Preparing for retirement can be a daunting task. You could get different answers to retirement planning questions from every source. So, narrowing your scope to a few specific tasks can streamline the retirement planning process. Luckily, there are five basic steps you can take to help 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. The retirement age is generally considered 65 but Social Security benefits, employment, and family situations can cause the age of retirement to 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™. An experienced financial planner can help you determine the optimal time to retire based on your specific situation.
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. Those who are eligible can receive Social Security, and the average Social Security benefit in 2023 is $1,827 or just under $22,000 annually – the maximum is just under 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 estimate for retirement expenses is 80% of pre-retirement spending. However, simplifying retirement expense planning to a “rule of thumb” is often a huge mistake. For example, this estimate can be inadequate for those who plan to travel or provide additional financial support to their families during retirement. 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 partner with an experienced financial advisor. Your advisor can help you estimate your retirement expenses and craft a plan for meeting them.
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. At Meld Financial, 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 retirement goals.
The first step to finding your RRoR™ is calculating your annual income gap. This is the difference between your retirement expenses and guaranteed sources of retirement income. The income gap 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 other environmental factors. To make this process easy and effective, work with a CFP® at Meld Financial.
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 specific situation. Your portfolio should be built around your RRoR™, retirement goals, risk tolerance, and personal situation. It should also be managed by an experienced team of financial professionals that can ensure your portfolio adapts to changing market conditions.
Financial Fingerprint® by Meld Financial – The Key to Your Retirement
The team of tax, legal, and investment professionals at Meld Financial can streamline the retirement planning process by developing your Financial Fingerprint®. This comprehensive wealth management plan was developed over 30+ years of working with our clients. The best part is it’s quick to assemble, easy to understand, and simple to modify as your circumstances change. In most cases, we can develop your Financial Fingerprint® in a single meeting. Then we use that data to create an investment strategy designed to meet your specific retirement needs. To get started, contact an advisor today.
