Seven Steps to Planning for Retirement

You’ve worked hard for the last 30 to 40 years, building your career and saving for your future. Now you’re nearing retirement, ready to sit back and enjoy your golden years. Retirement means you’ve built a successful career, but it also means that it’s over—and so is that paycheck. Here are seven key steps to take when planning your retirement:

  1. Establish your vision.One of the biggest mistakes when planning for retirement is not having a visual picture of what you want to do. Close your eyes for a minute and ask yourself: “Where am I, what am I doing, and who am I with?” Once you have a clear vision, you can position yourself for success.
  2. Establish a budget.It will help you understand what it’s going to cost per year to fund the vision you have created for retirement. This budget should be broken into two categories: nondiscretionary expenses and discretionary expenses. Nondiscretionary expenses are necessities you need to live, while discretionary expenses are for covering the fun in your golden years. Funding these different expenses may come from different types of investments.
  3. Don’t forget about inflation.Inflation is the rising cost of both nondiscretionary and discretionary goods and services, and it’s the silent killer of your savings. Inflation is currently running at 2% per year, which means your expenses rise by 2% every year. If your cost of living per month is $8,000 today, it will be $14,490 in 30 years. Due to inflation alone, your expenses nearly doubled over three decades. Think about what this would look like if inflation ran even higher!
  4. Invest for funding nondiscretionary expenses.Remember, these expenses pay for items that are required to achieve any sort of quality of life and should be funded by guaranteed income sources such as:

Social Security: Many people think they should claim Social Security as soon as it’s available, which is often a mistake. See if you and your spouse qualify for claiming benefits in ways that could substantially increase your cumulative Social Security benefits throughout your retirement years.

Pensions: If you are fortunate enough to have one, you will have to choose between a lump sum option, a lifetime payout, or a combination of both upon claiming benefits. Be sure to consider each option carefully, as they can have very different impacts on your money.

Annuities: These investment vehicles have evolved to provide excellent lifetime income benefits. When evaluating annuities, find out how much income is received for every dollar invested and the vital statistics of the insurance company (i.e., its ratings) offering the annuity.

  1. Invest for funding discretionary expenses.When selecting investments to fund discretionary expenses, an appropriate amount of risk can be taken. Be sure to invest in a diversified, low-cost portfolio and consider a few factors when planning it:

Asset allocation: Asset allocation management—how and why money is being moved across different asset classes, such as equities, bonds, real estate, and commodities—is the key determining factor in portfolio performance.

Risk-adjusted return: In 2013, the S&P 500 index returned 29.6%. With such a great year in the market, many lost sight of the risk they took to get that return. What they should consider, however, is if the market had gone down 29.6%, would their portfolio lose 29.6%? Make sure you have a handle on risk-adjusted returns so that you know you can stomach any potential downside.

Cost: If you retire at age 65 and live to age 95, and your portfolio costs you 2% per year on a $1 million balance, you are paying $20,000 per year in fees. This could cost you more than $600,000 over the span of your retirement. A fee-based adviser can really help reduce and control the costs of portfolio management.

  1. Create an estate plan.It can be as simple as writing a will, having advanced directives, and making sure beneficiary designations are correct on your accounts. A more complex estate plan will involve a trust for asset and tax protection, and allow you to have your estate planned before you pass on. A trust can also ensure that your heirs do not spend your assets unwisely.
  2. Don’t forget about taxes!Suppose the majority of your retirement income will be coming from fully taxable IRA accounts and your average annual effective tax rate is 20%. This means if you retire at age 65 and live to 95, you will pay $600,000 in taxes, assuming you maintain a 20% effective tax rate. Find a tax-efficient strategy to protect against this cost; there are many that can help with this.

When you follow these seven steps, you are putting you and your spouse on the path to a successful, lasting retirement. It’s important to find a fee-based adviser whom you can trust to help navigate your financial future and achieve the peace of mind you deserve.

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