Retirement planning is a multistep process that takes place over a period of several years. To have a comfortable, secure—and enjoyable—retirement, you must first create a financial cushion that will cover all of your expenses. The fun part is why it's important to pay attention to the serious—and perhaps boring—part of the process: figuring out how you're going to get there.

Retirement planning begins with a consideration of your retirement objectives and the time frame within which you must achieve them. Then you should investigate the various types of retirement accounts that can assist you in raising the funds necessary to fund your retirement. As you accumulate savings, you must put that money to work in order for it to grow.

Taxes are the final surprise: If you've taken advantage of tax deductions for the money you've put into your retirement accounts over the years, you'll be hit with a significant tax bill when you start withdrawing from your accounts. There are strategies for minimizing the retirement tax hit while you are saving for the future—and for continuing the process once the day comes when you are able to stop working.

We'll go over all of these issues in greater detail later on. But first, learn the five steps that everyone, regardless of age, should take in order to build a solid retirement plan. This will help you get started.

1. Recognize the length of your time horizon

The difference between your current age and your anticipated retirement age serves as the foundation for developing an effective retirement strategy. The greater the amount of time that elapses between now and retirement, the greater the amount of risk that your portfolio can withstand. If you're young and have more than 30 years until retirement, you should put the majority of your assets into riskier investments, such as stocks, to maximize your returns. Despite the fact that stocks have historically outperformed other investments such as bonds over long periods of time, there will be volatility. The key word here is "long," which indicates a period of at least ten years.

Additionally, you must earn returns that outpace inflation in order to keep your purchasing power during retirement. "Inflation is like an acorn," says the author. A small seedling can grow into a mighty oak tree over time, according to Chris Hammond, a Savannah, Tenn.-based financial advisor and founder of RetirementPlanningMadeEasy.com. "It starts out small, but over time, it can grow into a mighty oak tree," Hammond says.

"We've all heard about compound growth on our money, and we all want it," Hammond continues. Since inflation is depreciating the value of your money, it can be compared to the phrase "compound anti-growth." Over the course of approximately 24 years, a seemingly insignificant inflation rate of 3 percent will erode the value of your savings by 50 percent. Although it appears to be insignificant each year, when taken together, it has a significant impact."

In general, the older you are, the more your portfolio should be geared toward generating income and preserving your principal investment. Increased allocation to less risky securities such as bonds, which will not provide the returns of stocks but will be less volatile and provide income that you can use to support your family's needs in the short term. In addition, you will be less concerned about inflation. A 64-year-old who is planning to retire next year does not have the same concerns about the rising cost of living as a much younger professional who has only recently entered the workforce, according to the Bureau of Labor Statistics.

You should divide your retirement plan into a number of different components. Consider the following scenario: a parent wishes to retire in two years, pay for a child's education until he or she reaches the age of 18, and relocate to Florida. From the standpoint of putting together a retirement plan, the investment strategy would be divided into three periods: the two years leading up to retirement (during which contributions are still being made to the plan), saving for and paying for college, and living in Florida (regular withdrawals to cover living expenses). In order to determine the optimal allocation strategy for a multistage retirement plan, it must take into account various time horizons as well as the corresponding liquidity requirements. Rebalancing your portfolio should be done on a regular basis to keep it in line with your changing investment objectives.

2. Calculate your retirement spending requirements.

Having realistic expectations about your post-retirement spending habits will assist you in determining the appropriate size of a retirement investment portfolio. The majority of people believe that their annual spending will amount to only 70 percent to 80 percent of what they spent previously when they retire in the future. 1 It is common for such an assumption to be proven incorrect, particularly if the mortgage has not been paid off or if unexpected medical expenses arise. Retirees also have a tendency to spend their first years of retirement splurging on travel or other bucket-list activities.

"I believe that the retirement savings ratio should be closer to 100 percent in order for retirees to have enough savings for retirement," says David G. Niggel, CFP, ChFC, AIF, founder, president, and CEO of Key Wealth Partners LLC in Litilz, Pennsylvania. Especially concerning healthcare expenditures, the cost of living continues to rise year after year. People are living longer lives and want to make the most of their retirement years. Retirees will require a higher level of income for a longer period of time, so they will need to save and invest appropriately."

Given that retirees are no longer required to work for eight or more hours a day, they have more time to travel, see the sights, shop, and participate in other costly activities. Correct retirement spending goals aid in the planning process because increased spending in the future necessitated the accumulation of additional savings today.

"Your withdrawal rate is one of the most important factors affecting the longevity of your retirement portfolio, if not the most important. Having an accurate estimate of your retirement expenses is critical because it will influence how much money you withdraw each year and how you invest your account in retirement. Medicus Wealth Planning in Draper, Utah, is led by Kevin Michels, a certified financial planner, and certified estate planner. "If you understate your expenses, you will easily outlive your portfolio; if you overstate your expenses, you will risk not living the type of lifestyle you want in retirement," says Michels.

