Financial planning is probably not on your top ten list for how to spend your time. However, getting your hands around your finances and planning a secure future retirement can make you feel great. And, it doesn’t have to be hard. Here is your complete retirement planning guide.
This simple eight step plan will help you feel better — less stressed — about retirement.
Whether your are fabulously wealthy or just getting by, this retirement planning guide will help you discover your path to a secure future:
- Choose how you want to plan
- Document where you are / what you have now
- Set goals for your money and — more importantly — time
- Assess the strengths and weaknesses of your plan
- Make trade offs, if necessary
- Build confidence by planning for unknowns
- Look for opportunities for more wealth
- Maintain and update your plans over time
Step 1: Choose How You Want to Plan Now for Your Future Retirement
Below we’ve outlined the steps for retirement planning. Sure, you can kind of do some of these things in your head, but you will feel better if you formalize the planning process.
Managing your finances month to month is okay for the short term. However, maintaining a long term written plan is critical for a secure and successful future.
You have three main options:
A) Create your own spreadsheet
Lots of people do this, but doing it well can be challenging.
While a simple retirement calculator won’t cut it, sophisticated and comprehensive online retirement planning resources can facilitate the process of creating a reliable retirement plan.
Online budgeting apps and investment tools are common, but what you are looking for is an online do it yourself planner that has a comprehensive set of inputs and detailed charting and analyses.
The NewRetirement Planner is widely considered the best such tool. Forbes Magazine calls it “a new approach to retirement planning.” There is a free version and also a low cost subscription service ($96 a year) if you opt to get even more serious about increasing your wealth and security.
C) Hire a financial or retirement advisor
Many people benefit from having an advisor walking them through the process. Advisors typically charge anywhere from $500 to thousands, depending on how complicated your situation is and whether or not you want tax planning and investment advice or not.
Step 2: Start With Where You Are: What Resources Do You Have Now
“You can’t really know where you are going until you know where you have been.” — Maya Angelou
Documenting where you have been and where you are now is the first step to achieving a secure retirement.
You need to write down what you have in terms of time and money. This is the first step to achieving a secure future. This should be an easy step. And, as a big bonus, it is proven to reduce stress and make you feel better and more confident about your future.
You can enter just a few data points — your savings amount, savings rate and years to retirement — to get a rough idea of where you stand.
However, you can’t really feel good about your retirement plan until you add a lot more detail. Most retirement calculators ask for 5 or 10 pieces of information. Good online planners ask for a lot more.
At a minimum, you want to make sure that you have:
- Accounted for your spouse’s information separately from your own
- Entered all sources of future retirement income: retirement jobs, pensions, annuities, income from investments, passive income and more
- Documented inflation rates for general expenses, medical cost and housing — these typically rise at different rates
- Thought carefully about your expenses and how they will change over the 20-30 years you’ll be retired
- Budgeted any big one time expenses
- Documented debts and how you are paying them off
- Included all of your retirement accounts, the rate at which you are saving into them and their rates of return
Step 3: Set Concrete Goals for Now and Your Future
Retirement planning shouldn’t be entirely about savings accounts and calculations.
How you spend your time is an undervalued aspect of retirement planning. Think about it. You could probably retire right now — you would just live very frugally. You could set a goal to retire early and need to make some trade offs now to achieve that goal. Or, you could opt to work well past age 65.
Retirement — especially a “new” retirement — is not so much about how much money you have, it is also about what you want to be doing, when and with whom.
Without a plan for life after retirement, many retirees find themselves feeling vaguely unfulfilled and restless, craving something more but not knowing what that something might be. Focusing on the financial aspects of retirement is important, but the personal side of your retirement plan is just as important, and could ultimately guide how you use your retirement assets.
Thinking about what you want from your future can help you find the motivation and will power to make the kinds of trade offs you will need to make.
Learn more about how to set short, medium and long term financial goals.
Step 4: Assess if Your Plan Right Now Offers You a Secure Future
Once your plan is detailed enough, you will want to take a really hard look at whether or not you are all set. Is your future secure?
- When — if ever — do you run out of money?
- How balanced is your cash flow? Do your expenses exceed income?
- Are you tapping savings at an unsustainable level?
- How much savings do you have now? What will the value be of those savings next year and all the years thereafter?
- How much should you have saved now? What are the benchmarks for future years?
