Two people holding hands while discussing how to prepare for retirement.

6 minute read

Retirement Planning 101: How to Prepare for Retirement

It's never too early to start planning for retirement. Learn the basis of retirement planning and how to get started with this guide.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

According to accounting and research firm PricewaterhouseCoopers,  just 36 percent of the American workforce feels on track with their retirement savings. Our life expectancies are increasing, but so are our living and healthcare costs. If the majority of America feels that they are not on track to save up enough by the time they retire, it is clear that some conversations surrounding retirement planning need to happen. Part of the responsibility falls on the government, but in the meantime, we must do what we can to empower ourselves as individuals. Here’s a breakdown of the basics of retirement planning. It’s never too late to get started!

What is Retirement Planning?

Retirement planning is the process of creating retirement financial goals, determining what actions and resources are needed to achieve those goals, and then taking those actions. By planning for your retirement, you are preparing today for your desired life tomorrow. 

Retirement will look different for each of us. One person may have found their lifelong passion and plans to work until the day they pass away. Another person may want to retire as soon as possible and never work another day. That same person may want to live a lavish lifestyle that includes travel and vacation homes, while their neighbor may dream of moving to a cabin in the woods and living a simple life until they pass away.

A universal truth no matter our hopes or dreams for our golden years is that we will need retirement income to support our desired lifestyle. The amount of money we need to save will depend on a variety of factors, such as our projected expenses, possible income sources, assets and risk, and our projected time horizon. 

Because of this, the process of retirement planning is unique to each person. It requires setting your own goals, estimating how much money you’ll need, and developing a plan for growing your retirement savings. 

Why Is Retirement Planning Important?

Let’s take a look at a few points of data to begin to paint the picture of retirement:

  • The current average length of retirement is 18 years but can be much longer depending on the age at which you retire, and the age at which you pass away.

  • The average monthly social security check for retired workers is $1,666.49 in 2022.

  • The typical monthly cost of living for an “older” household (65 or older) is $4,065.95.

Based on this data, while controlling for other variables, the average retiree in the U.S. will need to supplement their social security benefit by roughly $3,900.00 per month to afford their cost of living. If their retirement lifespan is the average of 18 years, they will need $842,400 total or $46,800 per year.

While social security benefits are definitely helpful, the average American still needs to supply the better part of a million dollars in order to afford their retirement in total. This doesn’t cover the cost of unexpected factors, such as larger-than-average medical bills, for instance. 

This is why retirement planning is so important. Not only do we need to calculate precisely how much money we need to have saved before we retire, we need a strategic plan on how to achieve this financial goal given the amount of time we have. Before this, however, we also need to acknowledge that we need a plan and start taking action. Otherwise, we might wake up one day and realize we can’t afford to retire.

Luckily, compounded interest is on our side. By setting aside money today, our investment savings can grow while we sleep. The earlier we get started, the better. In the next section, we’ll go over exactly how to plan for your retirement and how to maximize your savings.

In the meantime, here are some points that highlight why retirement planning is so important:

  • Educate yourself on how to obtain financial security.

  • Improve your health long-term by reducing stress caused by money problems.

  • Create a strategy that results in less tax payments.

  • Build up a nest egg so that sudden job loss or forced early retirement won’t impact you as adversely.

  • Prevent yourself from becoming a fiscal burden on your children.

  • Obtain the lifestyle you wish to have during retirement.

How to Plan for Retirement

Planning for retirement can seem like a daunting task. To make it more manageable, we broke down the process into 6 manageable steps for you.

We recommend getting out a journal and a pen, and follow along with each of these 6 steps. Some of these steps include goal setting, while others require taking action. Be sure to write down the specifics of how you plan to take action to complete the step, when, and what resources you might need. Breaking each step into smaller tasks and steps can help encourage your steady process. 

Here is an overview of the 6 steps to planning for retirement: 

  1. Start a Retirement Fund

  2. Envision Your Future

  3. Set Specific Goals for Retirement Planning

  4. Take Advantage of Employer-Sponsored Plans

  5. Understand the Stages of Retirement Planning

  6. Be Consistent

1. Start a Retirement Fund

The first step of saving up for retirement is to start your fund. This is because you’ll need a separate, dedicated account in which to deposit your retirement contributions. These funds should be treated as sacred and left untouched so that it grows over time. 

Even if you don’t feel all too knowledgeable about retirement finances yet, don’t wait to complete this step. This is because you don’t want to lose out on the power of compound interest. 

