Retirement Planning: An Explainer

Planning for your retirement should be done as early as possible.

What Is the Definition of Retirement Planning?
Retirement planning identifies retirement income objectives, as well as the actions and decisions that will be required to achieve those objectives. It is necessary to plan for retirement by identifying sources of income, estimating expenses, developing a savings program, and managing assets and risk. Future cash flows are forecasted in order to determine whether or not the retirement income goal will be met. A number of retirement plans differ depending on where you live, such as the United States versus Canada, which has its own system of employer-sponsored retirement plans.

Retirement planning should be a continuous process that lasts a lifetime. You can begin at any time, but it is most effective if it is factored into your financial planning from the start. That is the most effective method of ensuring a safe, secure—and enjoyable—retirement. The fun part is why it's important to pay attention to the serious and, at times, tedious part of the process: figuring out how you're going to get there.

Understanding the Process of Retirement Planning

Retirement planning, in its most basic definition, is the preparation for life after paid employment has ended, not only financially but also in all other aspects of one's life. The non-financial aspects of retirement include decisions about how to spend one's time in retirement, where to live, when to stop working entirely, and other such matters. A comprehensive approach to retirement planning takes into account all of these factors.

The importance that one places on retirement planning changes as one progresses through different stages of life. Early in a person's working life, retirement planning entails putting aside a sufficient amount of money to provide for their retirement. The process of setting specific income or asset goals and taking steps to achieve them may also be included during the middle of your professional career.

When you reach retirement age, you transition from the accumulation phase to the distribution phase, which is referred to as the distribution phase by financial planners. You are no longer putting money into the system; instead, your decades of savings are paying you back.

Objectives for Retirement Planning

Keep in mind that retirement planning should begin long before you plan to retire, and the earlier you begin, the better. Although your "magic number," or the amount of money you'll need to retire comfortably, is highly personalized, there are a number of rules of thumb that can help you get a general idea of how much money you'll need to put aside.

Traditionally, it was believed that you needed approximately $1 million to retire comfortably. The 80 percent rule is also used by other professionals (i.e., you need enough to live on 80 percent of your income at retirement). If you earned $100,000 per year, you would require savings that could generate $80,000 per year for approximately 20 years, or a total of $1.6 million, if you included the income generated by your retirement assets in your calculations. Others argue that the majority of retirees aren't saving nearly enough to meet those goals and that they should adjust their lifestyle to make the most of what they have.

Plans Sponsored by an Employer

Young adults should take advantage of 401(k) and 403(b) retirement plans offered by their employers. An advantage of these qualified retirement plans is that your employer has the option of matching your contributions up to a certain amount, which is advantageous in the short term. A typical scenario would be that if you make a 3 percent annual contribution to your plan account, your employer may match that contribution by depositing an equivalent sum into your retirement account, essentially giving you a 3 percent bonus that grows over time.

While it is true that you can and should contribute more than the amount required to earn the employer match, some experts recommend that you contribute as much as 10 percent more. Participants under the age of 50 can contribute up to $20,500 of their earnings to a 401(k) or 403(b) plan for the tax year 2022, with some contributions being matched by their employer. For the 2022 tax year, participants under the age of 50 can contribute up to $10,000 of their earnings to a 401(k) or 403(b) plan, with some contributions being matched by their employer. For the year 2022, this amount remains unchanged. Participants over the age of 50 are eligible to make a catch-up contribution of an additional $6,500 per year.

Aside from earning a higher rate of return than a savings account, 401(k) plans have a number of additional advantages (although the investments are not free of risk). Additionally, until you withdraw the funds from the account, the funds are not subject to income taxes. Due to the fact that your contributions are deducted from your gross income, you will receive an immediate income tax deduction. Those who are on the verge of moving into a higher tax bracket may want to consider making a sufficient contribution to reduce their tax liability.

Roth IRAs are a type of individual retirement account.

