Planning for Your Financial Future in Retirement

When it comes to planning for the future, most people think of retirement. Retirement planning is important because it allows you to do the things that you were unable to do while working‒travel, start a business, go back to school, be closer to family, or simply relax. Because retirement is such an important phase in your life, careful planning is a must.

If retirement seems like it is a lifetime away, planning for how you’ll spend that time may  be difficult. But one thing is certain: you’ll need to have money in retirement. If you don’t plan on working in retirement, where will this money come from? Most people have three sources of income that work together to fund retirement: Social Security, pensions, and personal savings.

Retirement Sign

Retirement Planning Problems

Even with three potential income streams there are some problems to consider. First, we aren’t certain what the future holds for Social Security. Even in the best-case scenario where you receive your full Social Security benefits, the average person only receives 40% of their pre-retirement income. That can certainly help, but with increased costs on things like health care in retirement that money doesn’t go very far.

The next problem has to do with pensions. These employer-sponsored plans not very common today, and even if you are lucky enough to receive a pension benefit, the amount you receive in retirement will likely only supplement around 25% of your pre-retirement income. Younger generations have all but written off pensions as a source of retirement income, so if you have one, count your lucky stars.

With all of the uncertainty and limited payouts of Social Security and pension plans you’re left with finding ways to save some of your current income for retirement. Thankfully, the government realizes the importance of saving for retirement, so they have created tax incentives to encourage you to save for retirement. The problem is that most people simply aren’t saving enough for retirement.

Time is Your Greatest Asset

The most important component of retirement savings is to start as soon as you can. The power of compound interest requires time to work its magic, so the more time you have, the more your money will grow. If you have a 401(k) plan at work or a traditional IRA, begin saving as much as you can, even if it is only fifty dollars a month. Every little bit helps. In addition to saving money for retirement, by making these contributions you’ll also be reducing your taxable income today. That means less money in Uncle Sam’s pocket and more for you when you retire.

In addition to the common pre-tax plans like a 401(k) or traditional IRA, you should also consider a Roth IRA. While you don’t receive an immediate tax deduction from contributions into a Roth, the benefit here is that your money will grow tax-deferred and can be withdrawn in retirement tax free.

Investing for Retirement

Aside from starting early, the biggest obstacle in saving for retirement comes down to the investments. Where should you invest? How do you know if your investments are appropriate? Investing doesn’t have to be complicated as long as you follow the golden rule‒don’t put all of your eggs into one basket. You’ve probably heard that before, but it is worth mentioning again. As long as you spread your investments out across many investment types and asset classes you will maximize your returns while minimizing risk. There’s no way to completely eliminate risk, but diversification works. Take a look at how diversification generated positive returns during the “lost decade” of investing.

If you are primarily saving in a retirement plan through your employer, check to see if your plan offers any asset allocation investment funds. These are funds that automatically invest your money in a way that is appropriate for your age or investment objective. If you do a lot of investing on your own and aren’t comfortable making any drastic changes, you may want to seek professional help to ensure you’re doing what’s best. Working with a financial planner can help you make the most of your current investments and work with you to create a plan to reach your retirement goals.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

1 comments
HelenCLee
HelenCLee

If you have no idea where to invest your money or how to start managing your finances, yes, it is more ideal to get a financial adviser to help you.

BarbaraWSimms
BarbaraWSimms

I couldn't agree more with J. For your financial planning to work, you need to assess your finances. Before you take the first step, know what you have to gauge where you want to go or proceed next. Or, you can get a planner.

nathanieltoney
nathanieltoney

As soon as you start working, start your retirement planning. It's good to dream and have a goal but you also need to be realistic about it. List down a list of what you want to do after you retire, more like a bucket list. And also remember that to fully enjoy your retirement, you must be free from debt.

deecarreon
deecarreon

It’s sad to think that others don't see the importance of retirement planning until it is already too late. We all want to live comfortably later, off traveling the world, or settle some place where it's more relaxing. The younger you start planning for your retirement, the better.

Sofia2543
Sofia2543

I really appreciate the believe that everyone should Plan for their Financial Future in Retirement. With only receiving 40% of their pre-retirement income is not comfortable to live

J @ Your Own Retirement
J @ Your Own Retirement

You hit the nail on the head, if you don't sit down and plan you won't have what you need when it comes time to leaving the work force. I think part of the problem right now is that the baby boomer generation is digging into their savings to help their kids who might have over extended themselves with large mortgages and high debt.