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Explain the Steps of Successful Retirement Planning

There are a number of factors that determine how much you will need to save for retirement. These factors include your age, your desired retirement income (be realistic), your other sources of retirement income (for example, Social Security, investment accounts, real estate, your home), and your tax rate both before and during retirement. Other factors include the expected rate of inflation both before and during retirement and the expected return on your retirement savings accounts both before and during retirement. Each of these factors will help you decide how much you must save in order to have sufficient financial resources during retirement. There are seven steps to successful retirement planning:

  1.  Set retirement goals and estimate how much money you will need at retirement.
  2. Estimate how much income you will have annually at retirement based on your current investments
  3. Estimate your total retirement needs after accounting for inflation
  4. Determine how much you have already saved for retirement.
  5. Estimate the value of your home.
  6. Determine how much money you still need to save at an expected rate of return.
  7. Determine your optimal investment vehicles and begin saving.

Each of these steps is described in detail below. This process of successful retirement planning mirrors Learning Tool 6: Retirement Planning Needs Worksheet in the Learning Tools section of this series.


Before you begin the retirement process, you must make five critical estimates. First, estimate how many years you have left until you want to retire. While many people retire at age sixty-five, many others retire earlier or later. A possible key to successful retirement planning is to achieve your personal financial goals so you can retire with no change in lifestyle.

Second, estimate how long you will be in retirement. Although it is challenging to estimate how long you will live, take the challenge seriously. This estimate has a major bearing on how much money you will need for retirement. You may be able to call your life insurance broker and ask him or her what the actuarial tables predict your lifespan will be.

Third, estimate the average rate of return you will receive on your investment portfolio before retirement and the rate of return you will receive on your investment portfolio during retirement. Be conservative in making these estimates. As you enter retirement, you will most likely reduce the amount of risk in your portfolio, phasing out higher-risk, higher-return financial assets for lower-risk, lower-return financial assets . These estimates should come from section 1 of your Investment Plan developed in the investments section discussed earlier. I strongly recommend you use conservative estimates (which are generally significantly less than 10%).

Fourth, estimate what the rate of inflation will be both before you retire and while you are in retirement. Inflation will have a major impact on the amount you will need to save for your retirement needs, especially if you have many years left until you retire . See Learning Tool 27: Expected Return Simulation and Benchmarks for 1, 5, 10, 25, 50, 75, and 80 year inflation data.

Finally, estimate the average tax rate that you will likely pay during retirement. While some retirement assets are tax eliminated (you pay taxes on the asset before you invest and you eliminate all future taxes on earnings and principal, i.e. Roth IRA and Roth 401k/403b), most individuals have a large percentage of their assets in tax-deferred accounts; these individuals must pay taxes on the funds when the funds are withdrawn for retirement , i.e., traditional 401k/403b/457 plans and IRA accounts. When making this estimate, assume that most of your retirement assets are tax-deferred assets rather than tax-eliminated assets.


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