5-STEP RETIREMENT PLANNING GUIDE – You’ll need to develop a financial buffer to fund a comfortable, secure—and enjoyable—retirement. The fun aspect is why it’s important to focus on the serious—and possibly tedious—task of figuring out how to get there.

  1. Understand Your Time Horizon

The foundation of a successful retirement strategy is laid by your current age and expected retirement age. The longer the period between now and retirement, the bigger the risk your portfolio can tolerate. If you’re young and have more than 30 years till retirement, you should invest the majority of your money in risky assets like equities.

In speaking, as you get older, your portfolio should be more focused on income and capital preservation. This implies putting more money into less hazardous securities like bonds, which won’t provide you the same returns as stocks but will be less volatile and provide you with income. You’ll be less concerned about inflation as well. 

  1. Determine Retirement Spending Needs

You can determine the required size of a retirement portfolio by having realistic assumptions regarding post-retirement spending patterns. Most people anticipate that after retirement, they will spend just 70% to 80% of what they did before. However, this assumption is frequently proven to be impractical, especially if the mortgage has not been paid off or if unexpected medical expenditures arise. Retirees also sometimes spend their first years splurging on travel or other bucket-list goals.

Retirees have more leisure to travel, go sightseeing, shop, and engage in other costly hobbies because they are no longer working for eight or more hours per day.

Your longevity also needs to be considered when planning for retirement, so you don’t outlast your savings. The average life span of individuals is increasing.

  1. Calculate After-Tax Rate of Investment Returns

After determining the expected time horizons and expenditure requirements, the after-tax real rate of return must be calculated to establish the portfolio’s ability to generate the required income. Even for long-term investing, a needed rate of return of more than ten percent (before taxes) is usually unachievable. Because low-risk retirement portfolios are generally made up of low-yielding fixed-income securities, this return criterion drops as you become older.

Depending on the type of retirement account that you hold, investment returns are typically taxed. However, determining your tax status when you begin to withdraw funds is a crucial component of the retirement planning process.

  1. Assess Risk Tolerance vs. Investment Goals

A good portfolio allocation that balances risk aversion and return targets, whether you or a professional money manager is in charge of investment decisions, is undoubtedly the most crucial stage in retirement planning. How much risk are you willing to accept in order to achieve your goals? Should some income be set aside in risk-free Treasury bonds for required expenditures?

  1. Stay on Top of Estate Planning

Another important element in a well-rounded retirement plan is estate planning, and each aspect necessitates the skills of different professionals in that industry, such as lawyers and accountants. Life insurance is also a crucial component of estate planning and retirement planning. Having a comprehensive estate plan and life insurance coverage ensures that your assets are transferred according to your wishes and that your loved ones are not financially disadvantaged when you pass away. A well-thought-out strategy can also help you avoid the costly and time-consuming probate process.

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