Retirement financial planning begins with saving early in our work lives, and should become more detailed as we get closer to retirement age. What are the stages before retirement age?
Retirement planning, in the form of automatic saving, should ideally begin as soon as we begin working to support ourselves. The earlier we start the easier it is to accumulate plenty of savings for old age. (Tips for 20-somethings)
In addition, if we start saving before we work ourselves into a tight budget, the easier it is to think of it as a necessary expense, like rent, insurance, or car repairs, for example.
And it is definitely a necessary "expense."
This financial planning should start out very generally as a savings plan, and then gradually become more specific as retirement age gets closer.
If finances are tight, retirement savings should take precedence over college savings for your children, if you can’t afford to save for both.
Consult a fee-only financial advisor to find out if you can do both if you aren’t sure and want to do both. Retirement Savings or College Savings
In your early career, save enough to get the full matching in your 401K plan, usually about 6%. By reducing your taxable income, your 401k contribution won't cost as much as you save.
For example, if you contribute $100 per paycheck, it may only cost $80 out of your take home. Plus with a match, your $100 could be a $150 contribution each pay period. So you pay $80 and get $150 or $200, depending on what your employer matches.
If your employer doesn't provide a 401k, setup an automatic deposit to a savings account or even better to an IRA. You can get a higher refund on your taxes if you have an IRA to reduce your taxable income.
As you become established in your career and get raises and promotions, you should give your retirement plan a raise, too. Starting out you should be setting aside 6% of your paychecks.
In your 30's, try to add a percentage point or two each time you get a raise, or each year. By your mid-forties you should be comfortably maxed out, and this will ensure a nice retirement fund.
By age 45-50, (at least 10 years before retirement), retirement financial planning should include a very detailed analysis of retirement goals, and the savings needed to support those goals.
This is also a good time to discuss retirement with your spouse to make sure the goals of each individual are compatible with each other. It can be exciting to bounce around ideas for spending your free time.
One note of caution: Don't forget to live well during your working years! It is not a good idea to save all the special things for retirement. Consult a fee-only financial planner to see how you're doing and maybe you can plan some great things before retirement age.Detailed Retirement Planning Steps
Each year after that, the retirement plans should be actively evaluated and even tested against budgets. Spending habits should be examined in detail and factored into the retirement budget, if appropriate.
Additional retirement expenses should be factored in, such as long term care insurance, health care premiums, extra spending for hobbies and travel.
Thought should be given to how you will spend your time to get an idea of where spending is likely to increase. For example, eating out, socializing more, activities that might require special investments, such as mountain bikes, ski equipment, golfing, hotel accommodations, and so on.
As the goals and budget projections develop, savings and investments should be evaluated and possibly adjusted to make sure their projected values can support the retirement plan.