It is easy to get answers to all of these questions with the NewRetirement Planner.
However, don’t worry if you are not yet secure…
Very few people just so happen to naturally have a perfect financial plan where they can automatically drift off into a blissful retirement without a worry in the world.
However, with the remaining steps, you will discover how to find your path to the secure future you want.
Step 5: Make Trade Offs
Now, here is where retirement planning can get fun.
Think of planning a secure future as playing suduko or a video game. You just need to find the right combination of elements that meet the intersection of your goals, interests and resources (time and money).
You have many more levers for achieving a secure retirement than just saving more:
- Delaying the start of Social Security can literally gain you hundreds of thousands over your lifetime
- If you own your home, you can tap your home equity for retirement, gaining you more thousands – if not millions to use for retirement
- Planning to reduce expenses in retirement can dramatically improve your retirement cash flow. (Downsizing or retirement abroad could also enhance your lifestyle.)
- What about having a retirement job?
- Could you delay your retirement by a year?
- Accelerating debt payoffs can sometimes be a better use of money than saving into your 401(k)
- Passive income is an increasingly popular strategy for boosting wealth?
Run as many different scenarios as possible, until you come up with the right combination of factors that gets you to the retirement you want.
Step 6: Build Confidence by Planning for Unknowns
So, your plan is really coming along. Now you will want to build confidence in your plan by answering the following five questions:
A. Do you have enough with both optimistic and pessimistic projections?
There are a lot of things that you need to know to predict your financial security. The trick is that some of these things you can’t actually know. You need to make guesses about inflation (general, medical costs and housing) and returns on investments.
One way to feel confident about your future when there are so many unknowns is to create an optimistic as well as a pessimistic scenario.
Unlike many calculators, the NewRetirement Planner lets you set all of these assumptions — both pessimistically and optimistically — for yourself. And, we encourage you to strive to have a retirement plan that insures financial security with both sets of assumptions.
If you have not achieved these metrics, you may want to look at working longer, getting a retirement job, reducing expenses, tapping home equity, boost Social Security benefits, improve investment returns, save more, establish passive income and more…
Play with all of these scenarios in the retirement planner until you have achieved your goals.
B. Do you have an income plan? Have you guaranteed enough of your income?
Once you have established a plan that suggests that you will be secure with both optimistic and pessimistic assumptions, you may want to strive to establish a more detailed retirement income plan.
You will want to answer the following questions:
- Does your income cover your expenses? To help see this, review the cash flow charts in the planner.
- What sources of income are you relying on?
- What level of certainty do you have that you can work as long as you intend to work?
- If you are relying on withdrawals from savings, have you protected those savings from stock market fluctuations?
- If you have a pension, does the company have the funds to pay that pension?
Perhaps most importantly, you should consider whether or not you want to guarantee adequate income to cover your expenses? Social Security, pensions and annuities are guaranteed — you will receive them for your lifetime. Most other sources of income are not completely reliable.
If your guaranteed income is less than your necessary expenses, you may want to at least model a lifetime annuity in your plan to see if it is a cost effective way to give you real confidence in your financial future.
Learn more about retirement income with: 18 strategies for lifetime wealth
C. Can you afford medical care?
The average lifetime out of pocket costs for healthcare for a 65 year old couple retiring today is $285,000.
That amount is more than most people have in retirement savings.
A few tips for tackling medical costs in your retirement plan:
- Be sure you understand if medical costs are being calculated and, if yes, how. The NewRetirement retirement planner automatically builds in average retirement medical costs and will tweak those costs depending on whether or not you have supplemental Medicare coverage.
- Actively shop for the best Medicare supplemental policy each and every year. Your health will change and the policies change. It is worthwhile to rethink your coverage annually.
D. What to do about the potential for a long term care need?
Out of pocket medical costs can be staggering. However, they won’t cover what might be the biggest health care cost in retirement — a long term care need.
About 70% of people who turn age 65 will need some type of long term care in their lifetime, according to the U.S. Department of Health and Human Services, but few are prepared to pay for that care.
Strategies for funding these costs include:
The NewRetirement planner lets you model these strategies. Try a couple different options and be prepared.
E. Have you anticipated any other potential gotchas? (And “give-yas”?)
We are covering a lot on this checklist for retirement planning, but you still need to be prepared for other gotchas — expenses you might not have anticipated. You should also be prepared for “give-yas” — unexpected windfalls.
