A Simple Retirement Plan In 8 Steps (For Those Who Want Retirement Planning Made Easy)
- Discover how to calculate your target retirement date.
- Learn how to estimate and calculate how much you'll need to retire.
- Two insanely simple ideas for tax deferred savings anyone can use.
We live in an increasingly complex society.
Nowhere is this more true than retirement planning.
If complication isn't your thing, then here's a simple overview of the retirement planning process.
This is for readers who don't have the time or desire to become retirement planning experts.
It provides a solid starting point that beats the doors off procrastination because you don't know where to begin.
This analysis is purposefully simple so that taking action is easy, and then you can explore the included links later when you're ready to dig deeper into appropriate detail.
The main point is to just get started taking action now.
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Step 1: Design Your Dream Vision
The first step in retirement planning is figuring out what your vision for retirement is.
Are you going to vagabond the world with a backpack, travel the open road in a motor-home, or stay at home and read novels or play cards?
Your vision of retirement is the necessary starting point because it will determine how much your retirement will cost.
You need to have at least a rough outline for your dream life in retirement, or you can't complete the following steps, which include budgeting and planning.
“I don't see the necessity to retire from anything unless there's a really great alternative.”– Anjelica Huston
Step 2: Pick Your Retirement Date
Once you have a picture in your head of your ideal retirement, it's time to pick the date you'll start living it.
The reason this step is essential is because your pension and Social Security distributions will vary depending on your planned retirement date. Your healthcare costs will also depend on if you qualify for Medicare or not.
Additionally, the number of years you have to build your savings and the number of years your existing savings can continue growing will depend on your expected retirement date.
In short, you can't estimate your retirement income or plan your savings until you pick a retirement date.
Step 3: Estimate What It Will Cost
Now that you have a dream vision for retirement and a date to begin, it's time to estimate costs and revenues to see if you'll have enough money.
The first step in this process is to guesstimate how much your plans for retirement will cost, so make a budget.
Be overly generous in your estimates because inflation and all the stuff you inevitably forget to include will cause you to underestimate anyway. Round up where you can and use your current expenses as a benchmark to adjust from.
Related: 5 Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
It won't be totally accurate, but you have to start somewhere. This will probably be as good as it gets until your actual retirement date is close.
Some financial planners suggest using 70-80% of current spending as a guideline, but I discuss the problems with that guideline and provide detailed step-by-step solutions in this book on Amazon How Much Is Enough To Retire.
Step 4: Estimate Savings Required
Now it's time to estimate the amount of savings required to live your retirement dream.
You do this by matching your projected income to your estimated expenses following these four simple steps:
- Add your estimated Social Security and defined benefit pension payments together based on your projected retirement date from Step 2 above.
- Subtract that from your total estimated expenses from Step 3 above.
- The difference is your income surplus or shortfall. Any shortfall must be made up from savings.
- Estimate the amount of savings required to support the income shortfall by multiplying the annual amount by 25 (conventional 4% spending rule). You'll need to build this level of savings in your retirement plans (401(k), IRA, Roth, etc.) and other accounts to retire with financial security.
Based on this step, you now have a savings goal to achieve by your retirement date. All that's left to do is build a savings plan to achieve it.
For help implementing these steps try our free retirement calculators here and the downloadable ebook How Much Is Enough To Retire here.
Step 5: Build A Savings Plan
Take the shortfall estimate from Step 4 above and subtract your current savings and retirement plan balances to determine your current savings shortfall.
Divide that amount by the number of years until your expected retirement date from Step 2 above to give you the annual amount you must save to achieve your objective.
Conversely, you may choose to revisit your dream vision and corresponding budget if the savings goal is too daunting. In other words, the retirement savings shortfall can be made up by saving more or figuring out how to live happily on less – they're mathematically equivalent.
Some people find happiness on $24,000 per year and need little savings while others need $240,000 per year. There's no right or wrong answer, but it's important to note for every $10,000 per year less that you need to spend, you lower your savings required by roughly $250,000.
Many people find it easier to reduce spending by $10,000 per year than to increase savings by $250,000.
There's no right/wrong answer. Just decide what works for you.
For help calculating your savings needs, try our free online retirement savings calculators here. For help catching up on retirement savings, see our free guide 27 Retirement Savings Catch-Up Strategies For Late Starters here.
Step 6: Invest The Savings
This is the toughest step to reduce down to a sound-bite paragraph because a wall of books would still leave gaping holes in the knowledge required.
