9 Steps to Planning for Retirement

Planning for retirement involves a series of well-defined steps that aim to maintain financial stability and offer greater peace of mind in later years. Your first step will be to set clear retirement goals. This can help you assess your current financial situation, including savings and investments. Creating a detailed budget helps track expenses and identify areas for potential savings, while building an income plan and defining your withdrawal strategy can supply you with the recurring income you need to support yourself and pursue the retirement lifestyle you desire.

Determining what retirement looks like for you involves envisioning your lifestyle, activities and the location where you plan to spend your time. Whether it’s traveling the world or enjoying a quiet life in a small town, having a clear picture will guide your financial planning.

Breaking down your long-term retirement goal into smaller, achievable milestones can make the process more manageable. Setting annual or five-year targets helps track progress and adjust strategies as needed.

Questions to ask yourself during this step in the process include:

• At what age do you plan to retire?
• What type of lifestyle do you envision?
• What are your primary sources of retirement income?

A thorough assessment of your current financial situation is the next step in planning for your retirement. This includes evaluating your savings, investments, debts and other assets. Understanding your financial baseline will help you determine how much you need to save and invest for a comfortable retirement.

During this phase of the planning process, review your monthly income and expenses and calculate your net worth by listing all of your assets and liabilities.

Estimating future expenses in retirement begins with understanding your current spending habits. Review your bank and credit card statements to categorize your expenses, including essentials like housing, utilities, food, as well as discretionary spending like entertainment and travel. This provides a clear picture of your baseline spending.

Consider how your lifestyle may change in retirement. Some expenses may decrease, such as commuting costs, while others like healthcare or leisure activities may increase. It’s also important to factor in inflation, as the cost of living generally rises over time, impacting your future purchasing power.

Even in retirement, taxes remain a consideration. Understanding how different income sources, such as Social Security, pensions and withdrawals from retirement accounts, are taxed can help create a more accurate expense estimate. Consulting with a financial advisor can provide clarity on potential tax liabilities.

Retirement planning also involves a thorough understanding of all potential sources of income. Identifying these sources early can lead to a stable financial future. Begin by considering traditional income streams such as Social Security benefits. Estimate the monthly benefits based on your earnings history and planned retirement age.

Employer-sponsored retirement plans, such as 401(k) or 403(b) accounts, play a significant role in retirement income. Review your current balance and projected growth. Personal savings and investments can significantly supplement retirement income. Consider the value of your IRAs, brokerage accounts and any other investment portfolios.

Other assets like annuities, life insurance policies and rental properties can also provide sources of retirement income.

Beginning retirement planning early allows for greater accumulation of wealth over time. By contributing regularly to retirement accounts such as a 401(k) or an IRA, pre-retirees can take advantage of compound interest. Even small, consistent contributions can grow significantly over the years.

Many employers offer matching contributions to 401(k) plans, essentially providing free money towards retirement savings. Pre-retirees should contribute enough to take full advantage of these matching funds. Missing out on employer matches is equivalent to leaving money on the table.

If you can, contribute the maximum amount to a tax-advantaged retirement account. In 2024, the IRS allows you to contribute up to $23,000 to a 401(k) or similar workplace retirement plan, plus an additional $7,500 if you’re 50 or older. You may also save up to $7,000 in an IRA, plus an additional $1,000 if you’re 50 or older.

Diversifying your investment portfolio involves allocating your investments to different asset classes, such as stocks, bonds, real estate and other vehicles. This strategy can help manage risk by reducing the odds that poor performance in one area doesn’t significantly impact your overall portfolio.

For those planning retirement, it’s a way to protect savings against market volatility and economic downturns. A well-diversified portfolio balances different asset classes to achieve a blend of growth and stability.

Investing in different sectors such as technology, healthcare and energy ensures that your portfolio is not overly dependent on the performance of a single industry. This diversification can help cushion against sector-specific downturns and contribute to more stable returns. Including international investments can add an additional layer of diversification. Global markets often move differently than domestic ones, providing opportunities for growth and risk reduction

Healthcare expenses are a significant aspect of retirement planning, often underestimated. As you age, the likelihood of requiring more medical attention increases, making it essential to allocate funds for these costs.

In fact, Fidelity’s annual estimate of retiree’s healthcare expenditures found that a 65-year-old who retired in 2023 can expect to spend an average of $157,500 on healthcare. Since Medicare doesn’t cover everything, planning for out-of-pocket expenses is pivotal.

Creating a withdrawal strategy can help you generate a stable and predictable income stream throughout retirement. By strategically planning how and when to withdraw funds from various accounts, retirees can manage their finances to avoid running out of money prematurely.

A well-crafted withdrawal strategy takes into account the tax implications of different income sources. For example, withdrawing from taxable accounts first may reduce the tax burden in later years, whereas deferring withdrawals from tax-advantaged accounts like IRAs and 401(k)s can allow these investments to grow tax-free for a longer period.

One approach to sequencing withdrawals is to use the “bucket strategy,” which allocates funds into different “buckets” based on time horizon and risk tolerance. Short-term buckets hold low-risk, liquid assets for immediate needs, while long-term buckets invest in growth assets like stocks.

Retirement planning is not a one-time task. Regularly reviewing and updating your plan can help you keep your goals aligned while adapting to life changes. Monitor your investments and make adjustments as needed.

This step may include conducting annual financial checkups, making adjustments based on major life changes, as well as staying current with changes to retirement laws and regulations.

By setting clear goals, assessing your financial situation and estimating future expenses, you can lay a strong foundation for your retirement plan. Understanding your income sources and maximizing contributions to different financial vehicles can also enhance your financial preparedness, while diversifying your investments and planning for healthcare costs to mitigate risks and address significant future needs. And finally, creating a withdrawal strategy and regularly reviewing your plan can keep you on track and help you adapt to changing circumstances.

• As you plan for retirement, be mindful of required minimum distributions (RMDs). These mandatory withdrawals from tax-deferred retirement accounts like traditional IRAs and 401(k)s must begin by April 1 of the calendar year that immediately follows the year in which a person turns 73 (75 for people who turn 74 after Dec. 31, 2032). SmartAsset’s RMD calculator can help you estimate how much your first RMD will be.
• A financial advisor can help you plan and save for retirement. 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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