When planning for retirement, it's important to take your longevity into consideration so that you don't outlive your savings. Individuals' average life spans are increasing as time goes on.

Additionally, if you plan to purchase a home or fund your children's education after retirement, you may need more money than you anticipate. Those expenditures must be taken into consideration when developing a retirement strategy. Remember to revise your plan at least once a year to ensure that you are on track with your savings goals.

Whitehouse Wealth Management in Vancouver, Washington, explains that "early retirement activities should be specified and estimated, unexpected expenses should be taken into account in middle retirement, and what-if late-retirement medical costs should be forecasted."

3. Calculate the After-Tax Rate of Return on Investments.

Once the anticipated time horizons and spending requirements have been determined, the after-tax real rate of return must be calculated in order to determine whether or not the portfolio will be able to generate the required income. Even for long-term investing, a required rate of return in excess of 10% (before taxes) is generally considered to be an unrealistic expectation. Due to the fact that low-risk retirement portfolios are primarily comprised of low-yielding debt securities, this return threshold becomes lower as you get older.

Suppose a person has a retirement portfolio worth $400,000 and income needs of $50,000. Assuming no taxes are paid, and the portfolio balance is not depleted, this individual is reliant on an excessive 12.5 percent return to get by. The primary advantage of starting to plan for retirement at a young age is that the portfolio can be grown to ensure a reasonable rate of return in retirement. With a $1 million gross retirement investment account, the expected return would be 5 percent, which is a much more reasonable rate of return.

Investment returns are typically subject to taxation, depending on the type of retirement account that you have in place. It is therefore necessary to calculate the actual rate of return after deducting taxes from it. However, determining your tax status when you begin to withdraw funds from your retirement account is an important part of the planning process for retirement.

4. Evaluate your risk tolerance in relation to your investment objectives.

Investment decisions should be made by either you or a professional money manager. Choosing an appropriate portfolio allocation that balances concerns about risk aversion and returns objectives is arguably the most important step in retirement planning. What level of risk are you willing to accept in order to achieve your goals? Should a portion of one's income be set aside in risk-free Treasury bonds to cover necessary expenses?

You must ensure that you are comfortable with the risks that are being taken in your portfolio and that you understand the difference between what is necessary and what is a luxury. According to Craig L. Israelsen, Ph.D., designer of 7Twelve Portfolio in Springville, Utah, "don't be a "micromanager" who reacts to daily market noise." "Investors who use a 'helicopter approach' tend to overmanage their portfolios. Add more money to your mutual funds if they have a bad year, especially if they are in your portfolio. It's similar to parenting in that the child who requires your love the most often receives the least amount of it. Portfolios are similar to one another. Don't give up on the mutual fund whose performance you are dissatisfied with this year; it may turn out to be the best performer next year."

'Markets will go through long cycles of ups and downs,' says John R. Frye, CFA, chief investment officer and co-founder of Crane Asset Management LLC in Beverly Hills, Calif. "If you are investing money that you won't need to touch for 40 years, you can afford to see your portfolio value rise and fall with those cycles." "When the market is in decline, buy rather than sell. Refrain from succumbing to fear. You'd want to buy shirts if they were on sale for 20 percent off, wouldn't you? After all, why not stocks if they were going on sale for 20% off?"

5. Keep abreast of estate planning developments.

Another important step in creating a well-rounded retirement plan is estate planning, and each aspect necessitates the involvement of different professionals, such as lawyers and accountants, who are experts in their respective fields. Additionally, life insurance is a critical component of both an estate plan as well as the retirement planning process. It is important to have a proper estate plan in place, as well as adequate life insurance coverage, to ensure that your assets are distributed in the manner of your choosing and that your loved ones do not suffer financial hardship after your death. A well-thought-out plan can also help you avoid the costly and time-consuming (and often lengthy) probate process.

In addition to estate planning, tax planning plays an important role in the overall process. If a person wishes to leave assets to family members or a charitable organization, the tax implications of gifting versus passing assets through the estate process must be considered in the comparison.

Common retirement plan investment strategies are based on producing returns that are sufficient to cover annual inflation-adjusted living expenses while also maintaining the value of the portfolio's principal. After that, the portfolio is transferred to the beneficiaries of the deceased person. You should consult with a tax advisor in order to determine the most appropriate plan for the particular individual.

"Estate planning will change over the course of an investor's lifetime," says Mark T. Hebner, founder and president of Index Fund Advisors Inc. in Irvine, Calif., and author of Index Funds: The 12-Step Recovery Program for Active Investors. "Estate planning will change over the course of an investor's lifetime," he adds. In the beginning, things like powers of attorney and wills are necessary. When you start a family, it is possible that trust will become an important part of your financial planning.

"How you wish to have your money disbursed later in life will be of the utmost importance in terms of cost and taxes," Hebner continues. In the case of estate planning, working with a fee-only estate planning attorney can help you prepare and maintain this aspect of your overall financial plan."