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All about Retirement Planning

5 Important Steps in Retirement Planning

by Drew Overton | June 27, 2022 | Retirement Planning

The title of this blog may lead you to believe this is only for people within a few years of retiring. However, the inverse is true: the younger you are, the more important this information is for you. So, first off – what is retirement planning, exactly? It can sound like an overwhelming and far-away thing, but quite simply it is just planning for life after leaving the workforce.

Most people think only about the money needed for retirement. While this is an important aspect, there are several pieces to the puzzle needed to paint your retirement picture. When will you retire? What will you do once you retire? Where will you live?

While all these questions seem quite impossible to answer now, we’re going to walk through the five steps of retirement planning to ensure that you are on the right track.

Step 1: Decide when you prefer to retire.

This step involves two very important pieces of your retirement plan.

  1. Determine when you would like to retire.
  2. Calculate when you may be able to retire.

The first question is usually answered quickly. And while all this information is subject to change, it’s important to have a plan set in place. And a plan is just that, a tentative roadmap that you tweak as time goes on until you reach that goal. Most people will provide an answer anywhere between 65 and 70 years old. That said, some people get to age 70 and absolutely love what they do and would like to continue working.

On the other hand, some people may elect to retire closer to age 60 – or even better, some people as a part of the F.I.R.E. (Financial Independence, Retire Early) movement, will aim for a retirement age of 35 to 45 years old. Either end of that spectrum may sound extreme to you, but today we’re going to focus on the people who have a traditional retirement age in mind: mid-60s to early-70s.

Step 2: Determine how much is needed for you to retire at that age.

Once you’ve determined your preferred retirement date, now it’s time to project how much you may need to retire at that age. The further out that you push your preferred retirement date, the less in retirement assets will be needed at that date, assuming your life expectancy is the same. So, how do you go about calculating this, and what information is needed?

We always say, it’s a simple math problem as long as you can tell us two things:

  1. How much will you need each month in retirement?
  2. How long do you plan to live?

Those two questions are impossible to know exactly. On average, we project that people will spend around 70% to 80% of what they spent during their working years during retirement. While only an estimate, it allows us to use real data (what you are currently spending) and adjust it for lesser activities during that time. It’s important to look at your individual spending preferences and goals during retirement to increase the accuracy.

Next, we use an estimate for life expectancy. This involves combining the average life expectancy depending on your gender, your current health status, and your family medical history. We tend to use more conservative estimates for life expectancy, meaning we assume that you will live longer to ensure your retirement savings are sufficient.

For 2022, males in the U.S. have an average life expectancy of 76.1 years and females in the U.S. have an average life expectancy of 81.1 years. We like to plan for anywhere from 85 to 95.

Now that you have an idea of what you may need during retirement and how many years you are expecting to be retired, we can project the amount of savings you may need at retirement. A few other details that may be helpful are:

  • Current retirement savings
  • Current retirement savings rate (what percent of your earned income do you put aside for retirement?)
  • Other potential income (Social Security, pensions, part-time work during retirement, etc.)
  • Annual estimated inflation rate
  • Annual estimated rate of return

Click here for a retirement savings check-in based on the factors described above.*

*Please note that TFG is not affiliated with NerdWallet, and that projections are for illustrative purposes only. We recommend a comprehensive financial plan that is personalized to your specific situation.

If using the retirement calculator link above, you can “back in” to find the estimated savings rate needed to reach your retirement goal. That said, we want to equip you with our general savings rate recommendation as well. Over the years financial advisors have debated over the “perfect” savings rate needed to be able to retire comfortably. As you may have guessed, general rules don’t always apply to everyone.

Most financial advisors recommend a savings rate of anywhere from 10% to 15%, while some aim for upwards of 20% or more. It’s important to ensure that your savings rate is a reasonable balance between your lifestyle, budget, and retirement goals. We tend to lean more conservative, if your budget can handle a retirement savings rate of 15%, why not? Keep in mind that this rate includes any employer retirement plan match that you may be receiving.

Step 3: Choose the retirement vehicle that best suits your situation.

By now you’ve determined your retirement goals (which are always subject to change) and you’ve determined an estimated savings rate to meet those goals. But wait, there’s more! Where should the money that you are saving go? In your shoe, under your mattress, in the bank? Probably not. We find it most beneficial to harness the power of compound interest in a qualified retirement savings vehicle. Depending on your specific tax situation, you may benefit more from one over another:

  • Company retirement plan (i.e., 401(k) plan, 403(b) plan, Simple IRA, SEP IRA, etc.)
  • Individual retirement accounts (traditional IRA, Roth IRA, etc.)

The plans listed above may be subject to earnings limits, contribution limits, and deduction limits, among other things. If your company offers a retirement plan match, take full advantage of the match before investing elsewhere – that’s “free” money! Some people may benefit more from deferring the tax on retirement plan contributions (pre-tax contributions) rather than paying the tax now (Roth contributions).

It is important to talk to a financial advisor to determine which plan is best for you given your current situation. While pre-tax vs. post-tax may impact your retirement plan significantly, the most important thing is that you are saving. Click here for a brief overview of the different types of retirement vehicles.

Step 4: Choose investments that reflect your time horizon and risk tolerance.

Before you can set up automatic savings into your retirement vehicle, you’ll need to select the investments. In general, younger savers with a longer time horizon can afford to select a more aggressive investment mix. Conversely, as you approach the later years of your career, you may dial back on the risk within your retirement portfolio.

Most retirement plans offer target date funds, which are a great way for more “hands-off” participants to invest. You may also decide to invest in lifestyle funds or even index funds. Consider speaking with a financial advisor to determine the investments that best suits your situation.

Step 5: Reassess your progress annually.

While we recommend the “set it and forget it” mentality for automatic retirement savings, it is important to reassess your retirement plan at least annually. If you’re looking for a trusted CERTIFIED FINANCIAL PLANNER™ professional whose fiduciary duty is to you and your wealth only, call Tull Financial Group today on 757.436.1122 to see how we can help you plan for your dream retirement – no matter your age!