Determining Your Retirement Goals and Resources

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Determining Your Retirement Goals and Resources

The first step in planning for your retirement is to determine how much money you’ll need for retirement; to know that, you first have to determine the retirement you want. You’ll want to answer these questions:

What does retirement mean to you? Think about what you want out of retirement; everyone is different. What would you be driven to do? Some people want to work well into their old age, some want to start a business, some want to relax, some want to take up new hobbies, and many want to be active leaders in their communities. Do any of these goals resonate with you? Are there any people in your community who are good role models for each of these possibilities?

How early do you want to retire? The earlier you want to leave the workplace, the less time you will have to get your financial act together and the more time in retirement you will need to fund.

What other plans will you have? Do you want to buy a sailboat, a home for someone else, or the camper of your dreams? Does your health suggest you may need more medical care?

What will inflation do to your income? You need to consider how inflation will change your income needs. In 20 years, a 4 percent inflation rate will more than double the amount of money you’ll need to keep your current standard of living. Longer life spans mean more time for inflation to eat away at the buying power of your income.

What percentage of your current living expenses will you require? You may not need a large home, several cars, or funds to pay for raising children. But if you plan to travel or take care of another person or start a business, certain expenses may increase. For most of us, healthcare expenses will increase, and probably substantially, possibly eating up much of our savings.

When you’ve determined how much money you’ll need to retire on, you’ll be able to compare that with your current savings and investments and plan for a way to make up the difference.

Determining your retirement resources

If you have taken the time to determine what your needs for income in retirement will be, the next step in retirement planning will be to add up the resources you expect to have from your current saving and investment.

Start with income. Start by determining the income that will be provided by your current sources of retirement income: your pension plan, any employer-sponsored retirement plans, individual retirement accounts (IRAs), other investments, savings accounts, and the value of your home and other property.

Social Security. What about Social Security? You might plan based on current benefit levels, but remember that the longer you postpone taking Social Security benefits (up to age 70), the more benefits you can receive.

Put them together. Next, you will need to convert all your sources of retirement income into an annual income stream and make an estimated adjustment for inflation. When you subtract your estimated annual income from your estimated needs, you will know where you stand.

Is there a gap? If you are like many people, there is probably a gap between where you would like to be at retirement and where your current rate of saving and investing will bring you. The next step in retirement planning, then, is to determine what you will do about the shortfall.

Your options

For most of us, the task will be planning to make up the shortfall between what we’ll have and what we’ll need. You might start by deciding to decrease your needs: retire later, live on less, or do without some luxuries.

Or you might decide to increase your income when you retire. Establish a personal budget now that lets you set aside some money from your current expenses and invest it in your future. The government has established a number of ways to save and invest for your retirement that allow you to protect your income and earnings from taxes. These "tax-deferred" programs such as 401Ks and IRAs have helped millions of people save the money they need for retirement.

A final note

If these steps sound complicated or scary—and they can be for many of us—a retirement planner or financial planner can help you with them, as well as put together a plan to help you reach your retirement goals.