Retirement Planning is a process that can be started at any point during your working years. It includes determining how much you need in order to retire and setting goals for saving and investing.

A common rule of thumb is to save 15% of your income throughout your working life. However, each individual’s financial situation is unique and can vary from this general estimate.

Every person has a unique vision for their retirement. It may be traveling the world, trying out a new hobby or second career, or simply maintaining the lifestyle they’ve enjoyed while working. Regardless of your dreams, a financial plan can help you achieve them. A good plan can help you establish goals, estimate how much money you’ll need, and then save and invest to grow those savings.

It is important to consider all of the costs associated with retirement, including expected expenses and taxes. A common suggestion is to calculate how much income you’ll need using an income multiplier or percentage formula, but these can oversimplify the situation. A meeting with a financial professional can help you understand how your personal situation and planned lifestyle might affect the estimation process.

You will also want to understand the rules of your employer’s retirement savings plan(s). Federal laws require most employers to offer one or more plans to their employees, but these vary by company. Contact your human resources office or the administrator of your plan to learn more. Many plans also provide a booklet that describes key plan rules, called a Summary Plan Description, which you should receive upon enrolling or leaving employment.

Many retirees report that their expenses in the first few years of retirement are close to or even exceed what they spent during their working years. This can be due to a number of factors, such as spending more on travel or paying for home and healthcare services that aren’t covered by Medicare until age 65.

Another cost to be aware of is taxes, which can reduce the value of any withdrawal from a retirement account or annuity. Be sure to factor in all anticipated tax rates, including those on distributions from workplace and individual retirement accounts, investment earnings, Social Security benefits, and other sources of income. It may be a good idea to accelerate savings in the years leading up to retirement to try to make up for any shortfalls. Also, it is often a wise move to pay off high-interest debt prior to retirement, since this can free up additional funds for savings or investments.

Creating a Budget

Once you’ve identified your desired lifestyle in retirement, it’s important to plot out how much you anticipate spending. A common rule of thumb is that retirees need about 70-80% of their pre-retirement income to cover expenses.

During this process, you should consider your fixed costs, including housing, utilities and food. You should also factor in health care costs, which tend to increase with age. The Bureau of Labor Statistics estimates that the average American over 65 will spend about $60,844 a year on these costs. This includes premiums, deductibles and out-of-pocket costs.

Other considerations include outstanding debt, which may need to be paid off before you retire, and discretionary expenses, such as travel or hobby interests. Many financial professionals recommend setting aside an emergency savings account that can support three to six months of living expenses.

A retirement budget should also account for any planned or unexpected events, such as unanticipated medical expenses or home repairs. It’s a good idea to set aside funds for these kinds of shocks, because they can be financially straining and emotionally stressful.

In addition, you should plan for expenses that are likely to increase as you enter retirement, such as a new car, additional recreational activities or a major vacation. Finally, you should calculate your potential tax burden, including Social Security benefits and required minimum distributions.

You may want to use a budgeting app or website to help you create a realistic retirement spending plan. Once you’ve determined your expenses and income, it’s a good idea to track your spending for a few months to ensure that your plan is on target. It’s also a good idea to set up an accountability partner, such as a spouse or friend, who can hold you accountable for your spending and savings goals. This can be particularly beneficial if you’re having trouble sticking to your goals. The word “budget” can have a negative connotation, but it’s important to remember that it’s not about depriving yourself of things you enjoy in retirement. In fact, cutting back too severely on entertainment and leisure activities can have a number of detrimental health effects, including high blood pressure, heart disease, depression, anxiety, Alzheimer’s disease and weakened immune systems.

Investing

If you are planning to retire in the future, it is important that you start saving and investing for retirement as soon as possible. This will help ensure that you have sufficient funds to cover your living expenses and other financial goals. There are many different retirement investment vehicles available, with varying contribution limits and investment options. These include 401(k) plans, individual retirement accounts (IRAs), and brokerage accounts. Each has different rules about how much you can contribute each year, and how it is taxed.

Choosing the right investment vehicle depends on several factors, including your age and risk tolerance. You should also consider the role that your retirement savings and investments will play in your overall income plan, as well as any guaranteed sources of income like pensions and Social Security.

A diversified retirement portfolio should include stocks, bonds and cash investments. The amount of each type of investment will depend on your risk tolerance and the expected rate of return you need to achieve in retirement. For example, a younger investor might prefer a more aggressive portfolio (100% stock); a retiring investor might prefer a more conservative one (75% bonds and 25% cash investments).

It is important that you invest in low-cost investments such as index mutual funds or exchange-traded funds. These types of investments are passively managed, which helps keep fees low compared to actively managed funds. They also track the performance of a given market, which can reduce your risk by automatically diversifying your portfolio.

You should regularly rebalance your investment portfolio to make sure that it is still aligned with your risk-return profile. This will prevent you from being forced to sell assets in a down market, which can erode your returns. It is also helpful to consider the impact of inflation on your retirement plans, and to ensure that your investments are able to grow at a pace that can keep up with inflation.

You should also have an emergency fund, which should be enough to cover 3 to 6 months of expenses in case you experience a financial crisis or unexpected event. This will protect you from going into debt or having to take out costly loans, and it will also help you avoid unnecessary spending.

Deciding Your Income After Retirement

During retirement, individuals face a number of financial challenges that can be difficult to navigate without the proper planning. In addition to the usual expenses, such as housing, healthcare, food and transportation, many retirees find that their lifestyle changes significantly. These changes can lead to higher than expected expenditures, especially when inflation is taken into account. To combat these increased costs, retirement planning requires an individual to plan ahead and save more money than they think might be necessary.

The biggest concern in retirement planning is not how much a person has saved or invested, but rather how that grand total will translate into a sustained monthly income throughout the entire duration of their retirement years. A retirement advisor can help you determine this by working backward from your best-case life expectancy and factoring in a number of factors, such as how much you’ll receive from Social Security and pensions, and how much you’ve accumulated in your 401(k), IRA and other accounts.

A retirement plan must also take into account the potential need for long-term care and healthcare expenses, which are often among the most expensive. Many people assume Medicare will cover these expenses, but this is not always the case. In some cases, Medicare premiums and deductibles must be paid. Additionally, Medicare does not usually pay for long-term care costs or any other expenses that may arise. This is why it is important to set aside adequate savings for these expenses in advance of retiring.

A person’s retirement savings are typically comprised of contributions to an employer-sponsored retirement account such as a 401(k), an individual retirement account (IRA) or a simplified employee pension (SEP). It is recommended that people save at least 5-15% of their income into their retirement accounts. Individuals can also consider a variety of other investments, such as stocks and bonds, mutual funds and exchange-traded funds (ETFs). Choosing the right mix of investments is an important part of retirement planning to ensure that individuals are able to achieve their long-term goals and have the flexibility they need during retirement.