Retirement Planning: 5 Essential Steps to Follow

Retirement planning is a multistep process that evolves over time. To ensure a comfortable and secure retirement, it is essential to build a financial cushion to meet your future needs. Let’s look at some of the key steps involved in retirement planning, from setting goals to assessing risk tolerance and seeking professional advice.
 

1. Determine Your Retirement Spending Needs

Be realistic about your post-retirement spending needs. While some expect their spending to decrease to 70%-80% of pre-retirement levels, it is important to consider factors such as mortgage payments, unexpected medical expenses, and fulfilling bucket list goals. As retired adults are, by definition, no longer working eight or more hours a day, they have more time for travel, going sightseeing, shopping, and engaging in other expensive activities. Setting precise spending goals will ensure you save enough to support your desired lifestyle in retirement.

2. Assess Your Time Horizon

Your current age and expected retirement age are critical factors in determining your retirement strategy. Younger people with a longer time horizon can afford to take more risks and allocate a higher percentage of their portfolio to stocks. As you approach retirement, you will need to focus more on income and capital preservation. This means a higher allocation to less risky securities, such as bonds, that won’t give you the returns of stocks but will be less volatile and provide income that you can use to live on. You will also be less concerned about inflation.

3. Calculate the After-Tax Rate of Investment Returns

Calculate the after-tax real rate of return to determine whether your investment portfolio can generate the necessary income you need for retirement. Expecting an excessively high rate of return is often unrealistic, especially as you transition to low-risk investments in retirement. Consider the tax implications of different retirement accounts and calculate your returns on an after-tax basis.

4. Assess Risk Tolerance and Investment Goals

Balancing risk aversion with return goals is critical when allocating your investment portfolio. Make sure your risk tolerance matches your comfort level and long-term goals. Whether you manage your investments yourself or seek professional advice, the right portfolio allocation is key to successful retirement planning.

5. Review Life Insurance Needs

If you have dependents, especially young children, consider the importance of life insurance. As childcare and education costs rise, life insurance can help protect your family's financial well-being and maintain their lifestyle.

Bottom Line

Retirement planning is a personal and unique journey for everyone. It is important to prioritize your physical and mental health, start saving early and consistently, and live within your means. Although retirement may seem ages away, taking action now can significantly impact your financial future. Seek the advice of financial professionals who can help you ensure you have the right mix of retirement investments and create a plan to help you achieve your long-term financial goals. By starting your retirement planning today, you can enhance your financial confidence and secure a brighter future for yourself.