Creating a financial plan for retirement involves preparing for two stages of life: the saving/accumulation stage, and the retirement spending stage. You need a plan that will allow you to build wealth over your working life so that you have enough on hand to retire comfortably when the time comes. You also need a plan for how you will manage that wealth once you have it so that you can afford a sustainable rate of withdrawal and a comfortable lifestyle in retirement. There are many ways to build this financial plan, but all of them need to reflect your personal situation.
Do you have questions about or need help with retirement planning? Speak with a financial advisor about it today.
Keep Track of Your Social Security
For most households, one of the most important parts of a retirement plan is Social Security. This program offers guaranteed income throughout your retirement, with higher payments for people who earned more during their working lives and who wait longer to begin collecting.
The variable nature of Social Security means that you don’t necessarily know how much you will earn until you file for benefits. However, you can still get a sense of where you stand. The SSA offers a benefits calculator that can tell you how many Social Security credits you currently have and, as a result, your future benefits as things currently stand.
You can also estimate your benefits based on your age and current income using SmartAsset’s Social Security calculator. You can estimate your potential benefits based on the program’s averages for retirees. For example, at the time of this article’s writing, the average Social Security payment is $1,872 per month, or $22,464 per year.
As you make and adjust your retirement plans, keep Social Security benefits in mind. Don’t use this as a reason to reduce your savings, but remember that it can significantly boost your options later in life.
Anticipate Your Retirement Goals
One of the most important parts of making a retirement plan is also the most difficult: how much money will you need to last in retirement? This is your goal, which makes it the place to start. But it’s also the most elusive question in this whole process.
For example, say you’re starting a retirement plan early. It’s almost impossible to know at age 25 what your lifestyle and spending needs will be once your working life hits its stride. By contrast, the later you are in life the easier it will be to answer that question, but also the more likely it is that you have already established a retirement plan.
Still, even if you have to make an educated guess, set a retirement goal. Make an estimate of how much income you will need each year to live a comfortable life, even if it’s just a best guess. From there, calculate how much you will need saved to generate and sustain that income through a long retirement.
Let’s say that you don’t yet have a sense of what your lifestyle will be like over your working life. So instead, you assume the 2022 Census’ national average of about $75,000 per year. If you also assume $22,464 per year of Social Security income, that means your portfolio will need to generate $52,536 per year of income. If you assume a 4% withdrawal rate over 25 years using the 4% method, that gives you a savings goal of $1.3 million by retirement. While this is just an example, it’s a decent place to start.
Calculate Your Rate of Savings and Return
Your goal tells you how much you need to save between now and retirement. The next step is to run the numbers based on three variables:
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Your age, and how long you have until retirement
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Rate of return (how much growth you will target)
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Savings rate (how much you will invest each month)
These numbers generally make up the beginnings of your overall financial plan. Once you know how much wealth you need to build, you can calculate what rate of savings and growth will intersect to meet that goal by the time you retire.
Take our example above, let’s say that you’re 37 and just getting started. That gives you approximately 30 years to save up $1.3 million if you retire at 67, which is Social Security’s full retirement age. Say you plan to invest in an S&P 500 index fund. With the market’s average 10% annual rate of return, investing $580 per month could reach your $1.3 million goal by age 67.
Now, of course, there are many ways to approach this. Your actual numbers will vary widely. You might already have savings, so you will want to account for those in your plan. You might want a move conservative investment than the stock market, or 10% of your income might come to significantly more than $580 per month, or something else entirely. This is the step that sounds straightforward, but is arguably the most complicated part of the entire process.
Try not to get overwhelmed. Instead, remember this: You don’t need to get the answer right. This is about finding a place to start. You’re just looking for concrete numbers so that you can begin saving and investing tomorrow without feeling like you’re taking a best-guess approach to finance. As you move forward, you’ll keep reviewing and monitoring this plan, and you’ll keep adjusting these numbers to find a better fit.
Prepare Tax and Retirement Plans
You want to make a plan for how you will build your retirement savings, and how to maximize your tax advantages during that process. Specifically, what kind of retirement portfolio will you use? Something like a 401(k) or 403(b) offers great upfront tax savings, but is limited to W-2 employees whose employer offers those programs. And while pre-tax portfolios make it cheaper to save for retirement today, they can have high taxes while in retirement.
You can also invest in retirement through an IRA, which offers the same pre-tax benefits of a 401(k) plan, while also being available to self-employed individuals. However, an IRA has aggressive contribution limits. You can contribute roughly one-third as much money each year to an IRA as you can to an employer-sponsored program.
There are also Roth IRAs and Roth 401(k) plans. These portfolios are more expensive upfront, since they offer no tax deductions, but they are far more valuable once in retirement as they allow you to withdraw your savings entirely tax-free.
Lastly, you can invest through a taxed portfolio. This can, sometimes, be a necessary option if you want to contribute more than an IRA or 401(k) plan allows. However, taxed portfolios should usually be your last choice given that they offer no special tax benefits beyond long-term capital gains rates on qualifying investments.
Monitor Your Finances and Make Adjustments Over Time
At this point, you should have a place to start. You should have an estimate of how much money you can depend on in the form of Social Security, and how much more you want to have saved in your retirement portfolio. You should have a sense of what kind of return you will invest for and how much you will save each month in order to meet that goal. And you should know what kind of retirement vehicle(s) you will use to build that wealth and manage your taxes.
The next step is to keep monitoring your plan going forward.
Preparing for retirement is a project over your entire working life, and during that time a great many things will change. Your lifestyle may grow, leading you to want a more generous income in retirement. Your income may change, giving you more flexibility to comfortably save and potentially accelerate or expand your retirement options. The market may dip, leading you to shore up your investments from time to time with extra savings.
And you will almost certainly make adjustments as your many different estimates are tested over the years.
While you do all of that, keep your finances in shape for retirement. Prepare for specific costs like long-term care and gap insurance. Begin to consider how you want to take your income, whether it’s in the form of portfolio withdrawals, annuity payments or other formats. Think about sector-specific costs, such as the significant increase of housing costs over time if you rent.
Perhaps above all else, keep an eye on debt. As you approach retirement in your 50’s and 60’s, do your best to pay off any debt, including major loans like mortgages and student debt. Eliminating major, structured payments will give you more flexibility and sustainability for your portfolio.
Bottom Line
Creating a financial plan for retirement means making a good plan for how you will save your money, and a good plan for how you will make your withdrawals last. A good place to start is by making a plan for what you will need, and how you can build that kind of wealth.
Financial Planning Tips
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A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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This article is just the tip of the iceberg when it comes to making a financial plan. Check out SmartAsset’s guide to what a financial plan is to learn more.
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