Planning for retirement should be approached as an ongoing rather than a one-time event process. Ideally, you should start early in your working career: the sooner you start saving for retirement, the more time your investments have to grow by compounding. But, it is never too late to start planning. Whether you are age 25 or age 60, it will be to your benefit to do some basic retirement planning. The following notes only scratch the surface of what is involved in a comprehensive retirement plan. Use these notes, resources, and links to get started on this important matter.
Financial planning always has to do with quantifying in terms of specific time and specific dollar amounts where you are, where you want to go, and how you propose getting there. For retirement planning, here are the basic steps:
Step A—Present circumstances: Evaluate and document your present circumstances
Step B—Goals and assumptions: Set income goals during retirement and assumptions about inflation and investment returns
Step C—Devise action plan: Determine what actions are required to go from your existing circumstances in step A to the desired goals in step B.
Step D—Implement action plan: Act, save, invest!
Step E—Monitor and revise: Periodically review progress and return to step B.
Step A—Present Circumstances may be the hardest for most people. To get a complete picture of your present circumstances, you have to gather your personal financial information and organize as follows:
And look in your crystal ball to foresee:
Step C—Make a Plan requires a lot of number crunching. In this step you take all the numbers showing where you are, calculate all the savings/investment buildup until retirement, and calculate all the spending during retirement for the length of your assumed lifespan.
It is possible to work out rough estimates with pencil and paper. If you are so inclined, you might make up an Excel spreadsheet. Most people find it is easier to use one of the software packages mentioned above. Or they use an online retirement planner such as is available form Schwab, Vanguard, Fidelity, (links can be found below) and many other financial websites. But beware, the planning software on these sites will often produce widely different results. This is because they ask you to input your information and assumptions in differing ways; each planning software also has its own assumptions which are not always apparent to the user. You may also want to get the help of a financial planning professional, such as a Certified Financial Planner (CFP). Fitting together the probable outcomes based on all this input is an area to which you will want to dedicate some considerable attention.
A simplified "ballpark" estimator for this calculation is provided by the American Savings Education Council. Click here to perform the calculation online, or here to download a printable form in PDF format.
Your calculations should result in a number—how much to save each month, and an asset allocation—what investments to put your savings into. That is your action plan.
Start (or continue) saving.
Reallocate your investments and purchase new investments based on the asset allocation you have determined.
Review your progress towards your goals.
Reevaluate your current circumstances as applicable.
See how well the chosen assumptions fit real life results.
Consider rebalancing you investments to maintain your asset allocation.
Make changes to your assumptions and plans as necessary.
As the world changes, so does the standard thinking regarding retirement planning. From Money and all the other financial magazines, the Wall Street Journal, hundreds of financial websites, and self-help financial books, there are vast resources available to you. As the economy changes, your Pension Plan changes, Social Security and Medicare change, stay informed. This will allow you to take your best shot at arranging for a comfortable retirement.
You can check out this publication, a Financial Warmup, offered by the Department of Labor and the CFP Board as a starting point for your research. Or, start with any of the links shown below.
The Social Security homepage offers education on how your retirement benefits are figured, how social security may change in the future, how it's financed, and other basic facts and figures. Check this site on how to apply for your benefits, how to appeal these benefits, and everything else regarding social security.
Information on retirement plans, benefits, estate planning, and long-term healthcare. There is also a section on the personal concerns of retirement.
Vanguard, a mutual fund investment company, offers an extensive Vanguard Online Planner. It is free and does not require registration to run the planner. If you register (free) you can also save your information online and then come back later to revise it.