How to Begin Financial Planning for Retirement

Posted by Mckenna Duncan on Aug 26, 2022


Perhaps next to creating and maintaining a budget, financial planning for retirement may be one of the important things you can do for your financial future. We’ll explain financial planning, why we believe it’s so important, the steps you can take to create a retirement plan, and who can benefit from working with a financial professional.  

What Is Financial Planning? 

Financial planning is the process of looking at your entire financial picture, deciding on short, medium, and long-term goals (creating an emergency fund, buying a home, paying for your children’s educations, retiring). From there, you create a strategy that can involve debt repayment, saving, investing, tax, insurance, and estate planning to fund those goals.  

Think of a financial plan as a map, or in more modern terms, GPS. You might be able to reach your destination without a map, but it could take much longer. Is it possible to reach your goals without a financial plan?  

Financial Planning for Retirement 

The earlier you start saving for retirement, the better, but it’s almost never too late. If you’re several decades from retirement, it can be hard to determine things like what age you want to retire or how much you’ll need for expenses each year. Luckily, there are some formulas and rules of thumb that can help you get ballpark numbers for things you can’t predict with certainty. 

Determine Your Timeline  

When do you think you’d like to retire? If you really enjoy your career, you might like to work well past the typical retirement age of 65. If you aren’t happy in your career or if your work involves a level of physicality that you can’t maintain for decades, you might want to retire well before 65.  

Having some idea of when you want to retire helps you determine your risk tolerance when investing, generally your ratio of stocks to bonds—the further away from retirement, the more risk you can take.  

Determine Your Retirement Number 

Your retirement number is the amount of money you need to save before retirement. One method for calculating that number is the Multiply by 25 Rule. A good rule of thumb is that you’ll need 80% of your pre-retirement income. Here’s an example: 

  1. $100,000 per year salary 
  1. 80% of $100,000 is $80,000 
  1. $80,000 x 25 is $2,000,000 
    So your retirement number is $2,000,000.  

Determine Your Draw-Down Number 

Your draw-down number is how much you can withdraw from your retirement savings each year. The 4% Rule can be used to calculate this amount. According to the 4% Rule, if you invest at least 50% of your portfolio in stocks and the rest in bonds, you can safely withdraw 4% per year for at least 30 years and never touch the principal.  

The Rule was created by William Bengen, a retired financial advisor, in 1994 and tested against some of the worst markets in history. The results were always consistent; 4% was a safe draw-down rate.  

Using our $2,000,000 figure above, withdrawing 4% of that per year would give you the $80,000 you determined you would need for your expenses each year.  

Choose Your Investments 

When investing for short or medium-term goals, you have a shorter time horizon than retirement investing. Your retirement investments have longer to weather market ups and downs, perhaps several decades depending on when you started. So you can take more risks with your retirement savings, but your portfolio should gradually become more conservative as you near retirement.  

Who Needs a Financial Planner 

Not everyone needs a financial planner, but most people could benefit from some level of financial planning advice. Those with more complex needs, business owners, high-net worth individuals, and those with complicated family situations (multiple spouses with children from each marriage, children with special needs, etc.) should seriously consider professional help.  

The average lay person doesn’t understand the tax code and legal system well enough to create the kind of financial plan and estate plan needed for more complex situations. 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income. Examples shown are hypothetical and for illustrative purposes only. The Retirement Number and 4% rule are general guides. These guides do not account for individual situations and should not be solely relied upon for the basis of financial decisions. There is no guarantee that following these methods will provide enough retirement income or that they will not result in a reduction or complete depletion of principal. 

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