Retirement Planning

Ideally, planning for retirement starts as a small child (if it did, then you can probably "say hello" to early retirement). For most of us, it starts in our 20s, 30s, 40s (getting scary), 50s (getting real scary), or 60s (that's REAL scary). Retirement Planning has a lot to do with saving money for the future, and not letting things happen that cause that money to "evaporate", or be impacted by inflation. Some people have an aptitude for saving driven into them at a young age, some learn about it later on, while many NEVER learn it. Developing a Retirement Plan is a crucial first step to achieving financial independance.

This section discusses two basic options for creating a retirement plan which includes the following:
 

• Meeting with a Certified Financial Planner (CFP)
• Developing Your Own Retirement Plan

Meeting with a Certified Financial Planner

A Certified Financial Planner (CFP) is a person that has been licensed by the CFP Board of Standards.

A CFP can help you plan all aspects of your financial life by helping you understand what financial planning is, what are the benefits of financial planning, and take you through the financial planning process (click here for more info). Regarding Retirement Planning, a CFP can help determine if your goals are achievable, and what you will have to do to achieve your retirement goals.

Before you meet with a CFP, it will help if you define your retirement goals and pull together some preliminary information (click here for sample preliminary info).

To find a CFP in your area, consult your Yellow Pages or access the Financial Planning Network Search Engine.

To learn even more about CFPs, access the Institute of Certified Financial Planners.

Developing Your Own Retirement Plan

Creating your own Retirement or Financial Plan requires that you evaluate the inter-relationship between a MULTITUDE of variables such as your ages, incomes, taxes, investments, expenses, assets, liabilities, debt, life spans, etc.... It is HIGHLY recommended that you acquire a tool to help you with assessing all of the inter-relationships and "what if" scenarios. An adequate tool that I have found is the Quicken Financial Planner (QFP) from Intuit. Although there is always something you would like to see different in just about any software tool, the QFP should serve many of the needs of most aspiring Financial/Retirement Planners.

Getting Started

Your first step is to determine your retirement goals, time frames and risk.

Retirement goals are basically such things as "what type of lifestyle do I want in retirement" to include:
 

• Will I move to a smaller or a larger house
• Will I have older or newer car(s)
• Will I want to take lots of expensive vacations

Retirement Time frames play an important role in your retirement plan. You must determine "when you might like" to retire. You may want to retire at 40, but you may not be able to until you are 50, 60, 70...
This is what your retirement plan will help you determine.

Your risk level may be hard to quantify. Risk comes in two flavors:
 

• What YOU can endure (i.e. stocks, bonds, CDs, money markets, savings accounts)
• What is remotely feasible (don't expect a 20% yield on your investments forever)

Pulling Together Your Preliminary Information

Refer here for a sample summary of preliminary information you will need before you start your retirement plan. It is crucial that you take the time to itemize your current annual expenses, and then verify that your itemization is accurate.

More on Estimating Risk and Rate of Return

Risk and Return is a tricky one. This will have a VERY big impact on your plan. This is where you project what your rate of return will be on your savings and investments before and after retirement.

Peter Lynch in his book One Up on Wall Street says that for a savvy investor, in the LONG RUN, on average you can expect to make 11% per year with stocks. This implies 8% of stock appreciation plus 3% in stock dividends. At present, the average dividend of the S&P 500 is under 3%. Based on this, I choose the following risk scenarios:

High Risk:              11% before retirement; 10% after retirement
Moderate Risk:       9% before retirement; 8-9% after retirement
Low Risk:               8% before retirement; 6% after retirement

Now if your personal risk level is such that you can't handle the risk of owning a high percentage of stocks, then subtract about 1-2% off of the numbers presented above (with a lower limit of roughly
6%). These numbers also have a lot to do with how active and sophisticated an investor you are or will become.

 If you are lost, use 9% before and after retirement if you invest in mostly stocks, or use 6% across the board if you do mostly bonds, CDs and money markets. Try both of these cases to evaluate the impact it has on your retirement plan.

