Charting Your Course: The Basics of Retirement Planning


Tue Feb 06 2024

Charting Your Course to Retirement.

"Often when you think you're at the end of something, you're at the beginning of something else." –Fred Rogers. Many people think of retirement as the end of their careers. But do they consider that it is the beginning of a new chapter in life? We would like to envision retirement as stress-free, finally a time to relax after a long period of striving to grow a rewarding career. However, without proper planning, it could be anything but stress-free. It is especially important to plan for this chapter of life, because as we age, options for income become more limited. 

What is Retirement Planning?

Retirement is a chapter in life that we often look forward to with anticipation. It is full of relaxation, time to pursue hobbies, and enjoy the fruits of decades of hard work. However, without careful planning, retirement may be delayed, or worse, ruined by not having sufficient resources to support oneself properly. In this guide, we will take a look at the basics of retirement planning, helping you navigate the complex landscape of financing your post-career years.

Retirement planning is the process of setting financial goals and creating a roadmap to achieve those goals for a secure retirement. It involves a realistic look at how much money you need to live off of in years to come, assessing your current financial situation, and developing strategies to ensure you have enough savings and investments to maintain your desired lifestyle even after you stop working.

Work Backwards from Your Goal

Many people have a goal of retiring early, but even retiring at a typical age like 65 is difficult without proper planning. Keeping in mind your current age and lifestyle goals, what is the age at which you would like to retire? This is the goal we need to work backwards from. It is important to know where we are going in order to make a plan to get there. After considering your retirement age goal, we need to assess your current financial situation.

Assessing Your Current Financial Situation for Retirement Planning

Now that you’ve thought of your ideal retirement age, it’s time to assess your current financial situation. Have you taken a look at what assets you own, your debts, and monthly cash flow? Do you have retirement savings accounts already? 

As for your income, it’s important to look at your current salary, bonuses, and investment income. Can you calculate future income sources such as social security benefits, pension plans and annuities? Do you have any rental income, royalties, or other income? Is there a gap between what your retirement savings and benefits would provide for, and your desired lifestyle? That is where your current income can come into play to start investing more in your retirement plan.

Of course, it’s important to plan for expenses. What are your current expenses? No one likes planning for illness, but the reality is that we often suffer from more health issues as we age. When you retire, your healthcare expenses may increase, even if you are healthy now. And, on the brighter side, if your healthcare expenses do not increase, then your travel expenses may increase if you plan to enjoy retirement as a snowbird, or world traveler. In general, it is a good idea to plan cautiously for added healthcare and/or travel expenses, depending on your health and lifestyle.

Now, how about debt? Are you renting or do you own your home? If you own, would you be able to pay it off by the time you desire to retire? If so, that could allow you to allocate your previous mortgage payment to healthcare and/or travel! On the other hand, do you have credit card debt, or car loans that may weight you down in retirement? It’s important to factor these into your financial plan to pay down before retirement.

Setting Retirement Goals

Keeping in mind the age at which you wish to retire and your current financial situation, what kind of lifestyle could you afford? If it is not possible to reach your retirement age and lifestyle goals, you will need to adjust either your retirement age or your financial situation to make more money now before you retire, or be more realistic about your lifestyle goals and budget.

Consider goals for emergency funds, healthcare, and any legacy planning. You can work backwards from your goals for each category and create milestones.

In the meantime, if you have access to an employer-sponsored retirement plan, maximize your contributions and take advantage of employer matching contributions! 

You may also be able to utilize an HSA account, depending on your health insurance type, to maximize your healthcare fund as expenses may increase.

If you haven’t already, it’s important to start contributing towards tax-advantaged retirement funds such as a traditional IRA, and after-tax retirement in the form of a Roth IRA. Each offer advantages depending on your current income and financial situation that are worth learning more about. Consider your goals and tax implications and benefits of each type when making contributions.

In your IRA, you can build a diversified investment portfolio based on your risk tolerance and time to your ideal retirement age. Consider a mix of stocks, bonds and other investments to balance risk and return.

As you plan, it is a good idea to get familiar with Social Security benefits, including your eligibility criteria and benefit calculations. Also consider your ideal retirement age and early or delayed Social Security claims on your overall retirement income.

If you need to bridge a gap between Social Security, IRA distributions, and your desired lifestyle during retirement, consider additional sources of income such as part-time work, consulting or rental income! You may be able to monetize your expertise and experience, or teach others your favorite hobby or skill during retirement for some additional income.

Consider Healthcare Costs

Estimating healthcare costs can be daunting, but you can take a look at future insurance premiums, deductibles, and out-of-pocket costs based on averages, considering any pre-existing conditions you may have. It may be a good idea to invest in long-term care insurance at this time to mitigate potential high healthcare expenses, and have access to the best healthcare. Also, take some time to understand the eligibility criteria and enrollment process for Medicare. Explore supplemental insurance options to enhance your healthcare coverage. Although no one likes to talk about it, planning for a future with appropriate medical care is important.

How to Plan for the Unknown

Sometimes, you just can't anticipate what the future will bring. In this case, it’s important to maintain an emergency fund to cover unexpected expenses during retirement. A good benchmark is to have an emergency fund that can cover at least six months’ worth of living expenses.

As a part of retirement planning, make sure you have created or updated your will, designating beneficiaries for your assets. You may wish to consider establishing trusts to manage and distribute assets efficiently. Furthermore, you may wish to designate a trusted person as your power of attorney should you need help in the future with legal or financial decisions.

Since no one can predict the future with 100% accuracy, there will be many unknowns and changes in your retirement planning. Although it can feel overwhelming, rest assured that you are already doing the most important thing – researching the basics of retirement planning, retirement goal setting, and establishing the necessary retirement accounts, emergency funds, and contingencies for the future.

Retirement planning is a process that can change over time. Your life is not a static screenplay, and as such, any major life changes in expenses or income can affect your planning. By understanding your lifestyle goals for later years in life, current financial situation, and investment opportunities, you can create a secure and enjoyable retirement. Each year you may wish to reassess your plan and make sure you are on track, or more often if you have changes in your life, the market, or economic conditions. The sooner you start preparing, you can be more confident about your retirement journey, knowing you have taken the necessary steps to secure your financial future.