Planning for Retirement: A Step-by-Step Guide

According to Yahoo!Finance, 54% of Americans have special savings accounts to save money for a comfortable retirement life. If you also want to follow their example and do not risk relying on social provision, consider retirement financial planning. In this case, it does not matter how long you work—several years or even decades. The sooner you start saving money, the more confident you will feel in the future.

Let’s check out the details of the retirement planning guide from Rates experts and prepare to live your best years the way you want.

Planning for Retirement: What Is It, and How Does It Work?

This concept includes calculating the amount needed to maintain your desired standard of living after retirement, as well as developing a strategy for saving money. Such planning allows you to prevent a shortage of funds as a result of the loss of the main source of income — wages. Thanks to the availability of savings, you will be able to make a choice based only on your desire: continue to work, take a time out and return to work after a while, or finally retire and rest.

6 Steps Of Retirement Planning

In order for investment planning for retirement to be effective and really bring the expected results, we have compiled a checklist of steps for you to prepare for the new stage of your life. So, what are the first steps of retirement planning?

1. Set a Start Date for Retirement and Financial Planning

First, let us hasten to assure you that it is never too early to start planning for your retirement. Depending on the stage of life, only some features of this process will differ:

• Young people (21–35 years old). At this age, it is still difficult to transfer large sums to savings accounts, but young people have an undeniable advantage—time. In a few decades, it is possible to build up a decent capital, even if you don’t save as much as you would like.
• People of early middle age (36–50 years old). At this stage, it can also be overwhelming to invest much in a comfortable retirement life. While careers and earnings improve at this age, potential expenses rise as well. For example, mortgage payments, life insurance policy payments, personal transportation costs, etc., may be a priority.
• People of late middle age (50+ years). Thanks to income stability, this life period is the most favorable for contributions to retirement savings accounts. Major IRA and 401(k) retirement plans allow savers over age 50 to make additional contributions of $1,000 or more to their accounts.

2. Determine Your Retirement Age

To begin with, it is worth noting that the minimum age at which you are eligible to receive social benefits is 62. However, the amount of state benefits will be higher if you delay retirement until you reach the full pension age of 70.

Of course, this type of income isn't the main one for most Americans, but it's still worth considering when deciding to retire.

Also, this stage provides for the calculation of the amount needed for a comfortable life in the new status.

According to a study by Northwestern Mutual, Americans believe that for a comfortable life in retirement, they need at least $1.27 million. At the same time, the amount of savings of the average US resident does not exceed $87 thousand.

To avoid such discrepancies in desires and reality, set realistic goals for yourself. Experts say that for a pensioner to live comfortably, 70-80% of their previous income is enough. Calculate the required amount of savings and try to predict how long it will take to accumulate it. This will be the date of possible retirement.

3. Choose the Method of Money Accumulation

As practice shows, the most common way for future retirees to save is to open a tax-advantaged Individual Retirement Account (IRA) or enroll in a 401(k) plan. The latter provides for regular payroll deductions that will be at the depositor's disposal after retirement.

Unlike a 401(k), which is available through an employer, IRA is intended for self-employed persons. Such accounts can be opened at a bank, through an investment company, or a broker.

According to the Investment Company Institute (ICI) 401(k) plans have about 70 million active participants and contain $7.4 trillion in assets. People’s savings in IRA accounts are even larger, totaling $13.6 trillion at the end of 2023.

In addition to income from saving accounts, you can rely on accumulated cash or social benefits, but this is less effective than financial investments.

4. Select Investment Objects

Saving IRA and 401(k) accounts give savers access to a wide range of investment options. You can invest your money in bonds, stocks, exchange-traded funds, mutual funds, or even real estate. Choosing several investment objects will allow you to diversify your risks.

Another recommendation worth following is to invest more actively when you are young and choose passive income as you age. The trick is that if you invest poorly at the age of 30, you will have time to restore your finances by the time you retire. If you plan to stop working in a few years, it will be difficult to accumulate the required amount again.

5. Consider Possible Costs

Financial planning for retirement should definitely include estimated expenses that await you after retirement. And it's not just about spending on travel or shopping. One of the most important expenses is medical care and long-term care. It is a mistake to assume that the government health insurance programs Medicare or Medicaid will fully cover these aspects. In fact, their effect does not apply to all categories of the population and insurance cases.

6. Automate Retirement Planning

Each person has many everyday worries that cause such important tasks as planning for retirement to fade into the background. Automating this process can be a step from intention to action.

There are several ways to automate your retirement planning and ensure a comfortable life at a respectable age:

• Automate cash transfers. This option is available in a 401(k) plan, where the savings account is funded through payroll deductions. However, if you choose an Individual Retirement Account, you will have to fund the account yourself. To make it easier, you can set up regular withdrawals from your current account.
• Use a planner. Innovative technologies have made processing retirement planning information much easier. On the modern market there are specialized applications for smartphones that allow you to compare different investment scenarios, anticipate expenses, take into account possible contingencies and much more.

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Retirement financial planning is essential for everyone who wants to ensure a comfortable life after retirement. You can do it yourself or turn to professionals. The main thing is not to let the time when you’re young go to waste and start saving as early as possible.