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Do You Know What You Need to Retire? 8 Questions to Jump Start Your Retirement Planning

How much should you save for retirement?

There isn’t a one-size-fits-all answer to this question because the amount of money needed to meet income needs in retirement is specific to each individual, and based on their unique life circumstances and spending habits. A financial advisor can help develop a retirement plan that keeps you on track to meet your financial goals. They will also constantly reassess whether your financial plans need adjusting as you move through life and encounter unexpected events that might impact the trajectory of your retirement savings.

But whether you manage your retirement assets on your own or use the services of a financial advisor, you need to understand your current financial situation and how it relates to your financial future in retirement. These questions won’t answer how to invest your retirement assets, but they’re a starting point and foundation for building a solid retirement plan.

Like all things in life, you can’t get to where you want to go without first knowing your starting point. Think of these questions as the starting point on your retirement journey, so you can chart–and eventually navigate–a course to reach your goal.

These questions won’t answer how to invest your retirement assets, but they help you and your advisor understand your financial landscape before mapping a solid retirement plan.

1. How old are you now, and when do you plan on retiring?

While your current age is important, especially if you’re nearing retirement, it is best to think about your life in terms of stages because every stage has unique circumstances. Ideally, your retirement strategy will evolve as you move through these different life stages: young employee, established professional, and retired or planning to soon. The date you plan on retiring might be unknown. You might have dreams of retiring early and traveling the world. Regardless, your vision for retirement is the starting point for thinking about and defining a retirement strategy. Retirement planning addresses the amount of money you’ll need to save, what investments you should have to provide you the best possibility of growth, as well as the income you’ll need to support your lifestyle in retirement.

2. What does your spending look like today, and what do you think it will look like in retirement?

Be honest with yourself about your own and your household’s monthly spending. It is highly recommended that you use one of those programs offered by your bank that shows you where your money goes every month, so you have a clear picture of what you’re spending and what you’re spending it on. This exercise is surprising to many when they see how much they spend, especially on non-essentials.

You’ve worked all your life, and when retirement comes, what does that look like to you? Traveling abroad frequently? Downsizing your primary residence or buying a vacation home? Paying for your grandchildren’s college? Be realistic when forecasting the income needed in retirement, and consider using the services of a financial professional to ensure you don’t forget something that could significantly impact your lifestyle and spending patterns in retirement.

3. How long will you live?

The primary consideration for your age of retirement is how many years you’ll need to fund your retirement.People are living longer than ever before, which means that retirees are planning for more years of retirement than generations prior. According to Thrivent, retirees in 1990 had a life expectancy of 75; today, it’s 79. Today’s retirees will need to plan not only for more retirement savings per annum, but potential health costs, long-term care costs, and inflation.

This is a difficult, and emotional, question to answer. A financial professional can help by estimating your life expectancy using tools that take into account your health and savings, and which project how your savings will respond to unexpected life events over time.

4. Are your investment objectives and risk in line with your expected retirement date?

As you near retirement, your investment goals shift from achieving growth to preserving capital. Time horizon is an important factor when assessing your overall level of risk because the time you have to recover losses before you need to start drawing on your retirement assets for income declines. Stock market downturns are inevitable, but if you need to start withdrawing retirement assets after a major sell-off, you’ll miss out when the market corrects itself. You won’t fully participate in the recovery by having less money invested. This is why time horizon and risk are so crucial to retirement planning: you need to ensure that you have the income needed in retirement regardless of what happens in the market and how long you live, which means adjusting your investments as you age and stop working..

5. What will your taxes be in retirement?

It is essential to understand the different accounts you have and how each is taxed. It is likely that you will have accounts with different tax implications (such as a 401(k), Roth IRA, IRA, and taxable investment accounts) because you’ll be in a better position to minimize taxes by strategically taking income across the different types of accounts. It’s also important to be aware of how retirement withdrawals are taxed. For example, suppose you start taking periodic distributions for income from pre-tax retirement accounts. In that case, those withdrawals will be treated as income and could push you into a higher tax bracket. You might want to withhold taxes when taking distributions, so you don’t get hit with a massive tax bill at the end of the year. Furthermore, accounts funded with pre-tax retirement accounts have required minimum withdrawals once you hit a certain age. If you aren’t taking those distributions, then you could be subject to penalties.

Working with a financial advisor on your tax strategy in retirement can make answering this question easier, because they will help ensure you’re following the latest tax rules, avoiding penalties, and minimizing your tax burden.

6. Are you taking advantage of catch-up contributions?

As you approach retirement, it is important to put aside as much money as possible and take advantage of catch-up contributions. By 50, hopefully, you’re able to start taking advantage of these catch-up contributions to grow your savings more quickly than in previous years because every dollar counts down the road. For the calendar year of 2022, individuals over 50 can now put $27,000 into their 401(k) accounts instead of the $20,500 maximum for those younger than 50. You can also contribute $7,000 to your IRA and Roth IRA this year, an increase from the $6,000 limit in prior years. At 55, you can contribute an additional $1,000 per year to your health savings account.

7. How could inflation impact your retirement savings?

This is an important question to ask at any time, but with inflation at record highs, it has never been more important. Rising prices affect your purchasing power parity (PPP), or the buying power of your money. This means your savings won’t go as far as they once would. Even small increases in inflation can impact your retirement savings, especially if inflation rises higher than your investments’ returns. Inflation should be a consideration in your retirement planning. An advisor can help you navigate inflation by utilizing strategies and certain securities designed to potentially mitigate the effects of inflation on your retirement savings.

Conclusion

As Antoine de Saint-Expuery wrote in his famous children’s book The Little Prince, “A goal without a plan is just a wish.” It is never too early (or too late) to save for retirement. The most effective retirement planning evolves as you move through life’s different stages, adapting to your needs and life’s contingencies. A financial professional can help you prepare for your future and eliminate the fear of uncertainty associated with retiring so those years can be some of the best of your life.

If you’re ready to get started, please get in touch with us. We’d love to help create a financial plan for you and your unique retirement scenario.

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