4 Steps To Effectively Plan For Retirement

retirement plan bannerI read an interesting article about the Social Security system needing a bailout. Here’s an excerpt: “A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits. Instead of helping to finance the rest of the government, as it has done for decades, our nation’s biggest social program needs help from the Treasury to keep benefit checks from bouncing – in other words, a taxpayer bailout.”

With the growing problems for Social Security, future retirees will need to effectively plan their own retirement so that they will not end up having to rely on the Social Security system. Here are four steps to help you effectively plan for retirement.

1. Calculate your retirement needs.
The first step in building a retirement plan is to determine your retirement needs. You have to take a number of factors into consideration including your age, investment horizon, and desired amount of money. Start off by asking yourself a few questions. How much money will it take for you to reach your retirement goals?  How much money do you need to live comfortably and maintain your current standard of living? A good rule of thumb is to estimate that you will need at least 75% of your previous income to maintain your current standard of living.

Let’s say you saved up a $1,000,000 nest egg for retirement and that you plan on drawing 5% annually from your nest egg to live on. This will leave you with $50,000 a year for living expenses. As long as your living expenses are under $50,000 for the next 20 years, you would be fine. This doesn’t take inflation and other factors into account. Click here for a search I did on retirement calculators and choose one that suits you best.

2. Pick a retirement plan.
Unless you work for the government or a company that offers a defined benefit plan, you need to fund your own retirement plan. How do you choose an appropriate retirement plan? There are a number of great retirement plans available. If your company offers one, take advantage of your company’s 401(k) plan if they offer a match. 401(k)’s are employee sponsored plans that often provide matching contributions from the employer. Matching contributions are like getting free money. What if your company doesn’t offer a 401(k) with a match? No problem!  Set up your own Roth IRA or Traditional IRA. IRA’s are tax advantaged retirement plans.  What if you are self-employed? You can set up your own SEP-IRA. Work for a not for profit? You may be eligible to participate in a 403(b).

3. Determine your asset allocation strategy.
Asset allocation involves choosing the right mixture of stocks, bonds, mutual funds, cash, and CDs to invest in. Finding the right asset allocation mix depends upon your age and risk tolerance. At what age would you like to retire? How much risk are you willing to take? The combination of a low amount of current savings with a large amount needed for retirement means taking on more risk. An aggressive portfolio for an individual in their 30’s may consist of 65% stocks and 35% bonds. Whereas a conservative portfolio for an individual in their 50’s may be 40% stocks , 50% bonds, and 10% cash. Younger individuals should primarily focus on capital appreciation. Older individuals should be seeking capital preservation.

4. Review your portfolio annually.
You need to review your portfolio at least once a year to determine if you are on pace to meet your retirement goals. Adjust your portfolio to make sure that your plan is properly diversified. Never put all of your eggs in one basket. If your portfolio has become too stock heavy, increase the cash and bonds portion. Your portfolio should become more defensive as you get older. Try to save a minimum of 10% of your income. If you notice that you aren’t saving enough for retirement, increase your savings amount.

How many of you feel like you have done an adequate job of planning for retirement? How many of you feel like you have a lot of catching up to do?

(photocredit: christopher)

  • Will

    I am way behind on my retirement planning and have a lot of catching up to do.

    • Mark Riddix

      It’s never too late to catch up!

  • Jonathan Starr

    Your April 19 column on retirement planning is excellent. Seniors need hard-boiled, no-nonsense, direct, retirement facts-of-life. You’re the only one doing it. Thanks.

    • Mark Riddix

      Thank you Jonathan!

  • Kay Xu

    Good article!