Highly educated professionals botch the investing process, and neophytes are at even greater risk.
With that said, the assumption of this article is that you aren't into complication and detail and need to invest somewhere, so let's oversimplify and at least give you a starting point.
“People are always asking me when I'm going to retire. Why should I? I've got it two ways – I'm still making movies, and I'm a senior citizen, so I can see myself at half price.”– George F. Burns
One reasonable place to look is the variety of target date retirement mutual funds offered. The targeted date should coincide with your expected retirement date.
If you go this route, use a low-cost provider like Vanguard, TIAA-CREF, or similar, because expenses do matter.
This option will get you professional asset allocation and portfolio selection for stocks and bonds at a reasonable cost so you don't have to become an investment expert.
Another possibility is to consider positive cash flow, income producing real estate with the mortgage financed so you're free and clear by your expected retirement date.
These are just two possibilities to consider that are reasonable and achievable for someone with minimal investment expertise. And of course, you should always seek qualified professional guidance so your portfolio can be matched to your personal needs.
(See Step 5 and Step 6 of the “Seven Steps to Seven Figures” curriculum for additional guidance on investment strategy.)
Step 7: Maximize Tax Deferral
When seeking to make up the projected savings and cash flow shortfalls, it's wise to consider government sponsored retirement plans (401(k), SEP, IRA, etc.) and rental real estate. This will help you achieve two primary objectives:
- Tax Savings: Qualified retirement plans minimize the savings burden to you by making Uncle Sam pay part of the cost in lower taxes. You can also get your company to pay part of your savings costs when they offer a 401(k) matching contribution plan and you contribute enough to qualify. Additionally, rental real estate offers tax deferral through 1031 exchanges. It also offers immediate tax savings through the depreciation deduction while minimizing your out-of-pocket savings burden because your tenant can pay part or all of the cost. It's another valid investment vehicle for building retirement wealth.
- Hard To Get At: Another advantage of qualified retirement plans and rental real estate is they make the money hard to access. The weakest link in the savings process is you. Unless you have the discipline of a celibate monk, the first place you'll look when you need money is your nest egg. The high cost of refinancing and selling real estate along with the government mandated penalties for tapping qualified plans should slap your hands when you're tempted to reach into the cookie jar. This will help instill the discipline and persistence needed to keep you from raiding your growing retirement assets – which is a good thing.
Step 8: Begin Now
Procrastination is wealth suicide on the installment plan.
Simple delay destroys more plans for retirement than all other causes combined. It's the number one retirement killer.
The sooner you begin saving and planning for retirement, the easier the process will be. If you don't start now, you'll only make it harder on yourself. There's no reason to wait.
Step 1 and 2 of Seven Steps To Seven Figures are all about getting started immediately and correctly so you succeed, and Step 3 is about designing your life in a way that every action you take gets you one step closer toward financial freedom.
That's it! Retirement planning made easy – just as promised.
You now know enough to get started, and you have all the links to explore for additional information when you're ready.
The key is to just get started now. You can perfect your retirement plan later as you learn more using the many free resources on this site.
This article provides everything you need to know to get started. You have no reason to delay. Don't let yourself get in the way of your retirement.
Good luck, and let us know how we can support you.
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I like this. As Steven Covey would say… “Begin with the end in mind.” So many plans are backwards. That is to say, they are saving $X per unit of time and then see if and when they can retire. This logic turns it on its head and says, ‘Set the Goal, then create the plan that gets you there.’ Simple and obvious, yet not that common. Keep up the good work, Todd.
DougProvins Thanks Doug!
Well stated! Thanks for sharing! I’m glad to say I’m one month retired and we put together a plan that included many of these steps. Thanks for this excellent advice Todd. People need to get this message.
Vague General statements of a complicated process does not make it simple or easy, above article is loaded with catchphrases and no real substantial information on making things easier
You’re welcome to your OPINION, no matter how wrong it may be. I’ve worked with hundreds of people on these issues, and if you are at the beginning phase of planning (which is what this article is targeted to) then it’s more important to GET STARTED in the generally correct direction than to worry about all the details. The complication can be mastered later when it’s important, but in the beginning the key is to just get started taking action. Complication hinders positive action. Simplification makes action more likely. If your level of sophistication exceeds this article then don’t waste time with it – move on – but that doesn’t make the article wrong, as you assert. The article is valuable and accurate for the intended audience.