5 Step Retirement Planning

Retirement planning is one of the most neglected fields in financial planning. This is the reason why a lot of people have either completely failed to plan for their retirement or have lost a lot of their retirement funds due to poor planning. The end result is that a lot of these people in their old age are forced to compete with much younger people for jobs. This problem is likely to get further exacerbated in the future. This is because an increasing number of jobs is getting automated, and hence the number of jobs is likely to reduce in the future. At the same time, the lifespan of human beings is increasing because of advances in science and technology. This is the reason that retirement planning has become more important than ever.

In this article, we explain the five-step process, which is commonly suggested by financial planners in order to correctly plan for retirement.

Step #1: Assess How Much Money You Will Need?

In order to reach any goal, we must first know what the goal is. The same also applies to retirement planning. It is important for us to know the amount of money that will be required post-retirement. This can be difficult to guess since retirement is many years into the future. Also, the aspirations of the people are very different. Hence, different people want to spend their retirement in different ways, and as a result, their expenditure during retirement is expected to be quite different.

As a rule of thumb, if a person does not change their lifestyle too much, then their expenditure does not change too much either. They do not have certain expenses like mortgage and car payments. However, during that time, most people spend more on travel and health care, which nullifies the cost advantage.

The current expenses are then inflation-adjusted to reach the age of retirement. This inflation-adjusted amount is then multiplied by 25 to reach the sum of money that will be required for retirement.

For instance, if a person has an annual expense of $100000, then they need a nest egg of $2.5 million in order to retire comfortably. The assumption here is that in the long run, the investment will make around 7% return, whereas the amount withdrawn will not be more than 4%. Hence, the investor will be able to live their entire life without actually touching the principal amount.

Step #2: Assess Your Current Financial Situation

Once we know the sum of money that a person needs to retire, the next step would be to make a plan to obtain the same within the shortest period of time possible. This is where the investor is expected to take a closer look at their income, expenses, and their savings rate.

Ideally, if the savings rate is higher, the person will be able to reach their retirement goals faster. Many financial planners advise their clients to cut down on their expenses in order to funnel more money into their retirement accounts. Based on the savings rate and the amount required for retirement, the investor can decide to increase or decrease their contributions to the retirement fund.

Step #3: Decide Your Investment Vehicles

The next step in the process is to decide on the retirement vehicles, which can be used to save money for retirement. There are special investment vehicles that have been created exclusively for this purpose in the United States of America. They provide certain tax advantages to people using these structures. 401(k) retirement accounts, as well as Roth IRA retirement accounts, are the two most commonly used investment vehicles.

In future articles, we will have a look at the advantages and disadvantages of these instruments in detail. The problem with these accounts is that there is a limit for the amount of money that an investor is allowed to put in them. For most investors, that amount is enough. However, some investors may not to use other investment vehicles if they want to invest more money or if they want to invest in riskier asset classes.

Step #4: Manage Health Care Issues

Health care expenses are a big component of the overall retirement expenses. Hence, it is important to take health insurance at an early stage in one’s life. This is one of the first steps that must be done in retirement planning.

Generally, people tend to depend upon their employer’s health care plan early on in their life. However, the problem is that at later stages of their life, insurance companies are reluctant to give them policies without very high co-pay or deductibles. Taking out personal insurance policies early on in one’s life is the solution to this problem.

Step # 5: Monitor Your Retirement Portfolio

The last step in the process is to continually monitor one’s retirement portfolio and make adjustments as and when necessary. For instance, early on in one’s career, most of the investments are bound to be in equity. However, as time passes on, the investor has to move their investments towards debt and other secure assets. This needs to be done as a part of a periodic review and monitoring process.

Hence, it can be said that retirement planning is not a one-time activity. Instead, it lasts for many years over the career of an individual and has many different steps.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.