Financial Planning Tips for Retirement

One of the most significant financial transitions in a person’s life is the decision to retire. When it comes to retirement planning, there are no “one size fits all” solutions. A lot depends on a person’s goals (e.g., traveling and hobbies), and lifestyle decisions (e.g., where to live and whether to work), as well as available resources such as an employer pension. Other important factors to consider are health status, inflation, and family responsibilities (e.g., caring for aging parents).

Some people can live happily on half of their pre-retirement income while others require 100% (or more!). For many people, 70% to 80% of the amount earned prior to retirement is a realistic income replacement percentage. Inflation will increase expenses over time, however. Therefore, a reasonable annual inflation rate should be factored into retirement savings calculations. Below are six retirement planning tips to consider:

¨      Understand the 4% Rule- One frequently cited guideline is to withdraw 4% of retirement savings annually and adjust it for inflation. Extending the 4% rule, someone should save $300,000 for every $1,000 monthly withdrawal needed in retirement ($300,000 x .04 = $12,000/year or $1,000/month). This guideline assumes at least 50% of a portfolio in stock.


¨      Prepare a Retirement Budget– Track current living expenses for several months. Then identify those that will end or decrease in retirement (e.g., commuting costs and mortgage payments) and those that are likely to increase (e.g., travel, medical and dental expenses, and health insurance premiums).

 
¨      Prepare for Non-financial Aspects of Retirement– Consider the three pillars of retirement life: leisure activities, work, and volunteerism. Experts caution against retiring without giving thought to the type of lifestyle desired and activities that will fill the time that a job once occupied. A successful retirement requires much more than money.


¨      Calculate a Retirement Savings Goal– Use an online calculator like the Ballpark Estimate. Five key variables in retirement savings calculations are: age at retirement, amount of annual income needed (as a percentage of pre-retirement income), growth rate on savings, estimated life expectancy, and amount of money currently saved.

 

¨      Get Help-Check out retirement planning worksheets and online calculators. Monte Carlo analysis is a simulation of possible investment outcomes used to predict the likelihood of sustaining a certain withdrawal rate for, say, 30 years.

 

¨      Take Action- Enroll in an employer retirement savings plan and save as much as possible. Start small, if necessary, and gradually increase the amount of money saved, especially when income increases or a household expense ends.

 

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