5 Steps to Building a Retirement Plan

Quick Answer: Learn 5 essential steps for effective retirement planning. Secure your future with safe money alternatives. Start planning today with SafeMoney.com!

As we approach retirement, we face many decisions. Many of these decision-points revolve around future financial life. Retirement income planning – or creating a plan to cover expenses and retirement uncertainty – is an essential step.

But everyone has different income needs, and they vary in their readiness for retirement. Plus today’s retirement landscape is far different than what our parents and grandparents dealt with. In the past, a steady pension from an employer, dependable income from Social Security, and a small fund of retirement savings was standard fare. Now those days are largely a distant memory for most Americans.

Even with retirement planning being more of a personal responsibility, there are measures you can take to achieve a financially confident future. Here’s a look at five effective steps to building a solid game plan for your retirement lifetime.

Five Steps for Retirement Financial Security

1. Avoiding debt. As Americans approach or enter into retirement, thriftiness becomes more important. If you’re nearing this stage, consider avoiding new debt. Taking on debt while you’re in the “retirement red zone” – or 10 years before you retire and 10 years into retirement – can be a costly mistake.

New liabilities will put more pressure on your budget, diluting savings that could be paid toward other needs. Baby boomers tend to not be thrifty as their parents were, so be self-critical. Say you’re thinking about buying something. It’s advisable to pay cash, and if you don’t have the money now, consider delaying the purchase until you do have the money.

2. Considering wiping out existing liabilities – especially the mortgage. If you’re around 10-15 years or less away from retirement, now is a good time to pay off existing debt. That especially goes for the mortgage. According to the most recent data from the U.S. Bureau of Labor Statistics, housing costs were the greatest expense for retired households in 2014 – inclusive of mortgage payments.

Once you’ve left the workforce, the paychecks for your employment cease. Now you’re living off savings that you’ve put aside over a lifetime. Getting rid of debt now means more financial freedom later on. It helps free up savings, leaving more money to invest or spend as you wish.

3. Determining future expenses. Consider your current financial life. Do you have anything now that you won’t have or do in your retirement years? Based on current spending habits and assuming a 2-3% inflation rate per year, it helps to develop a personalized snapshot of what future monthly income needs will be like.

An entire article could be devoted to this, but here are some overall basics to follow. Your income plan should account for the different areas of spending: housing, food, transportation, clothing, utilities, insurance, entertainment, gifts & donations, hobbies, and medical needs. Of course there are miscellaneous expense categories which might be outside of typical monthly costs: house maintenance, income and property taxes, automobile upkeep, holidays, vacations, appliance upkeep or replacements, and other such areas.

Once these numbers have been determined, the total can be divided by 12 for a total monthly projection and added to the total of your other cost projections. With life expectancy on the rise, it’s ideal to have projections run for 30 years. Be sure that inflation is accounted for in each year, as well.

4. Creating a plan to pay the bills. With a snapshot of future income needs, it’s important to know how you’ll cover those expenses. Social Security plays a role in the finances of most retired households. Know what age at which you’ll claim your benefit and what you can expect for benefit payouts. Remember, deferring Social Security increases your benefit by 7-8% per year.

When considering what sources you’ll be drawing income from, you may want to consider withdrawal rates and tax implications. When they participate in an employer-sponsored retirement plan, many Americans opt to take a lump sum withdrawal (if an option). However, managing income streams from a retirement portfolio can be quite complicated – not to mention the possible tax liability. With contractual guarantees for income lasting as long as you could live, annuities may be an option to consider for steady, scheduled income payments.

5. Evaluating the risk profile of your plan. In retirement, it’s important to be mindful of risk. For those of us with a low tolerance for bear markets or investment losses, a falling market can provoke us to sell off stocks. We may think we’re staving off further losses, but in reality it’s foregoing recovery. And for seniors and baby boomers with a bigger appetite for market risk, having too much of their assets in volatile investments can lead to “sequence of returns” risk – or having to deal with the effects of investment losses early in retirement. A diversified portfolio with a suitable balance of risk and return potential, based on individual needs, age, and circumstances, can help.

With the ability to protect assets from market downturns, annuities may be a financial strategy for more conservative-minded retirees and pre-retirees to consider.

What about Your Personalized Income Strategy?

Dr. Robert C. Merton, a widely-respected economist and Nobel Prize winner, argues that too much of today’s financial planning focuses on investment values, returns, and return potential – not monthly income goals. Ultimately, SafeMoney.com believes that a retirement plan should focus on preserving assets and ensuring they’ll be around to generate income when you need them.

If you’re ready for help with preparing an income strategy that enables you to spend with confidence, SafeMoney.com can assist you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Frequently Asked Questions About 5 steps to building an effective retirement plan

What are the first steps to creating a retirement plan?

The first steps in creating a retirement plan involve assessing your current financial situation, including income, expenses, and savings. Next, set clear retirement goals, such as when you want to retire and how much income you'll need. This foundational understanding will guide your decisions on savings strategies and investment choices.

How can I ensure my retirement savings are safe?

To ensure your retirement savings are safe, consider utilizing safe money alternatives like fixed annuities, which provide guaranteed returns and protect your principal. Diversifying your portfolio with a mix of stocks and safe money alternatives can also help balance growth potential with security. Regularly reviewing your plan and adjusting as needed will further enhance your financial safety.

What percentage of my income should I save for retirement?

Financial experts typically recommend saving at least 15% of your income for retirement, but this can vary based on your individual goals and retirement timeline. If you start saving later in life, you may need to increase that percentage to catch up. Additionally, consider how much of your savings will be allocated to safe money alternatives to ensure a stable income during retirement.

What are safe money alternatives for retirement planning?

Safe money alternatives for retirement planning include fixed annuities, CDs (certificates of deposit), and high-yield savings accounts. These options provide stability and predictable returns, which can be crucial for retirees who want to avoid market volatility. Incorporating these alternatives into your retirement strategy can help protect your assets while still allowing for some growth.

Take the next step, run the numbers with our free retirement calculators.