Remember, NO ONE CAN GUARANTEE ANY OF THESE NUMBERS. But the higher you make them, the greater the probability is that your plan may look better than it really is in the long run.

Plan Evaluation and What Ifs

Your plan works if you have enough money to cover all of your expenses over your entire projected life span. A good criteria for evaluating your plan is how much money do I have at death.

Obviously, your plan fails if you run out of money before reaching your projected lifespan.

Having defined your goals, and populated all of the required info into your plan tool, you can see if your plan actually works. If your plan failed using a 9% rate of return across the board, then you must evaluate how to lower your expenses, how to better manage your debt, or how to save more money. Try moving to a state like Florida or Wyoming (in your planning software) to see if no state tax makes an impact. Try selling your expensive house for a cheaper house at various time frames. Try moving your retirement date out a year at a time. Try getting a dinky little job for a few years after you retire. Whatever you do, don't bump up your rate of return until your plan works.

Be concerned if your plan just works (e.g. you die at age 99 with $1.00). If you are slated to die in 60 years, you may want a $1-2 million cushion at death. (Remember, a million bucks wont be worth much 60 years from now). More on this below.

Once your plan is developed, you now have a valuable tool for playing "what if" games such as, what if I/we:
 

• want to buy an expensive new car.
• want to buy a bigger house or a second house.
• want to purchase an investment property.
• want to send our children to the best college.
• want to pay off that loan early (or later).
• want to retire early (or later).
• want to start a new business.
• want to change jobs.
• etc.

Hopefully it is now apparent that the development of a complete financial/retirement plan provides a valuable tool for making all of your present and future financial decisions.

Debt Reduction

As mentioned previously, a complete financial plan can help you make decisions regarding the management of your debt. Based on your current (and projected) debt level, your plan can help you make the following decisions:
 

• Should I pay off my debt as soon as possible (which may reduce the amount I have to invest) ?
• Should I make minimum payments on my debt (which may increase the amount I have to invest)?
• Should I determine the proper balance between debt reduction and investing ?

Periodic Tracking of Your Plan

About every 6-12 months, update your plan. Put in your current savings, debt, and income. Maybe there was a big correction in the stock market, and your savings are down by 10, 20, 30%. Plug that into your plan and see how it reduced the amount of money you had at death before the correction. In your planning software, make a separate dated file every time you modify your plan with your current data, so you can see your plan evolve over time.

With a series of dated plan files over time, you can now begin to estimate how much money at death represents a good cushion. For instance, if you experience a 20% reduction in your current net worth (e.g. due to periodic market corrections), then see how that reduces the amount of money you have at death. This reduction of money at death can help you estimate what your cushion should be.

Repeating this process over time should help to give you a good feel for how much of a cushion you should have. A good rule of thumb is to reduce your current savings by 5-10%, see how much that reduced the amount of money you have at death, and use that differential as your cushion. Note, however,  that rules of thumb are no substitute for the insight gained by watching your plan fluctuate over time. Every individual has their own goals and financial circumstances. The best advice is for you to become an expert with your planning software.
 

Insurance

Suffice it to say that you must have good health, home and car insurance. If your income is required for your family to maintain their lifestyle, then you may also want to have good life insurance. Also consider a Personal Liability Policy. They are not expensive. If you have $500,00-$1,000,000 in net worth, you probably want $1-2 million in personal liability coverage.

Test on Retirement Planning

Click here for a test on Retirement Planning. When you have completed the test, click here for the answers. !!!!!!!!!!!!!!!!!!!!(under construction)!!!!!!!!!!!!!!!!!!!! Then proceed on to Investment Strategies.
 
 

Some Interesting Links for More Info

Check out The Retire Early Home Page for some interesting information on early retirement.
 

ADDITIONAL TOPICS
 

Expense Management

 Basic Expense Management for those Currently in Debt
 

Retirement Planning Case Studies

 Young, Good Income, Want to Retire Early

 Middle Aged, Good Saver, Want to Retire Now

 In Debt, Can't Save, Will I Ever Retire ?