5 Keys to Retirement Planning

In discussions with our business owner and executive clients, we are always surprised to learn how many do not have a formal retirement plan. It appears they’re not alone: a 2011 survey by the Employee Benefit Research Institute suggests that only 42 percent of Americans have created a retirement plan that takes into account how much money they will need to have saved by the time they retire.

Even if you have already created your retirement plan, it never hurts to review it to be sure you’re on track. Below are the five key steps to building a retirement plan. Most investment firms and many financial planners have simulation programs that can help with this process. I personally use Fidelity’s retirement planner, but most firms have similar products.

Step 1: Determine how long you want to plan for. Personally, I use 100 as my target age because I really don’t want to run out of funds if I live too long.

Step 2: Calculate how much money you will need in retirement. We suggest splitting expenses into three areas:

  1. Fixed costs: Expenses that are essential to day-to-day living, such as food, utilities, rent/housing costs, loan payments, etc.
  2. Discretionary expenses: The items that you could do without but would prefer to be able to enjoy. Such costs would include vacations, eating out, travel, second homes, contributions, and gifts.
  3. Healthcare costs: Decide whether you feel comfortable relying on Medicare or should consider supplemental health insurance. You may also want to consider long-term care insurance.

Step 3: Compute how much money you've already saved for retirement. Remember to include your retirement accounts and your Social Security benefit. Note that most planners will advise you to defer your Social Security benefit to maximize the proceeds. If you plan to downsize your home or sell investment properties, include these amounts as well.

Step 4: Review how much you are currently saving for retirement and when you intend to retire. Some retirement planning tools will ask you to estimate an average annual return on your investments. Most that I have seen suggest using 4 percent (or put another way, you will need investments of about 25 times your annual spending needs at retirement). You may also be asked to estimate your tax rate in retirement, although some planning tools will automatically assume a tax rate.

Step 5: After you run the plan, see if you need to make any adjustments. These may include saving more for retirement, cutting your planned costs in retirement, or working longer. The younger you are, the easier it will be to make these adjustments and the greater the impact they will have.

I don’t know anyone who really enjoys going through this exercise. But spending some time now to do a little planning could be invaluable in your retirement years.

David Shaffer, Kreischer MillerDavid E. Shaffer is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email


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