Financial planning is the process of creating a roadmap to guide you to your financial goals. You can draft the plan on your own or with the assistance of a financial planner. Either way, you will initiate the process by evaluating your current financial situation, including weighing your assets and liabilities. Then, with the status quo clearly pictured, you can set a course for your future destination.
Often, that financial plan includes a strategy for retirement, but there is a notable divergence. A financial plan looks at the phase of life in which you earn money and accumulate assets. The financial plan should ensure that you know how much you need to save and are on track to get there. In contrast, your retirement plan should focus on your expenses after you stop working and explore how you can generate sufficient income to cover those expenses for the rest of your life. Financial planning will also incorporate tax strategy, estate planning, and investment goals.
What Is Retirement Planning?
Creating a functional retirement plan can allow you to enjoy the freedom of your non-working years without the stress of wondering if you have enough money to last. A retirement planner can assist you in comparing your assets to your expenses and ensuring that the assets will cover the costs. If there is an imbalance, a retirement plan will help you bridge the gap. A retirement plan will typically examine expenses in much greater detail than a financial plan and evaluate income sources.
For example, you may be counting on income from Social Security and a pension from your employer. Those are excellent sources of income in retirement, but do you know if they will be adequate to meet your needs? If you have a defined benefit pension plan from an employer, congratulations. That type of pension is increasingly rare. A defined benefit pension means that workers are guaranteed a set payment amount from the company after retirement. The figure is calculated based on factors the employer determines. Usually, this includes their average or highest compensation and the length of their service. This kind of pension was more common in the past but has been mostly replaced with defined contribution plans like 401(k) accounts.
Can I Count on Income from a Defined Contribution Plan?
A defined contribution account like a 401(k) plan is a significant part of retirement income for many workers, and it may be the primary source of retirement income for some. However, since the employer makes a set contribution to an account that belongs to the employee, the company doesn't retain control or responsibility for the outcome or guarantee any payments from the account. There are advantages and disadvantages to this approach. Workers can take their retirement savings from one job to another, but they can also neglect to participate fully or at all in many cases. A robust retirement planning process will help you determine the potential for income from your defined contribution plan, how it can supplement other sources, and any actions you may want to take now to address potential shortfalls.
