How to Start Planning For Retirement

A retirement plan is not your 401(k); therefore, just because you may be a part of an employer-sponsored retirement plan, it doesn’t mean you have a retirement plan. Some people think their retirement plan is their 401(k) or Roth IRA or something like that. Those are just types of retirement accounts–labels on special accounts. They are like one of the buckets of money that you are going to fill up on the way to your retirement destination. They aren’t even the investment. You might place mutual fund investments in those buckets; you have a lot of flexibility with the bucket type and the investment you toss into it.

Retirement isn’t a destination, it’s a new journey of life.  Remember graduation? It’s called commencement, a start of something new. Retirement is no different. It’s a new walk of life. So it’s helpful to think of planning for it like you would plan for a long journey. Either because of lack of finances or choices, people are telling me they aren’t going to retire like their grandparents or parents did. They have new things they want to do–businesses they plan to start, art lessons they’re going to take. Some want to go into nonprofit work, either for a modest pay, or as a volunteer. Some people tell me they are looking forward to selling their large homes in the suburbs and down-sizing away from all of the clutter they’ve accumulated. They want to try moving into a trendy urban neighborhood, where a lot is happening, a community they want to play a part in, not one in a drive-to-everything quiet suburb. Some want to do the opposite.

A retirement plan is a mixture of 5 things

1.  Retirement goal planning is the first place to start: You have to have a picture of what you want your retirement to look like and how you want to live your life. These are the essential things to think about:

  • When do you want to retire; at what age do you plan to stop your normal job?
  • What will retirement look like to you? Are you going to live entirely off your investments and not earn a dime working for someone else or even yourself? Or do you plan to retire from one line of work and transition to something different to earn a different wage, until you reach a certain age? What is realistic, given your current financial situation; will you have to work into your senior years? How long will you do these things?
  • What kind of lifestyle do you want? Where you want to live and what you want to do during retirement is important to know. Do you want a house near water so that you can have a boat? Do you want to travel? Do you want your general overall lifestyle to be extravagant, modest, or somewhere in between?
  • Will retirement  be vocational in any way? Vocations are regular activities that you are passionate about and have some talent for. They might pay you an income into retirement. They might be some wrinkle of what you did before retiring or something totally new. For example, lets say you are an accountant and you just love bookkeeping and tax work. You don’t want to stop doing it entirely when you retire. However, you don’t want to do it at the same crazed intensity. Maybe you want to do it for free for a few small nonprofits or for a few select clients to supplement your income. Perhaps you want to take some classes to develop your artistic talents, or to receive training to pursue a new career you have always wanted to do.
  • Financial planning software systems will run the calculations and illustrate a plan. These systems will develop a road map for you to follow, based on your goals, how much money you’ll need, and your investment plan’s rate of return expectations. There are many more things to take into consideration, but great software like eFinPLAN will help you pull it off.

2.  Investing for retirement is key. Now that you’ve made goals for retirement and need to save for it, the next thing to decide is where to put your money. Most people’s retirement savings are tied up in accounts that are called (tax) qualified or retirement plans.  Here’s a quick review of them, but if you want to read a little more about the differences between Investment Accounts and Investment Types, read this article to help you sort it out.  You may want to talk to a tax adviser to help you determine which of these accounts to use.

  • Employer provided retirement accounts. The most common one today is the 401(k) plan. You can contribute to it before tax, and your employer can contribute on your behalf. They grow tax deferred and are fully taxable when you take the money out of them for retirement. A few other types of plans are Roth 401(k) and profit-sharing. If you work for a nonprofit institution or a government entity, you may also have a 403(b) or a 457.
  • Individual Retirement Arrangement, or IRA. The main tax advantage of IRAs is that they grow tax deferred. Unlike most other non-qualified accounts, the investment income or growth isn’t taxed while it accumulates on the way to retirement, helping you to accumulate as much money as possible. However, when you take the money out of them at retirement, that untaxed portion is taxable. This is not true for Roth IRAs and Roth 401(k)s. Roth’s also grow tax-deferred but the income at retirement is 100% tax-free. For regular IRAs, you can make after-tax deposits into them, or before tax too.  Before tax means that you can deduct the contributions from your income tax and lower your tax bill. The most you can contribute into a regular IRA, Deductible IRA, or Roth IRA for 2014 and 2015 (as of 11/1/14) is $5,500. If you are age 50 or older, you can contribute $6,500.  Not everyone is allowed to contribute these amounts.  You might not be able to contribute at all, or you may be able to contribute a reduced amount, and the same goes for the tax deduction. This can all depend upon various factors, such as your income, and if you participate in an employer-provided retirement plan. The Internal Revenue Service website clearly spells out how this works.
  • Annuities are insurance contracts issued by insurance companies. Annuities come in many types. Fixed annuities offer interest rates similar to investment grade bonds. Variable annuities provide mutual fund like accounts, called sub-accounts, that accumulate funds in various managed stock, bond and other types of portfolios. There are also index annuities that offer the possibility to have investment returns near to the stock market or other investment indexes, but unlike variable annuities, they usually guarantee your initial investment or an income stream, even if the underlying investment becomes worthless. Annuities grow tax deferred like IRAs, and the non-taxed portion is taxable when you take the money out. People are attracted to annuities because of their guaranteed income, death benefits and tax status. They usually pay a higher commission to the sales person, compared to the commission for mutual funds. Personally I like some features of annuities, but they can be oversold. If you are considering them, make sure you ask tons of questions, and that the salesperson or planner gives you all the time you need to understand them without any pressure. Beware, some of them have high fees, and large surrender charges that you pay if you take your money out of them early, which are reasons some wealth advisers greatly dislike annuities.

3. The next step is building an investment portfolio.  As you begin putting together your investment portfolio, it’s smart to get a basic understanding of the major investment philosophies and then to select one. Then you’ll want to determine your investment risk level. These two things are especially important for determining the rate-of-return assumptions you’ll use in your financial plan. To learn more, go here: Fundamentals of Investing, and Do it yourself investing options.

4. Make sure you gather important data about all your assets that will fund your retirement. Gather statements from your existing 401(k)s, IRAs, Social Security income projections (go to and other retirement and investment accounts.

5. Implementation: This is the step of following the directions in your financial plan. The plan will give you all sorts of things to do, like debt to reduce, investment plans to fund, and insurance to buy so that emergencies don’t cut into your future plans. One of the biggest things people face is how their current lifestyle decisions affect their retirement plan implementation. You have to decide how to adapt your lifestyle today to save for that future journey. If you have really big goals for retirement, you’re going to have to live more modestly now. It’s important to have a healthy balance between the two, but either way retirement planning for most people will surely lower your current lifestyle and spending.