Retirement Planning Steps You Aren’t Taking Now, But Should

September 30, 2020

6 min Read

couple having coffee and discussing retirement planning

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Whether retirement is a faraway dream or a looming reality, it’s important to be prepared. Although saving and spending wisely are important, those are just the basics. Learn what specific retirement planning process steps you should be taking now — and what else to consider along the way — to help you crush your retirement goals.

Where Do I Start With Retirement Planning?

You should start your retirement planning by considering your ideal retirement. For most, retirement means being able to cover necessary expenses along with some luxuries. It means ensuring you have guaranteed income, ideally from multiple sources.

Before you start retirement planning, take stock of where you are financially. The amount you should have in your retirement fund at every age depends on your circumstances and how far you are from retirement.

What Are the Steps in Retirement Planning?

The steps in retirement planning help you clarify your goals. These important retirement planning steps can help you decide how much you need to save for retirement and how to invest those savings.

1. Decide When You Want To Retire

While you might want to retire yesterday, it’s essential to decide on a realistic retirement date. If you want to retire before your full Social Security benefits start at age 65-67, you’ll want to have other sources of retirement income to draw on. Here’s more about your full retirement age.

Moreover, if you retire before age 65, you won’t have access to Medicare, so you’ll need other health insurance in place.

Other factors to consider include:

How aggressively you’re able to save
Whether you have any health conditions that will influence your ability to work
Whether you can do your current work until retirement — or if you’ll need to shift to another type of employment

There’s no right or wrong retirement date, as long as you can financially support your choice.

2. Determine How Much You’ll Spend in Retirement

Conventional wisdom is that you’ll need 70% to 90% of your preretirement income to live comfortably. That may or may not be true for you, though.

What kind of lifestyle do you see for yourself in retirement? If you’re planning to downsize, you could see lower expenses. If you’re renting now and plan to continue renting, your housing costs may stay about the same.

Other Retirement Costs

In addition to the basics like housing, transportation and utilities, what else do you want to do in retirement? If you’re planning to travel extensively, those costs will impact how much you’ll be spending during your retirement.

3. Assess Your Sources of Income

The best approach to retirement is to have multiple sources of income. For most, these include:

Social Security

You can start drawing on Social Security at age 62, but you won’t receive your full benefits until you are least 65, depending on when you were born. If you wait to claim benefits until 70, you’ll receive a higher amount. You can find out how much your benefit will be by logging into your Social Security account.

Defined Contribution Plans

Defined contribution plans include 401(k)s and 403(b)s. How much income they’ll provide depends on how much you and your employer have contributed. Your plan custodian may be able to run projections for you, or you can use retirement planning tools like a retirement calculator to estimate how much income to expect.

A financial planner can also assist you in determining how much income you can expect.

Individual Retirement Accounts

IRAs are tax-advantaged retirement vehicles. You can contribute up to $6,000 per year ($7,000 if you’re age 50 or older).

If you choose a traditional IRA, you may be able to deduct your contributions. If you choose a Roth IRA, your contributions aren’t deductible now, but you’ll have minimal taxes to pay when you retire.

Other Options

401(k)s and IRAs aren’t your only options for retirement income. You can also set aside savings in other ways. Here are some to consider.

Savings Options

CDs

Stocks

Bonds

Savings accounts

Money market accounts

Mutual funds

Real estate

4. Consider Your Risk Tolerance and Investment Goals

Based on the amount of income you need to generate and your current savings, you can set your investment goals.

What investment vehicles are right for you? The best approach is to diversify. The Department of Labor recommends that when it comes to retirement planning, you should diversify by having different categories of investments, then further diversify within each category.

For example, you might have some funds in cash, some in bonds and some in stocks. You might diversify your bonds by investing in bond funds. You can do the same with stocks by investing in mutual funds.

How Much Should You Have?

That depends on your risk tolerance. More risk typically equals more reward, but you also need time to recover from worst-case scenarios. In general, the longer you have until retirement, the more risk you can take with your investments.

5. Consider Your Healthcare Options

A retirement plan that sets aside funds for investments will only go so far. Healthcare is expensive.

If you’re planning to retire before Medicare starts, look into whether your employer will offer retirement coverage. If not, price out plans on your state Health Insurance Marketplace. These plans tend to be pricey, but you only need it until age 65.

Once Medicare starts, you’ll want a Medicare Supplement or Medicare Advantage plan to supplement Medicare. Medicare alone has significant out-of-pocket costs.

6. Keep Up With Estate Planning

Also, don’t forget about your estate. Estate planning includes keeping your will up-to-date and having trusts and powers of attorney set up. Insurance also figures into many estate plans.

Consider consulting with an attorney to ensure your estate plan will meet your needs. Once you have a plan in place, revisit it every few years.

What Is the Best Option for Retirement Planning?

The best option for retirement planning is a 401(k) if you have access to one. Retirement planning and employee benefits come together with a 401(k), with employer matches boosting your funds. 401(k)s also have high contribution limits compared to other retirement vehicles, like IRAs.

Good To Know

IRAs are also powerful tools for retirement. These aren’t tied to employment, and you can lower your taxes now or in the future, depending on the type of IRA.

One of the reasons 401(k)s are such a successful retirement vehicle is that you don’t have to think about it. Your contributions are automatically deducted.

You can take this approach with other retirement vehicles as well. For example, you can set up automatic contributions to an IRA or to a brokerage account. The less you have to think about saving, the more likely you are to save.

This article has been updated with additional reporting since its original publication.

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