When it comes to retirement, the vast majority of Americans lack a concrete conception of what it actually means to plan for retirement. If you’ve had a successful career, you most likely have a retirement account, such as a 401(k), through your employer, and you may actually have a decent amount saved there.
But a retirement account and a retirement plan are not the same thing.
Instead of viewing your retirement strictly through the lens of savings in retirement accounts, I encourage you to look at it holistically. Think about it like you would think about building a house. If you’re building a house, your first step wouldn’t be to buy things like windows, doors, light fixtures, etc. You need a plan first, a blueprint. Financial instruments are like the parts that make up a house. Obviously, you will need them, but first you need a plan.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If building a house is a stretch, consider all the ways that planning for retirement is like a road trip. I live in the Atlanta area, and if I’m planning a road trip to California, there are many factors that I have to plan for before I actually hit the road. If you want to get there, you need not only a vehicle, but an idea of what you’re going to do when you get there and a plan for what to do if you have an accident or get lost. I call this plan the retirement road map.
When to plan? 5 to 10 years in advance
As you think about retirement, try to avoid the all too common response, which is to put off planning for a bit longer. It’s tempting when you are busy with work and you don’t have a compelling reason to retire. However, if you’re asking the question of when you should start planning for retirement in the first place, the answer is probably now.
Retirement planning starts with an idea of when you want to retire and the assets you have to retire with. It starts — but doesn’t end — there. You need at least five to 10 years between constructing a solid retirement plan and actually retiring. That way there is the opportunity for your savings to grow and the ability to shift your asset allocation to protect yourself and account for any potential risk.
What is your big picture goal?
If you’re like most Americans, your picture of retirement is fairly hazy. You may think about it as one long vacation or a lifestyle made up of weekends. However, that’s not a realistic conception of retirement. First of all, retirement is a stage of life, not an event. It can last 30 or 35 years, which means you need to figure out how you are going to spend a third of your life without the anchor of work that you’ve had for decades.
That means that you — and your spouse, if you have one — must consider not only the big picture but the day-to-day picture. Ask yourself some of these questions:
- Do you see yourself staying put or living somewhere else in retirement?
- What will your daily routine look like?
- Who do you want to spend your time with?
- What hobbies or activities do you engage in now that you want to continue in retirement?
- How do you plan to handle declining health as you age?
- Are you and your spouse on the same page?
I encourage you to write your lifestyle goals down. If you want to travel, quantify that — what types of trips and how often? If you want to relocate or buy a second home, where and for how much?
How much will it cost?
The second step in the retirement road map is aligning your retirement vision with your financial resources. That means quantifying what your lifestyle will cost on a monthly and yearly basis.
Make sure you not only figure out how much your yearly vacations will cost, but also the non-discretionary expenses, such as utilities, car maintenance, health insurance, groceries, entertainment, etc. This calculation needs to be tailored to what you spend today and how that will change in retirement. You must add in some savings to replace items that eventually wear out, everything from a new dishwasher to a new car.
Vanguard offers a helpful worksheet to help you figure out some of these expenses.
Once you have a number, there’s the pesky matter of taxes and inflation. Many Americans neglect to consider the impact of taxes on their retirement budget. However, it is a big issue for most who hold the majority of their retirement savings in traditional tax-deferred 401(k)s and IRAs. When you withdraw those funds in retirement, you must pay taxes at ordinary income rates.
The federal government requires you to begin required minimum distributions from these accounts beginning at age 70.5. You’ll need to make quarterly estimated payments to the federal government to meet your tax obligations as well as state and local taxes, if those apply.
What might go wrong?
You’ve got a plan and have aligned your resources with that plan. Now it’s time to consider what might go wrong. Major retirement detours include:
- Stock market crashes
- Bad economy
- Higher taxes
- Long-term care
- High health care costs
- Higher inflation
- Loss of a spouse
- Long life expectancy
Fortunately, there are many tools that can be used to deal with these potential problems. Diversifying your portfolio through asset allocation can help you ride out bad economies and market downturns. Asset allocation involves the practice of dividing your retirement savings between stocks, bonds and cash.
Purchasing an annuity that provides guaranteed income for life can help offset inflation, long life expectancy and the income loss that can come with the passing of a spouse. Proactive tax planning that employs a Roth IRA conversion can help mitigate the potential risks involved in higher taxes in the future.
Put the pieces together
Let’s return to the metaphor of a road trip. Unless you’re 19 and on spring break, you don’t spontaneously drive out to California without making any plans. As we’ve said, you’ll need a car, places to stay and sights to see.
Constructing an actual retirement road map involves a number of steps that incorporate the ideas and questions I mentioned earlier, including:
- Inventorying your assets: 401(k) plans, IRAs, savings, any other retirement accounts and real estate.
- Reviewing your sources of income: Social Security, pensions, dividends, interest and real estate rental properties.
- Listing your expenses: Non-discretionary — such as income taxes, real estate taxes, groceries, utilities, health care costs and insurance — and discretionary, such as travel and entertainment.
- Aligning income and expenses: Your income and expenses should match to ensure that you won’t outlive your money.
A final word
Retirement planning can sound stressful, which is another reason people tend to avoid thinking about it in detail. But the hard-working Americans with the kinds of income and retirement assets I’m talking about have no reason to shy away from retirement planning.
In fact, when you wake up to the fact that you have all these assets you’ve never tapped into, planning for retirement can be a source of excitement. And if you take the steps I’ve described, there’s no reason why you shouldn’t be excited about the prospect.
Amy Buttell contributed to this article.
Licensed Insurance Professional. We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
Investing involves risk, including the loss of principal. No Investment strategy can guarantee a profit or protect against loss in a period of declining values. Any references to protection benefits or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.
-
Walmart's Transformative Ways Spark a 100,000% Stock ReturnWalmart's strategic store expansion and relentless cost-cutting have catapulted its share price over the years.
-
What DOGE is Doing NowThe Kiplinger Letter As Musk's DOGE pursues its ambitious agenda, uncertainty and legal challenges are mounting — causing frustration for Trump.
-
How Roth Accounts Can Ease Your Tax Burden in RetirementStrategic Roth IRA conversions can set you up for tax-free income in retirement and a tax-free inheritance for the people you love.
-
Are You a High Earner But Still Broke? Five Fixes for ThatIf you're a HENRY (a higher earner, not rich yet) but feel like you still live paycheck to paycheck, there are steps you can take to get control of your financial future.
-
Tax Diversification: Smart Ways to Preserve Your Nest EggA long and active retirement may be costly — and may even bump you into a higher tax bracket. Paying some taxes on your savings now could be the answer.
-
How to Thrive in Retirement: Balancing the TradeoffsTo cultivate a happy retirement, you need to tend to it as carefully as you would a flourishing garden, and that means making the right choices for you.
-
Kick the IRS to the Curb in RetirementThat 401(k) or traditional IRA you've filled with your hard-earned money could turn into a tax bomb. Before it blows, see if a Roth could help rescue you.
-
How to Stop Scammers Targeting Your Retirement SavingsAnyone can fall victim to a financial scam, but retirees can be more vulnerable than most, so stay alert to these common tricks that could catch you off guard.
-
Choosing a Trustee? These Six Tips Can Help You Pick WiselyHow can you be sure a trust will be managed properly, without causing a headache for the beneficiaries? The key is choosing the right trustee (and a backup).
-
Five Things That Are Spiking Your Insurance PremiumIt's a drag, but just as your expenses keep rising, so does the cost of doing business as an insurance company. That means higher premiums.