Other tax-advantaged retirement savings vehicles include the traditional individual retirement account (IRA) and the Roth individual retirement account (Roth IRA). A Roth IRA, which is funded with after-tax dollars, can be an excellent investment vehicle for young adults. This eliminates the immediate tax deduction, but it also prevents a more significant income tax hit when the money is withdrawn at retirement. Even if you don't have a lot of money to invest at the outset, starting a Roth IRA as soon as possible can pay off handsomely in the long run. Keep in mind that the longer money is left in a retirement account, the more interest is earned, which is tax-free.

Roth IRAs are subject to certain restrictions. For either an IRA (Roth or traditional), the contribution limit for each year is $6,000, or $7,000 if you are over the age of 50. Even so, there are some income restrictions with a Roth: For the 2021 tax year, a single filer can contribute the maximum amount if their annual income is $125,000 or less; for the 2022 tax year, the maximum amount is $129,000. After that, you can invest to a lesser extent, earning up to an annual income of $140,000 in 2021 and $144,000 in 2022, depending on your investment strategy. (The income limits are higher for married couples filing jointly because their combined income is higher.)

If you withdraw money from a Roth IRA before reaching the age of retirement, you will be subject to penalties similar to those applicable to a 401(k). In some cases, exceptions can be made that are particularly useful for younger people or in an emergency situation, for example. The first advantage is that you can always withdraw the initial capital that you invested without incurring any penalties. For the second time, you can take money out of your account to cover certain educational expenses, such as a first-time home purchase, health-care expenses, and disability expenses.

Having established a retirement account, the next step is determining how to allocate the funds. For those who are intimidated by the stock market, consider investing in an index fund, which requires little maintenance because it simply mirrors a stock market index, such as the Standard Poor's 500 index, rather than the actual stock market. The assets held by target-date funds are also designed to automatically alter and diversify over time in accordance with your desired retirement age.

Retirement Planning Has Several Stages

The following are some guidelines for successful retirement planning at various stages of your life, as outlined below.

Young adulthood (between the ages of 21 and 35)

Even though those entering adulthood may not have a lot of money to invest, they do have the luxury of time to allow their investments to mature, which is a critical and valuable component of retirement planning. The reason for this is due to the principle of compound interest.

Compound interest allows interest to earn interest, and the longer you have the opportunity to earn interest, the more interest you will accrue over time. Because of the wonders of compounding, even if you can only set aside $50 per month, your money will be worth three times more if you invest it at the age of 25 than if you wait until you are 45. Even if you have the ability to invest more money in the future, there is no way to make up for time that has already passed.

Early Midlife (between the ages of 36 and 50)

Mortgages, student loans, insurance premiums, and credit card debt are just a few of the financial burdens that can befall people in their early middle years. Nonetheless, it is critical to continue saving during this stage of retirement planning as much as possible. When you combine the opportunity to earn more money with the amount of time you still have to invest and earn interest, these years are among the most favorable for aggressive saving.

At this stage of retirement planning, individuals should continue to take advantage of any 401(k) matching programs that their employers may provide. Contributions to a 401(k) or Roth IRA should be made to the greatest extent possible as well (you can have both at the same time). Traditional IRAs are an option for those who are not eligible for a Roth IRA. This is similar to your 401(k), in that it is funded with pretax dollars and the assets within it grow tax-deferred over time.

Some employer-sponsored plans provide participants with the option of making after-tax retirement contributions through a Roth account. You are restricted to the same annual limit as with a Roth IRA, but there are no income restrictions as with a traditional IRA.

Last but not least, don't forget about life insurance and disability insurance. When you pass away, you want to make sure that your family can continue to live comfortably without having to rely on their retirement savings for support.

Later Midlife (between the ages of 50 and 65)

As you get older, you should make your investment accounts more conservative in nature. While time is running out for people who are at this stage of their retirement planning to save, there are some advantages to doing so. Higher wages, as well as the possibility of having some of the aforementioned expenses (mortgages, student loans, credit card debt, and so on) paid off by this time, can result in more disposable income to invest.

