4 Steps to Planning for Retirement

People today are living longer in retirement than ever before, which means the need to plan for your retirement early – and revisit that plan often – is even more important. During this process, one of the most frequent questions I receive from my clients is, “How much do I need to retire?” While this seems like the natural question to ask, I like to take a different approach. My answer is always a question in return: “What will your retirement expenses be?”

When you’re setting any budget, it’s important to understand the types of expenses you have, whether they will be incurred one time or ongoing, and how these costs fit in with your goals. And, understanding how much you may expect to spend is a great starting point for determining how much you need to save.

If this seems like a daunting approach, don’t worry. Here’s a look at how I break down and walk my clients through this question.

1. Identify Your Sources of Income

Consider the sources of income you can reasonably expect and rely on after you’ve retired. Social
Security may be one source, as well as your 401(k) or investments. What about property or farmland? Are you planning to work a part-time job or retire completely? Make a list of all your sources, and see what these combined add up to each month.

2. Estimate Your Expenses

No matter your point in life, including retirement, there are always expenses you know you will incur each month. These expenses can include your mortgage or rent, any auto or loan payments, and your regular living expenses, such as groceries and utilities.

3. Outline Your Retirement Goals

Everyone has a different picture of what “retirement” will be like for them. For some, it’s their opportunity to engage in hobbies or activities they couldn’t devote time or resources to before. Consider what’s important to you in retirement. Will it be traveling to Europe once a year? Traveling across the country regularly to see your kids and grandkids? Understanding your goals helps you determine how much to put aside or budget so you can achieve them.

4. Determine What your Existing Portfolio Can Generate

This is where saving up, even a little bit, every year starts to pay off. Typically, you can draw four to six percent annually from your investment portfolio, and sustain that amount over a long period of time. Your chances of running out of that money increase significantly if you start regularly withdrawing more than six percent. This, of course, depends on your risk tolerance and other factors regarding how you’ve managed your portfolio.

Once you’ve completed each of these four steps, you can start finding the answer to the “How much do I need to save?” question. In fact, this exercise may help you answer other questions as well, such as when and where you want to retire.

Jason Egge is a Financial Advisor with Osaic Wealth, Inc. Securities and investment advisory services offered through Osaic Wealth, Inc., member FINRA/SIPC. Osaic Wealth is separately owned and other entitites and/or marketing names, products or services referenced here are independent of Osaic Wealth. Check the background of this investment professional on FINRA’s BrokerCheck. Not FDIC Insured. No Bank Guarantees. May Lose Value. Not a Deposit and Not Insured by any Government Agency.