Preparing for retirement can be a daunting task. You could get different answers to your retirement planning questions from every source you ask. So, narrowing your scope to a few specific tasks can greatly streamline the retirement planning process. Luckily, there are five basic steps you can take that will help you secure your retirement plan.
1. Determine When You Plan to Retire
When can you retire? This is a very personal question and depends heavily on your situation. While the retirement age is generally considered 65, mostly because of Social Security benefits, the age of retirement for many people can vary greatly from person to person. People delay retirement for a variety of different reasons, such as enjoying their job, needing income to support family, and taking time to build more savings. However, as you get closer to retirement, there are a few key ages to keep in mind:
- Age 55: The earliest that you can draw on retirement plans if you have been separated from your job.
- Age 59 ½: The earliest that you can begin to withdraw from most retirement plans.
- Age 62: The earliest that you can begin receiving Social Security.
- Age 65: The age that you will become eligible for Medicare coverage.
- Age 66-67: Full retirement age for Social Security.
- Age 70: The latest that you can begin taking Social Security payments.
- Age 72: The age you must begin taking required minimum distributions from most retirement plans.
To determine the optimal age for your planned retirement, be sure to work with a CERTIFIED FINANCIAL PLANNER™. At Meld Financial, our planners can help you develop your FINANCIAL FINGERPRINT™ which will help you determine the best time for you to retire.
2. Define Your Retirement Income
How much do you need to retire? Interest income from retirement savings is just one of many possible retirement income sources you may have. Those who are eligible can receive social security, and the average Social Security benefit for 2019 was $1,503 or just over $18,000 annually – the maximum was just over double that. Depending on your retirement age and pre-retirement income, Social Security can be a sizable contribution to retirement income.
Although waning in popularity, defined-benefit plans, like pensions, are still offered by some private firms and many public sector positions. Rental properties can also bring in significant monthly income, especially for the retirees who have accumulated multiple homes. And, some might still have that yearning for work. Picking up part-time work or a consulting gig can be a way for some retirees to stay connected to a team or workplace while adding to their retirement income.
3. Estimate Your Retirement Expenses
Just as you did with your income, you need to develop a working estimate of your retirement expenses. As opposed to income, where you typically lose your largest source during retirement, expenses for many retirees can be similar to their pre-retirement levels.
A common, general estimate for retirement expenses is 80% of pre-retirement spending. However, simplifying retirement expense planning to a “rule of thumb” would be a huge mistake for most retirees. For example, this estimate can be very inadequate for those who plan to travel or provide additional financial support to their families during retirement. And for many, including those who have planned well and can retire early, expenses could actually increase for a few years into retirement.
To have confidence that you will have your needs met during retirement, you should work with a CERTIFIED FINANCIAL PLANNER™. A Meld Financial CFP® will help you to develop your FINANCIAL FINGERPRINT which will provide retirement expense estimates based on your specific situation.
4. Calculate Your Required Rate of Return™
Once you have a handle on your retirement income and expenses, it is time to find out how much you will need to earn on your retirement savings to meet your needs. We call this your Required Rate of Return™ [RRoR™]. Your RRoR™ is the average return on your retirement savings that is needed to meet your planned expenses during retirement.
The first step to finding your RRoR™ is calculating your annual income gap. The income gap is the difference between your retirement expenses and retirement income. This amount represents the interest income you will need to cover the shortfall in income from your other sources.
After estimating your annual income gap, you can now calculate your RRoR™. The RRoR™ represents the intersection between how much you plan to make during retirement, how much you plan to spend during retirement, and how much you have saved for retirement. Each of these parts individually can provide some insights into your overall retirement plan, but bringing them together gives you a single point of focus for your retirement planning.
Calculating your RRoR™ is a complex process that should account for interest rates, expected inflation, and several other environmental factors. To make this process easy and effective, work with a CFP® at Meld Financial to develop your FINANCIAL FINGERPRINT which will provide you with confidence in estimating your Required Rate of Return™.
5. Determine Appropriate Investment Strategy Based on Your RRoR™
Finally, once you have your Required Rate of Return™, it is time to build an investment allocation that best matches your retirement goals. This is another point where enlisting the help of the team at Meld Financial can streamline the process. Our qualified professionals develop your FINANCIAL FINGERPRINT™, a proprietary process, which results in a comprehensive retirement plan for you – in a single meeting. Then we use that data to create an investment strategy designed to meet your specific retirement needs.
Working with Meld Financial can alleviate many of the stresses related to your retirement planning. If you are looking for help saving and planning for your retirement, contact us. Our team of wealth managers consists of financial, legal and tax professionals who will help you develop your FINANCIAL FINGERPRINT™. Then you can be confident that you are on the road to a successful retirement.