And it's never too late to start a 401(k) or an IRA and make contributions to them. One advantage of entering this stage of retirement planning is the ability to make catch-up contributions. From the age of 50 on, you can make an additional $1,000 a year contribution to your traditional or Roth IRA, as well as an additional $6,500 a year contribution to your 401(k) in 2021 and 2022, if you are still working.

When it comes to retirement savings, those who have exhausted their tax-advantaged options should consider other forms of investment to supplement their retirement savings. Depositing your money in certificates of deposit (CDs), blue-chip stocks, or certain real estate investments (such as a vacation home that you rent out) may be a relatively risk-free way to build up your retirement savings.

Also possible is to get a general idea about how much your Social Security benefits will be and when it makes sense to begin collecting them. The eligibility for early benefits begins at the age of 62, but the full retirement age for full benefits begins at the age of 65.

Additionally, now is a good time to look into long-term care insurance, which will assist you in covering the costs of a nursing home or in-home care if you ever require it in your later years. They can completely deplete your savings if you don't properly prepare for health-related expenses, especially if they are unexpected.

Various Other Aspects of Retirement Preparation

Retirement planning entails much more than simply determining how much money you will save and how much money you will require in retirement. In addition, it takes into account your entire financial picture.

'Your Residence'

The majority of Americans consider their home to be the most valuable asset they own. What role does this play in your long-term financial planning? In the past, a home was considered an asset; however, since the housing market crash, planners now consider it to be less of an asset than they did previously. As a result of the widespread use of home equity loans and home equity lines of credit, many homeowners are entering retirement with mortgage debt rather than with their financial affairs in order.

There's also the question of whether or not you should sell your home once you reach retirement age. If you are still residing in the home where you raised multiple children, it is possible that the space is larger than you require, and the costs associated with maintaining it may be significant in comparison. Your retirement strategy should include an unbiased evaluation of your home and recommendations for what to do with it.

Estate Planning is a vital part of any successful business.

The provisions of your estate plan address what will happen to your assets after you pass away. A will should be included in the package, but even before that, you should set up a trust or employ some other strategy to keep as much of your estate as possible from being subject to estate taxes. Even though the first $11.58 million of an estate is exempt from estate taxes, an increasing number of people are finding creative ways to leave their money to their children without giving them a lump sum of money as an inheritance.

Aside from that, there may be changes coming down the pipeline in Congress regarding estate taxes, given that the exemption amount for estate taxes is scheduled to decrease to $5 million in 2026.

Efficient Taxation

When you reach retirement age and begin receiving distributions, taxes become a significant source of frustration. The majority of the funds in your retirement accounts are subject to ordinary income tax. This means that any money you withdraw from your traditional 401(k) or IRA could be subject to taxation at a rate of as high as 37 percent. Because of this, a Roth IRA and/or a Roth 401(k) are both highly recommended, as they both allow you to pay taxes up front rather than when you withdraw your funds. Performing a Roth conversion may make financial sense if you believe you will make more money later in life than you currently do. An accountant or financial planner can assist you in sorting out the tax implications of your decisions.


The protection of your assets is a critical component of retirement planning. You will have to navigate the often-complicated Medicare system as you get older, which will result in higher medical expenses for you. The standard Medicare program, many people believe, does not provide adequate coverage, and they turn to a Medicare Advantage or Medigap policy to supplement their coverage. Another thing to think about is life insurance as well as long-term care insurance.

An annuity is a type of insurance policy that is issued by an insurance company. An annuity is very similar to a pension. You make a deposit with an insurance company, which then pays you a set amount of money every month until the account is exhausted. There are many different options available with annuities, as well as many factors to consider when deciding whether or not an annuity is right for you.

Krees DG

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