Retirement planning might seem overwhelming, but breaking it down into steps makes the
whole process much more manageable.

To thoroughly enjoy your retirement, you must take the planning part seriously. Think about your retirement goals and how much time you have to meet them. Consider the different types of retirement accounts and which type of investment is best suited to help you reach your goal. Finally, think about taxes. If you invested tax-free money, you’ll owe taxes when you begin withdrawing those funds, but there are ways to help minimize this hit.

Retirement plans evolve, so it’s important to be engaged throughout your working life as you make your way to retirement age. Here are five steps to managing an ever-changing retirement plan to help you ensure you can meet your goal.

1. Consider the amount of time you have.

Your current age and the age you plan to retire are two of the most important factors of your retirement plan. The more time you have, the more risks you can take. When you’re in your 20s and 30s, you have three or four decades until retirement, so it typically makes sense to keep your assets in something riskier, like the stock market. You will see your share of ups and downs over the years, but historically, the stock market has increased over long periods of time. When it comes to stocks, a long period of time means that you have 10 years or more until retirement.

You also have to consider inflation. Year-to-year inflation may not seem like that big a deal, but when you consider that the plan you’re making now involves money you’ll be using three or four decades from now, inflation is important to think about. You may be growing your money with compound interest, but inflation is growing, too. The power of your dollar today is not going to be the same as it will be when you retire. Over the course of decades, even the smallest rise in inflation can erode the value of your retirement fund significantly.

That said, compound interest is definitely something to take advantage of, and the younger you do so, the longer the opportunity for compounding interest. If you start saving a little bit in your 20s, compound interest is designed to have your potential earnings increase over time well into your 60’s and beyond..

Generally, the closer to retirement you are, the more you should likely focus on preserving capital. Choose investments like bonds that aren’t as volatile as stocks and will provide a less volatile income to rely on. As you get older, you don’t have to worry about inflation as much, either. The cost of living is not going to change as much for someone who is planning to retire in the next few years as it does for someone who is planning for several decades down the line. You should also consider dividing your retirement savings into different components to help you meet different goals. For example, if you are planning to retire in five years, contribute to a college fund for a child or grandchild, and move south, each of these should be addressed independently. Multi-stage plans should keep each time frame in mind as well as address liquidity and allocation. When appropriate for your individual situation, rebalance as needed to get closer to these goals.

2. Determine your future budget.

Be realistic about your retirement spending. Most people underestimate how much they will spend after they retire, especially if they are still paying a mortgage or if unexpected medical bills occur. Many people also overspend in the first few years of retirement by traveling or making big investments in bucket list items. Retirees are no longer working 40 hours a week, they’re still relatively healthy, and they want to shop, go sightseeing, and enjoy the fruits of a lifetime of labor.

Remember, the cost of living increases every year, so it’s not safe to assume that you will spend less per month on expenses when you retire. To be safe, plan on covering 100 percent of your pre-retirement monthly budget. This approach will also help you adjust for any unforeseen expenses.

One important thing to consider is how long a retirement portfolio has to last. This determines how much you can safely withdraw each year and how you should continue to maintain your investments. The average lifespan is increasing, meaning that most retirement funds have to last longer than they once did.

If you plan to buy a home, relocate, or fund a child’s education after retirement, these things should be factored into your retirement plan as early as possible. Revisit your plan once a year to make sure you’re on track and increase the contribution, replan, or reallocate as needed to ensure everything is as accurate as possible.

3. Figure out the after-tax real rate of return.

After you figure out your age and monthly after-retirement budget, consider the after-tax real rate of return to determine if the current plan is enough to get you where you want to be. A rate of return of 10 percent or more before taxes isn’t realistic in most cases, even for those who started young. The odds of reaching this go down every year. As you get closer to retirement, it’s even more unlikely as investments are not as risky and yield smaller returns.

So, for example, someone with a retirement portfolio worth $500,000 may take $50,000 a year and hope for a 10 percent return to preserve the balance of the portfolio; that is, recoup the $50,000 over the course of the year. But, someone with a $1 million portfolio could take $50,000 a year and would only need a 5 percent return.

That said, depending on the type of account, investment returns may be taxed, so to be as accurate as possible, the actual rate of return should be calculated on an after-tax basis. Determining what is taxable and the tax rate before you begin to withdraw funds is an important part of retirement planning. Be sure to work with your qualified professionals to
assist with these taxable events.

4. Weight risk tolerance against investment goals.

Properly allocating your retirement accounts can be a great way to balance risk versus return, and some consider it to be the most important part of retirement planning. It’s a very personal decision and one that has to be carefully considered. How much risk is too much? Should you make riskier investments with part of your retirement while setting some aside in something that is typically less volatile like bonds to help ensure you have enough to meet your budget?

Make sure that you are comfortable with the risks you’re taking and assess your needs and wants. Pay attention to trends, but don’t stress too much about day-to-day changes. If you have a mutual fund that doesn’t do too well, consider contributing little more to it and get it back up to speed. Sometimes, the accounts that are performing poorly need a little more attention.

If you’re investing money in an account you’re not going to need for 30 or 40 years, you will see many cycles with ups and downs. Don’t give in to the panic. When the market falls, buy what you can to take advantage of it, especially if you have time to wait through another cycle.

5. Don’t neglect estate planning.

Estate planning is another step to retirement planning, and it requires professionals in many fields to ensure that it’s done properly. Life insurance is also an important factor as proper estate planning combined with life insurance coverage ensures that you leave fewer financial burdens for your family after your passing.

Tax planning is a key part of the process as the tax implications of passing on assets must be considered. One approach is to produce returns that cover inflation while still maintaining the value of your assets.

Estate planning should change over the course of your lifetime. Early on, it’s important to establish a power of attorney and create a will. As you get older and start a family, you might want to consider a trust. How your money is disbursed is very important when it comes to taxes and fees.

Final Thoughts

Retirement planning is complicated, especially now. Fewer people have a pension these days and some may rely on contribution plans and other investments than ever before. One of the most important parts of retirement planning is the balance of what you expect your retirement lifestyle to be and what you can realistically expect to afford. A good solution is to create a flexible portfolio and update it ongoingly to adjust to the changing market and any deviations from your original plan.

You should discuss any tax or legal matters with the appropriate professional. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Thomas B. Fleishel and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.