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Financial Planning For Retirement: Overview And How It Works

You’ve worked hard enough to create a life full of dreams, accomplishments, and happiness for yourself and your family. As you approach retirement age, new dreams and goals may be born in you. You may also desire to rest from all those years of labor which will enable you to tour the world and enjoy nature while you spend time with your loved ones. 

As a responsible and loving parent, you may also have other obligations that you desire to fulfill for your children like helping them grow while they build their careers and livelihood. You can achieve all these and even more while still maintaining financial independence with proper financial planning for retirement.

If you’re a parent that wants to achieve all of these and more and you’ve been wondering about how you can write a realistic financial plan for retirement then you’re in the right place. In this article, you shall be learning about what it takes to write a financial retirement plan as well as how it works.

What Is Retirement Planning?

Retirement planning simply means the act of speculating and preparing for a future lifestyle to meet your goals, and financial obligations independently.

It entails setting financial retirement goals and crafting strategies of saving, investments, and ultimately distributing money meant to sustain yourself and your family after retirement.\

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Why Should You Plan for Retirement?

Harry Emersin Fosdick once said: “Don’t simply retire from something; have something to retire to.” You can only have something to retire from by planning and ahead of retirement; that’s why it has been said that “if you fail to plan, you’ve planned to fail.” Not making a decision is a decision in itself.

Since you only retire from your job, not from your life. You may also have new goals for your post-retirement life. Below are a few reasons why financial planning for retirement is important:

  • It’ll enable you to be ready for life after your career
  • Enables you to be prepared for emergencies
  • It helps you maintain your standard of living.
  • To combat inflation
  • To leave a lasting legacy for your children 

How Do Financial Retirement Planss Work?

Before selecting a plan, you must, first of all, identify your needs and goals. If you have a few years until retirement and want to build a corpus, you can consider a retirement savings plan. If you are nearing retirement and have some money to invest, you can choose a retirement annuity plan.

When you invest in a retirement savings plan, you will receive a compounded payment as your retirement fund upon maturity. You can invest the entire compounded amount or a portion of it in an annuity plan to receive lifelong regular income.

What Are The Steps In Financial Planning For Retirement?

Before we go into the various steps in financial planning for retirement, let’s look at some key factors to consider before planning.

Factors to consider when planning for retirement

Here are a few key questions to ask yourself as you think about a retirement plan:

1. When would you like to retire?

If you plan to work until you’re 65 or older or intend to retire early. The number of years you plan to remain in the workforce significantly impacts the amount of money you are likely to require. 

2. Where is your dream home?

Will you be staying in your current residence or relocating? Another important factor affecting how much money you’ll need in retirement is the cost of living in the area where you want to live as a senior citizen. 

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3. What are your plans for covering your living costs?

Will you have a pension in addition to your Social Security retirement income? What plan will you also need to put money aside or invest in?

Once you’ve answered the above questions, you can decide on the step in financial planning for retirement.

Steps in Financial Planning for Retirement 

1. Start early

Time is your most valuable asset when it comes to financial retirement planning. The more time you have, the better your money will grow and the more milestones you’ll be able to achieve.

2. Make a financial plan

The financial plan is your current budget, which includes all of your current earnings and expenditures.

It’s a good idea to make financial retirement savings and line items in your budget, just like food and housing expenses, so you can consistently put money aside every month. 

3. Adopt the Habit of investing first and spending later

In the rule of wealth, we’ve been educated to save, invest and spend from what is left rather than doing the reverse. Plan your investments for a day or two after you receive your monthly paycheck, invest and spend from what is left.

4. Have an emergency account

Having a separate emergency account with three to six months’ worth of salary in it will allow you to cover any unexpected expenses without throwing your retirement plans off. 

5. Configure automatic transfers

Automatic transfer ensures that funds set aside for the future are transferred from your bank account to your investments on the same day each month, perhaps the day you get paid. There is no risk of you spending that money if you do it this way.

6. Pay off debts

While you’re working on your retirement strategy, you can put your money toward paying down any debt you have first, especially if the interest rate is high. 

7. Examine for tax efficiency

When deciding on an investment, you should consider how the returns will be taxed.

8. Set up an annuity

You can rely on annuity plans for guaranteed lifelong income to secure your post-retirement income. 

9. Adjust investments as you get closer to retirement

As you get closer to retirement, you may want to shift your investments to lower-risk investments. For example, you can use the Switch Funds option to reduce your equity exposure.

10. Check-in regularly

You should review your investments at least once a year. This can help you better adapt your plan and make quick decisions if you’re not satisfied with your return.

11. Maintain paperwork and involve family members

You may want to keep your family informed of all important paperwork and financial details. This is especially useful during emergencies and unfortunate events. 

