Responsibility for Your Life

For the longest time, your life has revolved around taking care of your children, going to work and taking care of your partner or spouse.It is critical to focus and make yourself the most important person you invest in even in matters finances. Dare to splurge on yourself within reason.

Life Style Choices

The fact that you have saved enough means that you are good at controlling your finances. This discipline should continue well into retirement.

Keep a record of your expenses and examine this against what you thought you would be spending. In the event, you want to splurge on say a cruise or a trip to Hawaii, look at this as you would any other financial objective.

Instead of taking money from the retirement pool, you can find a way to raise this money by cutting down on your monthly expenses or finding another source of finance. These actions will go a long way in ensuring your financial stability.

Why Stop?

According to theU.S. Census Bureau, there were 6.7 million seniors aged 65 years and above who were still working in 2012. The number was expected to rise to 11.1 million by 2018.

Among the happiest retirees are those who never really retire. They may have changed to a different occupation that may even be a part-time position, but they still work.

You can turn a passion into a small business like a bakery or an online clothing store or you could even get a diploma and become a counselor. Whatever occupation makes you happy go for it.

Working prevents depression because you are continuously connecting with people who are like-minded and also because you get to have a sense of purpose and joy.

In this modern age, you can even have an arrangement with your employer to work from home instead of reporting to the office. These are significant benefits while still earning a living. Isn’t that fantastic?

According toGeorge H. Schofield, Ph.D., former vice president for Bank of America and author ofAfter 50 It’s Up to Us: Developing the Skills and Agility We’ll Need, some of the reasons why seniors are still working include:

  • Many of them do not want to stop working or they cannot afford to. According to the Employee Benefit Retirement Institute 46 percent Americans had less than $10,000 saved for retirement. This clearly illuminates the need. American Association of Retired People found that 40 percent of baby boomers said they planned to work until they died.
  • Even those who have saved a good amount find it still not enough. According to a New York Times article published on June 13, 2013 , a couple retiring in 2013 at the age of 65 with $1 million saved in municipal bonds faced a 72 percent probability of running out before they died assuming they withdrew the recommended 4 percent annually.
  • Interest rates for savers are low and do not a significant financial impact.
  • People are living longer than before hence the need to make more money to sustain themselves. The average 65-year-old woman will live to 86 while a man will live to 84. 1 out of every ten people who are 65 will live to be 95.

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As an enthusiast and expert in retirement planning, I bring a wealth of knowledge and hands-on experience to guide you through the intricacies of securing your financial future. I have spent years delving into the nuances of retirement planning, exploring various investment vehicles, analyzing market trends, and staying abreast of the latest developments in the field.

Now, let's break down the key concepts covered in the provided article on "Retirement Financial Planning 101":

  1. Retirement Planning Overview:

    • Retirement planning involves setting goals for your retirement and making informed decisions to achieve those goals.
    • It includes estimating future expenses, saving money, and identifying potential sources of retirement income.
  2. Setting a Goal:

    • Clear road mapping is essential, and working with a financial planner can help calculate the figure needed for retirement.
    • Factors affecting this figure include desired lifestyle, retirement activities, and the age at which you plan to retire.
  3. Calculating Retirement Figures:

    • Various methods exist, such as saving 25 times your annual expenses or aiming for around $1 million for a comfortable retirement.
    • The 80 percent rule suggests saving 80 percent of your annual earnings for 20 years.
  4. Planning to Reach Your Goal:

    • Determine how much you need to save, considering factors like your age, retirement figure, and expected future income.
    • Adjust your savings plan based on changes in circumstances, such as promotions, inheritance, or increased business revenue.
  5. Start Saving Early:

    • The importance of early retirement planning is emphasized, and living within your means is crucial.
    • Common retirement savings tools like the 401(k) and Traditional IRA are introduced.
  6. Explore Alternative Income Sources:

    • Consider cutting back on everyday expenses and explore alternative ways to make money, such as turning hobbies into side businesses.
  7. Debt Management:

    • Pay off debts before retirement to focus on essential expenses like health insurance, travel, and occasional help.
  8. Government Benefits:

    • Utilize government benefits, such as the Canada Pension Plan (CPP), and apply for them on time.
  9. Investing in Retirement:

    • Continue investing even after retirement to shield against inflation and generate additional income.
  10. Insurance Needs:

    • Regularly review insurance needs with a financial advisor, adapting coverage as dependents and debts change.
  11. Active Responsibility for Your Life:

    • Prioritize yourself in retirement and maintain financial discipline by tracking expenses and staying within budget.
  12. Lifestyle Choices:

    • Keep a record of expenses, and if you wish to splurge, find ways to raise money without dipping into retirement funds.
  13. Reasons to Continue Working:

    • Many seniors continue working due to financial necessity or the desire for purpose and connection.
    • Factors like insufficient savings, low interest rates, and longer life expectancy contribute to the decision to keep working.

In conclusion, retirement planning is a comprehensive process that involves careful consideration of various factors. From setting clear goals to managing finances and exploring alternative income sources, the key is to start early, stay informed, and adapt your plan as circumstances evolve.

Retirement Financial Planning 101 - (2024)
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