One of the most asked questions that concerns financial planning is “How to plan for retirement”. As simple as this question seems, the proper answer is rather lengthy and complex. Regardless, the following 3 major steps will show you how to plan for retirement.
Step 1 – Determine Your Expected Retirement Income
Depending on how much time you have until retirement you might need to switch step one and two. If you only have a few years until retirement, your ability to increase your savings is probably pretty limited. In cases such as these you should first determine how much income you will be able to generate during retirement. On the other hand if you have a significant amount of time until retirement and you still have time to increase your savings you should perform step 2 first.
With that said, determining your income during retirement will allow you to plan what kind of life you can afford to live while you are not working. As a prudent measure, it’s important to determine what you can afford to do before you begin to design your retirement lifestyle. So to get started calculating your retirement income you need to list all of your potential revenue streams and capital assets. Start by listing all of your employee benefits such as a 401(K) plans and company pensions (either lump sums or annuities). Next list all of your personal assets such as brokerage accounts, savings accounts and IRAs. Finally list your expected Government program benefits such as Social Security. Once you have your income streams and capital assets listed you should total them up and determine how much you have to work with during retirement.
One great retirement planning strategy is to convert a lump sum of cash, mostly from investments, into an income stream through the use of annuities. This ensures that you do not run out of money late into retirement.
Step 2 – Determine Your Retirement Expenses
Determining your retirement expenses is important for two reasons. First knowing how much your monthly bills are will help in determining how much income you will have left over to spend on discretionary items such as entertainment. Second this information will also allow you to make some tough decision depending on how much you can afford after your income calculations. Retirement is usually a balance between affording what you want to do and what you have to do, thus sometimes a retiree may need to reduce their expense structure (mortgage, cars, vacations, etc.) in order to have enough money to last through retirement. There is nothing worse than being worried about money deep into retirement.
So to get started, take an approach similar to what was described in step 1. Make a list of all of your monthly expense. This will includes your mortgage or rent payment, average electricity bill (round up to make a conservative estimate), water bill, car expenses like gasoline, cable bill, etc. List every single expense that you can think of. Once you have listed all of your potential expenses, you need to determine where you need to focus your attention. Will you have enough monthly income to cover your expenses? If your answer is no, you will probably have some hard choices to make. Please continue to the second part of this article for step 3 and some retirement planning strategies.
Step 3 – Retirement Lifestyle Planning
If you already completed steps 1 and 2 (determining retirement income and expenses) then you should have a good idea on where you stand financially. Money being one of the critical constraints in our lives, it’s time to determine what is needed to ensure that you enjoy your retirement and, at the same time, do not outlive your financial resources.
During the retirement planning process many people do not spend the time planning. Sounds a little funny right? As an individual or more times than not a couple need to sit down and determine how they are going to live during retirement, after all these are the golden years of one’s life. To begin this process start a list of all of the things that you would like to do during retirement, where do you want to live? Would you like to travel, volunteer, start a business, take care of the Grandkids? An important part of this exercise is to get your partner involved in this planning process. You need to ensure that all affected family members are informed about your decisions.
Once you have a clear vision of what you want your retirement to look like, its time for the hard part; making it all work. This is the point in time where you need to start making compromises, so take your newly created list and try to estimate what it would cost to live the life you want to. Are any big financial changes needed, like the need to purchase a new house or sell an old one? Will you need to change your spending habits in order to retire how you would like to? i’m sure you will have to do the research to determine how much all of this stuff costs, however you can find the prices for most anything on the internet.
Transitioning into retirement is not easy, however if you take the time to look at your income, expense and lifestyle and crunch the numbers you should be able to have both a fun and financially secure retirement. Here are a few retirement planning strategies for your consideration.
One great retirement planning strategy is to convert a lump sum of cash, mostly from investments, into an income stream through the use of annuities. This ensures that you do not run out of money late into retirement. In addition studies show that retirees that have a secure income stream are generally more happy during their retirement than people without a guaranteed annuity.
Quick Tip – A common rule of thumb for estimating income needs (to cover expenses) during retirement is take 70% of what your current household income is today. The addition 30% is considered income that you will not need. This amount is usually comprised of savings, clothing expenses (work), less gas expenses, etc.
Delaying your Social Security payments a few years can significantly increase your monthly benefit. So if you have big plans for your retirement in the early years (traveling, etc.) consider postponing your Social Security payment for a few years. This will allow you to spend a little extra in your early retirement years without sacrificing income or capital reserves later into your retirement.