Retirement 101: What to Know About the Basics of Planning

A financial advisor is working on retirement planning.

Key Takeaways

  • Establish clear goals and preferences for your ideal retirement - when you want to retire, where you want to live, activities and interests, etc. This provides a vision to work towards.
  • Analyze your current financial situation realistically - account balances, savings rates, income sources, etc. Know where you stand today.
  • Calculate how much money you'll need in retirement and develop a retirement savings plan. Utilize retirement calculators and tools.
  • Implement the plan by opening retirement accounts like IRAs and 401(k)s, selecting investments, and consistently contributing.
  • Monitor your retirement plan over time - review progress towards goals, re-calculate amounts needed, and make adjustments as needed based on changes. Stay on track.

Property ownership has its benefits. Exotic vacations have their appeal. But your main financial goal in life may well be a comfortable retirement. This is true for millions of Americans.

So, how do you approach such a significant goal? In short, it takes careful planning and continued discipline.

Retirement 101? Start at the beginning. If you've already begun to save for your golden years or intend to start soon, understanding the basics of saving, investing and retirement planning is essential. This overview can help you identify your goals, establish a plan for meeting them and track your progress as time goes by.

Understanding the Basics of Retirement Planning

Whether you work with a financial professional or you do your own planning, a smart approach to creating a solid retirement plan is to create a basic structure — and stick to it. By applying your personal goals and preferences, you can create a plan of action for building the retirement you envision.

Here are some steps to take when planning for a financially confident retirement:

  • Establish your goals.
  • Analyze your financial situation.
  • Develop an action plan.
  • Implement that plan.
  • Monitor your progress over time.

As part of this retirement 101 rundown, here's a closer look at some steps and basics to understand.

Establishing Planning Goals & Preferences

Retirement planning begins with the end in mind. This step in the planning process is more about your preferences than it is about financial status. It helps to consider some guiding questions. For example, at what age would you like to retire? Where would you like to live once you're retired? What would you like to do? Will you travel? Will you work in a part-time job? As you establish a personal vision of retirement, the financial details can follow.

If you work with a financial professional, they may also help you assess your feelings about risk in this step. Risk and reward go hand in hand with investing. Therefore, you'll need to determine how much risk you're comfortable taking — your "risk tolerance" — in considering your investments. Of course, investments cannot guarantee growth or sustainment of principal value; they may lose value over time. Past performance is not an indication of future results.

Analyze Current Finances

Next, you can start putting together your financial details and setting targets for results. For example, if you've established a goal of retiring at a certain age or in a certain year, how many years do you have between today and that time? What are you currently doing to reach your goals? How much are you contributing to retirement accounts, such as individual retirement accounts (IRAs) or employer-sponsored retirement plans, such as a 401(k)?

Getting an accurate picture of current finances can help you understand how to approach your retirement goals. From there, you can start to formulate a plan.

Develop a Plan: Calculate What You Need

Creating a retirement plan is incredibly important. It provides you with a road map for years (or decades) and can help you feel closer to securing the retirement you desire. This is when you'll estimate your retirement living expenses, calculate how much you need to contribute to retirement accounts and project the growth you hope your savings and investments will achieve over time.

Good news: There are tools that can be helpful in developing retirement financial plans:

  • Retirement cost-of-living calculator : Your cost of living in retirement will be different than it is today. Calculating how much money you'll need is an important step in planning your retirement, as it establishes the goal you'll work toward.
  • Retirement savings calculator : Answering a brief set of questions and analyzing the results can help to paint a picture around whether you're on track to reach your goals. It can also help you understand if any changes could benefit your retirement planning strategy.
  • 401(k) calculator : If your employer offers a 401(k), it's important to estimate the growth of your retirement savings, including any matching contributions, if applicable.
  • Compound interest calculator : Estimating the growth and future value of your retirement savings and investments over time can help you get an idea of how far your funds can stretch.
  • Retirement savings withdrawal calculator : An important step in retirement planning is to calculate how long your savings will last in retirement, based on the withdrawals you plan to make during that time.

Implement Your Plan: Accounts & Investments

Once you've established your goals and identified a viable action plan, you'll want to set your plan into motion. Now is the time to open retirement accounts such as a Roth IRA or traditional IRA, select your investments and establish a plan to make regular contributions.

Keep in mind that there are many types of retirement accounts in addition to IRAs and employer-sponsored plans. Take time to find out which is best for you and your financial situation. Moreover, you'll want to pay attention to the types of investments available through your retirement accounts. For instance, stocks, bonds, mutual funds and exchange-traded funds (ETFs) can be put to work toward your retirement goals — but those aren't the only options.

Monitor Your Plan

After you've created your retirement plan and set it into motion, you'll need to periodically check in on your progress to see if you're on track to achieve your plan. As time goes on, changes can occur — with things such as tax laws, economic conditions and personal circumstances — so it's a good idea to level-set every so often.

To monitor your plan, you can simply return to previous steps in your planning process and make new estimates for retirement living expenses. From there, you can calculate the potential growth of your savings and investments and see if you're still on track. If you're not, you will need to consider where changes may be needed.

Bottom Line

Retirement financial plans are complex given their many factors, such as your personal and financial circumstances and how they evolve over time. With an understanding of these retirement 101 insights, you can get a clear look at your current finances and see what you need to do to meet your savings goals.

Whether you're just getting started or you're near retirement, working with a financial professional may help. These individuals can take a look at your situation and offer personalized insights and guidance to assist with your planning needs.

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