2 examples of retirement plans for all ages
Many financial experts will have you believe that retirement planning is a complex world of spreadsheets and expert knowledge. This is only half true. An expert can add value to the planning process, but you can also start planning for retirement independently. You just need to know what assumptions to make and what they mean.
The two sample retirement plans below provide a framework for your independent retirement planning. Use one or both to identify a starting point for preparing for retirement. You can always hire an advisor later to provide more details, but you should get started as soon as possible.
1. Retirement plan for the meticulous
There are benefits to taking a more in-depth approach to your retirement plan. For one thing, the first step in a thorough plan is to look at your living expenses. This process usually reveals easy reductions that you can make to spend less and save more.
And second, being in control of your financial details should help demystify retirement planning to some extent. This, in turn, can help instill confidence that you are going in the right direction.
This premier retirement plan explains your living expenses in retirement, along with your Social Security estimate, how much income you need from your savings, your target savings goal, and how much to invest to reach that goal.
- Calculate current living expenses.
- Add up your monthly expenses.
- Add pro rata amounts for expenses that occur quarterly, semi-annually, or annually. Examples include homeowners association fees, insurance premiums, personal property taxes, and property taxes that are not included in your mortgage.
- Also include income taxes that are currently deducted from your salary.
- Make adjustments for changes to your living expenses in retirement. Your spending composition may change once you leave the workforce. Estimate the net change by adding the expenses that will be higher and subtracting the expenses that will be lower. Here are some sample numbers to show how it works.
- You think you’ll spend an additional $ 350 per month in retirement on health care premiums, copayments, and deductibles.
Once you retire, you will likely stop making pension contributions. You might not earn one today, but for our example, let’s say you contribute around $ 720 per month. This represents 15% of an average salary of $ 58,000.
Upon retirement, you will also stop paying FICA taxes. This is 7.65% of your salary, which you calculate at $ 367 per month.
That’s $ 350 minus $ 720 minus $ 367, or minus $ 737. Your expected net change is a reduction of $ 737 in living expenses.
- Estimate your annual living expenses in retirement. Total your current living expenses and adjustments. Multiply by 12 to get an annual number.
- Estimate your annual Social Security income. You can find your estimated Social Security earnings by creating an account with my Social Security. Once logged in, you will see benefit estimates at different claim ages. If they don’t seem correct, check the accuracy of your income statement.
Find the benefit estimate for the age you plan to retire. Multiply it by 12 to get an annual number.
- Estimate the required income from savings. Subtract your annualized Social Security estimate from your annualized adjusted living expenses. The answer is the minimum income you will need from savings. You can add 5% or 10% as a cushion.
- Estimate your target savings balance. To find your target savings balance, multiply the answer in step 5 above by 25. This assumes that you will withdraw 4% of your savings balance each year.
- Calculate the monthly contribution needed to reach your target savings balance.
You’ll need the help of a compound income calculator like this to figure out how much to save and invest each month to reach your goal.
Any compound income calculator will ask you for an estimated interest rate. You can use an inflation-adjusted rate of 5% to 7% depending on the aggressiveness of your investment. If you mostly own stocks and plan to stick with that, you would use 7%. If you have a more balanced portfolio, a lower rate is more appropriate.
Please note, these growth rates are averages. This means that they will be more accurate for periods of 10 years or more compared to shorter durations.
The calculator will return a monthly savings amount required to reach your goal on your calendar. Use this as a starting point, then repeat this exercise every year to check your progress.
2. The Quick and Dirty Retirement Plan
If the above seven steps seem overwhelming to you, or if you are even struggling to understand the concept of your own retirement, you may prefer a more streamlined approach. This second retirement plan gives you just enough information to start saving. There are only two steps.
- Estimate your target savings balance. Multiply your gross income today by 15.
- Calculate the monthly contribution needed to reach your target savings balance. Use a compound income calculator to calculate how much to save and invest each month to reach your goal.
Here are the assumptions built into the two-step plan:
- You benefit from social security at your full retirement age (FRA). Social Security normally replaces around 40% of labor income, but only if you wait until FRA to apply. Claim earlier or later than FRA and the replacement percentage could be lower or higher.
- Your living expenses in retirement will remain the same. If you expect your lifestyle to grow, use a multiplier greater than 15, say 18 or 20.
- You will withdraw 4% of your retirement savings each year to use as income.
As with everything, the quick approach here may be less precise. Plan to recheck and refine your strategy at least once a year to see how much progress you are making.
Detailed or quick, you need a plan
Whether you prefer to master the details or to brush up on it, it’s important to have a plan to guide your retirement savings. It helps you define what is possible and gives you concrete steps. Most importantly, a good plan should motivate you to start saving and investing. If your plan does this, it has already proven its worth.