How to Start a Retirement Plan: 5 Ways You Can Prepare

By Erik H. Nelson on December 23, 2020
Categories: RETIREMENT

Figuring out how to start a retirement plan is an important goal no matter what your age. The sooner you begin preparing, the more flexibility you’ll have with what you can likely achieve during your retirement years. You’ll also have a better financial buffer anytime an emergency comes up, whether it’s something broad like an economic recession or more personal like a major health issue.

Learn how to start a retirement savings plan by following these recommended five steps. Unfortunately, there’s no magic button to push that suddenly propels you to your retirement goal. Instead, with patience, consistency, and some professional help, you can better set yourself up to get you where you want to be in retirement.

#1:  Don’t Wait to Get Started

Retirement planning is not something to put off until the last minute. In an ideal world, you would start planning for this stage of life as soon as you enter the full-time workforce in your 20s. Even if it’s something as small as paycheck deductions directed into an employer-sponsored 401(k), you have the power of time on your side when it comes to planning. Starting to save for retirement early lets you take advantage of long-term growth, helping even small amounts of money to snowball, or compound, into larger amounts as you grow your income and your portfolio. Plus, you’ll have decades to weather the ups and downs of the market, which is a natural and important aspect of accumulating a retirement fund.

As idyllic as starting to plan for retirement this early sounds, we know it’s not a reality for everyone. Even if you’re only two to three years away from your retirement age, or even closer to retirement, you can follow the rest of the steps to figure out where you stand today and what you can do over the next few years to meet your financial goals. The longer you wait to tackle retirement planning, the more likely you may have to delay your timeline and continue to work either part-time or even full-time.

#2:  Create a Holistic Budget

Before you start preparing specifically for retirement, it’s important to first understand your current finances, commonly identified through a budget. The better you understand your current budget and how you spend your money now, the better prepared you’ll be to do so in retirement. It can be very helpful to identify what expenses are fixed and will not change much year-to-year (needs), determine what portion of your spending is discretionary and may vary (wants), and think about other financial goals that you’d like to achieve but may not be recurring (wishes). By understanding your spending habits at a more granular level, you can better plan for what’s needed once you enter into retirement.

This sort of budget planning allows you to prioritize your financial goals and develop timelines and funding strategies to help best achieve your spending goals in retirement. In theory, it may sound easy to pay off your mortgage, pay for your kids’ college tuition, buy a second home, go on vacation every year, and save for a comfortable retirement. All of these goals can be very attainable, however you should understand what your goals mean in terms of dollar amounts, frequency of occurrence and where they fall in the prioritization of your goals.

There are many ways to help yourself stay on track with your budget. An old-fashioned spreadsheet with your spending and saving categories is an effective way to get into this new habit. If you’re more tech-savvy, you can also try one of the countless available mobile apps designed to help you automate the budget process.

Finally, budgets are meant to be revisited regularly and tweaked along the way to retirement. At the very least, review it once a year so that you can audit and make updates whenever a major life event occurs, like marriage, having children, divorce, the passing of a spouse or a major promotion.

#3:  Set a Target Retirement Budget

Once you know where your current budget stands, you can use your current spending habits to develop a projected budget for the type of retirement you desire. As you start, or continue, to set aside retirement funds, you can plan for and project the savings rate needed to achieve your retirement spending goals.

Exactly how much to set aside depends on several different factors, including your age, broader financial situation, and what you hope to do once you retire. If you’re currently in the workforce and have access to an employer plan like a 401(k), check to see if there are any incentives to contribute, such as an employer match where your employer will contribute as much as you do, up to a set percentage of your income. If this employer contribution is available at your workplace, you should take advantage of what is essentially “free money.”

#4:  Prepare for the Unexpected

No matter how much planning you do, life inevitably comes with its own bag of surprises. When learning how to start a retirement plan, it’s important to realize that unexpected emergencies must be part of your plan. At Dowling & Yahnke Wealth Advisors, we are very conservative in preparing our clients for unpredictable events and financial surprises. It’s crucial consider the unexpected during retirement planning because there’s no certainty in knowing exactly what life will throw at you.

Both external and personal events can impact your ability to retire (and on what terms) if you’re not prepared. Market volatility, for example, can have a huge impact on the value of your investments. What happens if you’re nearing retirement age during a recession, or a downturn occurs shortly after you’ve retired? Your retirement plan should account for and illustrate the impact that such events could have so that you can better prepare for the financial flexibility that may be needed when unexpected events inevitably occur.

Healthcare costs are also an issue for many retirees as medical expenses tend to rise, faster and faster, as they age. Because additional medical expenses tend to increase with age, they can be difficult to project out using your current budget. D&Y incorporates best estimates that are compiled by leading retirement health care studies within our retirement plans to help better avoid a funding shortfall for retirement health care spending.

Finally, create a plan to protect your retirement savings before you need them. That means having robust, liquid assets on hand to get you through any financial emergencies that happen before you retire. By establishing an emergency fund, you’ll be able to insulate potential unexpected needs from market volatility and potential poor timing.

#5:  Collaborate Regularly

One of the best ways to ensure you’re adequately saving for retirement at any age is to collaborate with a financial advisor throughout the process. A financial advisor works with you to understand your unique goals throughout life’s various stages and into retirement. Plus, they will help you complete the steps discussed above with a professional eye while looking out for your best interests.

While you may start planning for retirement on your own, questions to ask financial advisor about retirement will likely arise during the process, and collaborating with one gives you a major advantage in multiple ways. If you’re running behind, a financial advisor will help you identify your appropriate savings rate to better achieve your goals.

They’ll also keep tabs and help you plan for your future retirement income streams, including investment income and withdrawals, Social Security, annuities, or rental income. This is important to consider not only in the context of how much you have today, but how much you’ll have in the future and need to have in the future when accounting for inflation.

A financial advisor accounts for these more complex variables when working with you to create a detailed retirement plan. They also craft appropriate strategies for your financial situation to help you better achieve your goals with the wealth you’ve worked so hard to earn.

If you’re wondering “How do I find a financial advisor for retirement?” the answer will vary based on your particular goals, but important criteria include a reputation check, billing methods, and how their planning process works.

Bottom Line

It’s never too late to learn how to start a retirement savings plan. Getting started today with even a simple savings strategy is the first step in making sure you’re truly prepared for the next stage of life.

Ready to collaborate with a financial planning team in San Diego? Reach out to Dowling & Yahnke Wealth Advisors today.


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