Even if you can tuck away just $100 per month into your retirement savings, with time and interest, this can add up to an impressive sum over the years. However, the later in life you start saving for retirement, you’ll have to tuck away larger amounts to catch up. The earlier you can start, the better. 

There are several different types of retirement funds you can set up. Read our guide “What is a Retirement Fund” to learn more.

2. Envision Your Future

Next, it’s time to get a rough idea about what you want your future to look like. You can definitely shape and refine this vision as you get older, but it’s good to set some clarity now so that you can start setting specific goals that align with this vision. 

Get out a journal and pen and spend some time journaling about how you see your retirement going. Where do you want to live? What kind of lifestyle do you want to lead? What kind of expenses will you have? 

Don’t be afraid to journal about the ideal retirement you envision for yourself, even if you might think it’s out of reach. Even if you make a modest income now, it doesn’t mean you won’t grow your career and wealth later in life, helping you achieve some of these dreams.

This step will be vital when you begin to set specific goals, up next.

3. Set Specific Goals for Retirement Planning

Figuring out how much you need to save up for retirement requires some specific goal-setting. You won’t know how much to tuck away towards retirement each month unless you have a goal number to work backwards from. 

To calculate how much you need to retire, focus on your monthly spending rather than income. This is because when you retire, you likely won’t have your traditional income. Rather, you want to focus on making sure that you can afford your monthly expenses. 

A popular rule of thumb to help you calculate your retirement goal is to multiply your current spending (per year) by 25. Let’s say that you calculate your expenses for the past year and it is roughly $40,000. You’ll need a total retirement portfolio that is worth $1 million at the time you retire. This is what will allow you to comfortably withdraw 4 percent each retirement year to live on. This estimate is adjusted for inflation and has good odds that you won’t outlive your fund. 

4. Take Advantage of Employer-Sponsored Plans

Virtually nothing comes for free in life — except for employer-sponsored retirement plans. Yes, philosophically, you have acquired your employer-provided benefits through your labor. However, if you focus solely on retirement savings plans sponsored by your employer, it’s essentially free money that you should absolutely take advantage of.

First, your employer will likely sponsor retirement investment and savings accounts. This means that you get to put money away toward retirement without having to also pay for the account itself. Further, most employers offer some type of benefit, such as employer matching. Do not leave this free money on the table. 

5. Understand the Stages of Retirement Planning

Your retirement strategy is influenced by your age. The retirement strategy of a 30-year-old will look entirely different from that of a 45-year-old. 

The younger you are, the less you’ll need to put into your retirement account each month because you have time on your side. However, if you’re getting started a little later in life, you’ll need to start saving more aggressively.

You’ll also want to make sure you’re on track to hit certain savings benchmarks based on your age. From there, you can adjust your savings strategy based on how much below or over you are for your respective benchmark. 

Learn more about the different benchmarks and stages of retirement planning by age here

6. Be Consistent

Last but not least, it’s important that you commit yourself to being consistent when it comes to your retirement savings. Virtually all retirement savings calculations are made based on the assumption that you set aside a certain amount of money each month. If you are sporadic in your saving habits, then you are less likely to meet your projected goal.

It’s recommended that you “pay yourself” each month by setting aside your retirement contribution as soon as you get paid. That way, you are less likely to feel tempted to spend that money. Most employers offer the option of setting aside your retirement savings pre-tax, meaning that it is taken out of your paycheck automatically. 

If you are self-employed, or if your employer does not offer this option, you can still set up automatic payments into your retirement account each month. 

Make Sure Your Retirement Fund Is Included In Your estate plan 

Saving up for retirement is no easy feat. In general, salaries are not increasing in correlation with cost of living, forcing many Americans to live on tighter and tighter budgets. Some even live paycheck to paycheck and do not have the luxury of planning for the future. 

Thanks to compound interest, any amount you can afford to tuck away into retirement, no matter how small, is absolutely worth it. You can always start small and increase your retirement contributions any time you get a windfall or salary increase. 

Retirement planning is an essential tool that allows you to gain clarity on your savings goal and map out actions you need to take today to meet that goal tomorrow. Today, we shared 6 actionable steps to help you plan out your retirement.

An additional step that you should be sure to include is your estate plan. While this is not directly related to your task of calculating your retirement savings target, it’s an important aspect of protecting yourself and your family as you begin to grow your nest egg. At Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement options today!

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