For many, retirement planning is akin to going to the dentist.  We know we should do it, but delay it for as long as possible.

Perhaps we need more knowledge or understanding about the process or feel overwhelmed by the options. But deferring retirement planning may be setting ourselves up for financial stress and hardship down the line.

What is retirement planning?

Retirement planning is setting goals and implementing strategies to plan for a comfortable and secure retirement. It involves assessing your current financial situation, estimating future expenses, determining a savings plan, and considering investment options.

Who needs retirement planning?

It’s a common misconception that retirement planning is only for those in upper-income brackets.

Everyone should consider retirement planning, regardless of age or income level.

Whether you’re just starting out in your career or nearing retirement age, planning for your future can mean the difference between enjoying your retirement or being consumed by financial anxiety when you are most vulnerable.

Is Social Security enough?

Social Security benefits are designed to replace only a portion of your income, so you may need more to cover your retirement expenses. It’s important to have other sources of income, like savings and investments, to supplement your Social Security benefits.

As of October 2022, the average Social Security monthly benefit check was only $1,550.48, according to the Social Security Administration.  Even accounting for differences based on the type of beneficiary, the average benefit for retired workers was only $1,676.53.

Depending on your unique circumstances, it could be very challenging to fund a comfortable life in retirement if Social Security benefits are your sole source of income. 

The benefit of retirement planning

Retirement planning isn’t a panacea, but engaging in the process – especially when you do so early in your career — has the following benefits:

Understand your needs: By setting specific goals and creating a roadmap, you will understand how much you will need to cover your living expenses, medical costs, and any unforeseen circumstances that may arise during retirement.  You can then formulate a plan to save what you will need to fund your retirement.

Compound interest: The power of compound interest can significantly impact your retirement savings. Starting early allows your investments more time to grow, taking advantage of compounding returns. This means that even small contributions can grow substantially over time, making it easier to reach your retirement goals.

Cope with inflation: Inflation erodes the purchasing power of money over time. By planning for retirement and factoring in inflation, you will set realistic retirement goals that recognize the impact of inflation.

What’s involved in retirement planning?

Here are some issues to consider when doing retirement planning:

Define your retirement goals: Determine how you envision your retirement lifestyle.  Consider factors like housing, healthcare, travel, and potential changes in your circumstances.

Calculate income sources: Identify potential income sources during retirement, like Social Security benefits, pensions, and investment income. Calculate the expected income from each source and determine if any gaps need to be supplemented with additional savings.

Implement a savings and investment strategy: Start saving and investing as early as possible. Explore retirement account options, like 401(k)s and traditional or Roth IRAs, which offer tax advantages and potential employer contributions. Diversify your investments to manage risk and maximize expected returns.

Budget for healthcare costs: Consider the potential costs of long-term care. Don’t assume that Medicare will cover all of your medical expenses. Typically, Medicare will only cover a portion of long-term care costs and only for a limited amount of time.

Explore whether you should purchase long-term care insurance, which can help offset some expenses associated with assisted living, nursing home care, and other medical services.

Another option is to set aside funds specifically for long-term care costs through a dedicated savings account or by including these expenses in your overall retirement budget. No matter what approach you take, it’s important to be realistic about the potential costs of long-term care so that you can plan accordingly.

Tax planning: Incorporate tax planning into your retirement strategy. Understand the tax implications of different retirement accounts and investment vehicles. Utilize tax-efficient strategies to minimize your tax burden in retirement and optimize your overall financial plan.

Stay disciplined and save consistently: Make retirement a priority and commit to a consistent savings plan. Automate contributions to retirement accounts and resist the temptation to dip into those funds for other purposes.

Consider lifestyle adjustments: If you need more than you can save to fund your retirement, consider lifestyle adjustments to bridge the gap. Delaying retirement, reducing expenses, or exploring part-time work during retirement can help supplement your income and secure a more comfortable future.

Educate yourself: Take the time to educate yourself about retirement planning. Read books, attend seminars, and stay informed about financial strategies and trends. The more knowledge you have, the better equipped you will be to make informed decisions and adapt to changes in the financial landscape.

Monitor and adjust your plan: Regularly review your retirement plan to ensure it aligns with your evolving financial situation and goals. Make adjustments as needed, considering changes in income, expenses, and investment performance.

Do you need a financial advisor?

Hiring a financial advisor may be beneficial when it comes to retirement planning.  Here’s why:

Expertise and knowledge: Financial advisors have specialized knowledge and expertise in retirement planning. They understand the complexities of investment options, tax implications, and various retirement vehicles like IRAs, 401(k)s, and annuities.

Tailored approach: A financial advisor can assess your unique financial situation, goals, and risk tolerance and create a personalized retirement plan. They consider your desired retirement age, expected expenses, healthcare costs, and other circumstances.

Long-term strategy: Retirement planning is a long-term endeavor, often spanning several decades. A financial advisor can help you develop a comprehensive long-term plan that considers your investment objectives, risk tolerance, and time horizon. They can guide you in making appropriate investment choices and periodically review and adjust your plan as needed, considering changing market conditions and life circumstances.

Portfolio optimization: Financial advisors can help optimize your investment portfolio by diversifying your assets and allocating them appropriately across various investment options. They can help balance risk and return, considering your investment goals and tolerance for volatility.

Tax efficiency: Retirement planning involves understanding the tax implications of different investment vehicles and strategies. A financial advisor can provide guidance on tax-efficient strategies to minimize your tax liability both during the accumulation phase and in retirement.

Reduce stress: Planning for retirement can be overwhelming and stressful, particularly if you need more knowledge or time to manage it effectively. A financial advisor can handle the complexities of financial planning, monitor your progress, and provide ongoing guidance and support.

While hiring a financial advisor comes with a cost, the potential benefits can outweigh the associated fees. Whether you do it yourself or retain a financial advisor, the takeaway is that doing retirement planning shouldn’t be deferred.  It’s the key to reaching your retirement goals.

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