Here are two considerations:
Have an Emergency Fund: A survey released by the Federal Reserve Board found that 47% of American consumers report they would not be able to come up with $400 for an emergency without borrowing or selling something. That’s half of the country living in a continual state of financial peril. You need to have readily available funds to use if your car breaks down, a family member needs help, natural disaster strikes or some other emergency arises.
Think Through Your Future Spending: Imagining your future in as much detail as possible can help you budget appropriately for retirement. A few things to consider:
- Will your kids graduate college and hopefully be on their own so your budget will be freer?
- Are you prepared to help your own parents with a long term care need?
- Will you receive an inheritance?
- Might you sell your vacation home at some point?
- Is there a possibility for divorce or remarriage?
- Are you ready for the death of a spouse?
Step 7: Look for Opportunities for More Wealth
One of the final phases of for retirement planning is about maximizing your wealth — growing or getting as much out of your money as you can.
A. Do you have the right asset allocation?
Depending on your financial situation, you may have very different asset allocation goals. Some people can live comfortably off income from their assets. Others can grow their net worth — even after retirement. And, still others need to make withdrawals to make ends meet.
You need to make sure that your asset allocation strategy really meets your specific goals. Learn about creating an investment policy statement, or consider working with a financial advisor to help you position your savings to really maximize your wealth.
B. Have you minimized tax liabilities? Maximized tax efficiencies?
The average American pays about $10,500 a year in total income taxes — federal, state and local. Of course, many households pay a lot more and some people pay nothing at all — depending on your income level.
Ten thousand dollars is a big chunk — about 14% — of the average budget. So, if you think about it, taxes can be a bigger lever in your budget than investment returns, cutting expenses or waiting to claim Social Security for a bigger benefit check.
The NewRetirement Planner can walk you through personalized opportunities for lowering this expense.
C. Have you established an adequate estate plan?
What is your goal for leaving an estate?
The NewRetirement Planner enables you to set an estate goal and you can update your progress against your goals at any time. Of the people who have set an estate goal with NewRetirement, 89% are currently on track to achieve their goal for leaving a financial legacy.
The system also gives you a check list of all the documents you need to create and maintain for an adequate estate plan.
D. How will you optimize housing and spend retirement in the best place for you?
Where you live — your community and the walls around you — has a profound impact on your well being. Your home is probably also your single greatest expense and, if you own, it’s your most valuable asset.
Therefore, optimizing housing for retirement ranks close to the top in terms of the best retirement plans.
Here are some considerations:
- Research the best place for retirement (for you)
- Explore housesharing
- Downsize — reduce costs and the emotional burden of a large home.
- Can you be happy in a tiny home?
- What about retirement abroad?
- If you already like where you live but need access to money, you might want to explore the pros and cons of a reverse mortgage?
- Would you ever consider a mobile home park? (Time Magazine calls it the home of the future!)
- Become a traveling gypsy, live aboard a cruise ship or crisscross the nation in an RV
- What about a retirement community?
- Could you? Would you enjoy moving in with family?
Step 8: Keep Your Plan Updated and Continuously Make Adjustments
The final phase of this retirement planning checklist is all about keeping your plan updated and making the necessary adjustments based on how your situation changes.
You should evaluate and update your whole plan and do a retirement check every time there is a change to any aspect of your health, finances or lifestyle. Small changes can have a big impact over your lifetime.
In addition to assessing your retirement plans when things change, a quarterly retirement check in can be an excellent way to keep your financial future on track.
After all, the economy marches onward. You will want to check to make sure that your:
- Investments have grown in the way you expected
- Projections for inflation are tracking as projected
- Debt is being paid down as anticipated
- Spending, saving and earning rates are tracking as you planned they would
If you have documented your overall retirement plan, then checking in is quick and easy. And, always reach out for professional financial help anytime you are feeling unsure.
NewRetirement was founded by financial and technology experts who discovered that their own parents — professionals who hadn’t saved quite enough — needed help figuring out how to retire. There were no trustworthy and affordable resources that addressed anything beyond investments.
Now NewRetirement helps hundreds of thousands of people every month to develop detailed DIY retirement plans and discover ways to be wealthier, more secure and feel more confident and happier about their future.