Types Of Retirement Plans

There are numerous types of retirement plans, so you have a plethora of excellent options for financial planning for retirement.

Retirement plans are classified as follows:

  • Defined Contribution Plans
  • Solo 401(k) Plans
  • Individuals Retirement Account (IRA) Plans
  • Traditional Pensions
  • Self Employed Retirement Plan
  • Guaranteed Income Annuities (GIAs)
  • Cash-value Life Insurance Plans
  • Nonqualified deferred compensation plans (NQDC) 

1. Defined contribution plans

Defined contribution (DC) plans, which include 401(k)s, have nearly taken over the retirement market since its introduction in the early 1980s.

According to a recent study by insurance broker Willis Towers Watson, roughly 86 percent of Fortune 500 companies offered only DC plans rather than traditional pensions in 2019.

The 401(k) plan is the most common DC plan among employers of all sizes, while the 403(b) plan, which is similar in structure, is available to employees of public schools and certain tax-exempt organizations, and the 457(b) plan is available to state and local governments.

Thrift Savings Plan: Only federal government employees and uniformed forces people have access to this plan, which is similar to a 401(k).

Pension Plans: are also known as defined benefit plans because they provide a consistent, predetermined amount of money each month for the rest of your life once you retire. 

2. Solo 401(k) plan

The Solo 401(k) plan, also known as a Solo-k, Uni-k, or One-participant k, is created for a business owner and his or her spouse.

Because the business owner is both the employer and the employee, firms can make elective deferrals of up to $20,500, plus a non-elective contribution of up to 25% of remuneration, for a total yearly contribution of $61,000, not including catch-up contributions.-up contributions.

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3. Individual retirement accounts

An IRA is a useful retirement plan established by the United States government to assist workers in saving for retirement. In 2023, individuals can contribute up to $6,000 to an account, while workers over the age of 50 can contribute up to $7,000.

Traditional IRAs, and Roth IRAs, are among the several types of IRAs. Here’s an explanation of what each is and how they differ.

Traditional IRA: This allows for tax-deductible contributions and treats retirement distributions as ordinary income for tax purposes.

Roth IRA: Contributions are not tax-deductible but withdrawals are tax-free in retirement.

READ ALSO: How Much Do I Need To Retire Comfortably In 2023

4. Traditional pensions

Traditional pensions are a sort of defined benefit (DB) plan, and they are one of the simplest to maintain because they require so little of you as an employee.

Employers fully fund pensions, which pay a fixed monthly income to workers upon retirement. DB plans, on the other hand, are on the endangered species list since fewer firms are offering them. 

5. Self-employed Retirement Plans

Although these plans involve some administrative work if you are self-employed, you have a few options for accessing many of the same tax benefits that employer-sponsored retirement plans provide. Self-employed people can open the following types of retirement accounts:

SIMPLE IRAs (Savings Incentive Match Plan for Employees): These are retirement savings programs for businesses with less than 100 employees.

SEP IRA: The Simplified Employee Pension IRA is a type of IRA that requires employers to contribute 100% of the account’s funds and to offer equal benefits to all qualifying employees.

6. Guaranteed Income Annuities (GIAs)

Employers rarely offer GIAs; however, individuals can purchase them to fund their retirement accounts. You can buy an instant annuity with a large amount upon retirement to get a monthly payout for the rest of your life, but most individuals are uncomfortable with this arrangement.

Additionally, you can purchase these after-tax, in which case you’ll only owe tax on the plan’s earnings. You can also buy it through an IRA and receive a tax deduction.

7. Cash-value Life Insurance

Some firms provide insurance vehicles as a perk. There are various types: whole life, variable life, universal life, and variable universal life. They give a death benefit while also accruing cash value, which can be used to supplement your retirement needs.

8. Nonqualified Deferred Compensation Plans (NQDC)

You can pretty well forget about getting an NQDC plan unless you’re a high executive in the C-suite. There are two types: one resembles a 401(k) plan with salary deferrals and a corporate match, and the other is paid entirely by the employer. 


The Bottom Line About Planning for Retirement

As you approach retirement age, you may develop new ideas and visions. Whether you want to start your own company or you want to travel around the world and enjoy nature while you spend time with your loved ones, as well as meet financial obligations for your children such as their college or wedding.

Adequate Financial Planning for Retirement can help achieve all these and even more while still maintaining financial independence. If you can sustain the discipline to keep at it, financial planning for retirement will benefit you in the long run, so if you want to enjoy financial ease, then having a financial retirement plan is nonnegotiable.

We hope this article has opened your mind to the essence of financial planning.

Cheers to securing your financial future!


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