There is little advice more important than illustrating the need to start saving for retirement early. However, I understand that sometimes life can get in the way of planning for the future. This is especially true when we face many uncertainties and when retirement is 15 or more years down the road.
Creating your own retirement plan, regardless of your age, is an important step in the financial planning process. The following retirement planning steps will help you determine how much you need to retire and estimate your retirement income.
If you have already gathered your financial data, created a budget and your financial planning statements you should already have an idea of your monthly and annual expenses. This first step in the retirement planning process will help you define your financial needs baseline. This will help you gauge how much money you currently need to maintain your standard of living and lifestyle.
If you need to determine your current expenses you should gather all of your monthly bills and bank transaction statements for the past 6 months to a year if available. This data will help calculate your average monthly and annual expenses.
Expected Retirement Expenses
Once you have determined what it costs to maintain your current lifestyle, its time to adjust a few assumptions in order to calculate your expenses during retirement. Common retirement planning assumptions include reducing expenses such as gasoline and car maintenance, dry cleaning and clothes.
However, even-though you may be able to reduce some expenses during retirement, some expenses such as healthcare can increase. Take your list of current expenses and scrub it until you are confidant that you have determined your “most probable” post-retirement expenses.
Once all post-retirement expenses have been calculated, focus your attention on determining your sources of retirement income. There are a variety of retirement sources that you might be able to rely on. These sources include: Social Security, 401(k) accounts, IRAs, corporate retirement benefits (defined benefit and contribution plans), personal investment accounts and part-time employment.
Your ability to benefit from these retirement income streams is completely contingent on the decisions you make leading up to your retirement. This is a clear way of saying that you should plan ahead and contribute to as many retirement programs as you can.
Adjust Lifestyle, Savings and Investments
The last step in the retirement planning process is to determine what expenses and or lifestyle adjustments you may need to make. Expense and lifestyle adjusts may be needed in retirement due to over or underestimating retirement income needs. Some decisions that may have to be made can range from dining out and traveling less to downsizing living arrangements. These decisions do not come lightly, however it may be the only way that you can get by during retirement.
Retirement planning is an important part of every financial plan. Following these steps should help you determine your current expenses, post-retirement expenses, expected retirement income and any adjustment that you may need to make.