The term “retirement planning” refers to the overall process of saving for retirement, investing what you save, and managing your retirement funds in order to achieve financial independence. Comprehensive retirement planning includes forecasting your goals and needs in retirement, as well as developing tax and withdrawal strategies. Retirement planning should be a critical component of personal finance.

Individual goals are a crucial element in determining how to plan for retirement. Knowing your goals gives you a picture of your life in retirement, which influences how much money you’ll need. Do you want to travel? Play golf? Visit grandchildren? Start by making a list. Then, review it and prioritize your goals.

Deciding when you’d like to retire is also a key part of the retirement planning process. Some people want to retire early. Others push their retirement age back, since to better meet their financial goals or simply because they love what they do.

Never underestimate the importance of retirement planning, whatever your age is. If you’re asking yourself when you should start retirement planning, know that today is always better than tomorrow.

If you’re in your 20s and 30s, planning and investing now will give your retirement funds decades to grow. You may not have fully realized retirement goals (other than a vision of a beach!), but thinking about your options helps you begin. 

Between your 40s and a few years pre-retirement, your goals may become firmer. You can thus begin to fully align your goals and plans, with financial forecasts to maximize a comfortable retirement. 

One of the most important steps to take to maximize your retirement savings, whatever your age, is to take advantage of one of the chief benefits of employer-sponsored plans (such as 401(k)s):  the employer match!

If you contribute 5 percent of your income to your 401(k) and your employer offers a 100 percent match, you’ll receive an additional 5 percent contribution, so your total annual contribution will equal 10 percent of your income. 

Passing up a match leaves free money on the table.

Retirement plans don’t exist in a vacuum, of course. It’s important to have a working budget for all your financial needs and goals, including retirement. 

A budget lets you know how much you can reasonably save for retirement while fulfilling other financial needs. If you need to adjust your spending, a budget helps you determine which categories you can adjust and how much. 

A truly holistic approach to retirement planning has to include a debt management component. If you currently are making payments on unsecured debt (such as credit cards), it’s very important to develop a plan to reduce and eventually eliminate these payments.

If you can’t afford to pay cash for something, it may be best not to buy it. That doesn’t mean you have to pull paper bills out of your wallet every time you go shopping. Use your credit card for the purchase. Just make sure you pay it off in full at the end of the month. 

Obviously, homes and new automobiles cannot be paid off in a month’s time. You can, however, search for lower interest rates, refinance as time goes by, and increase your monthly payments to pay off the debt sooner. Live debt free as often as possible. 

A budget also ensures that you don’t save too much for retirement. If you put more money in your retirement savings every month than you can really afford over the long term, you run the risk of having to withdraw money from your retirement fund accounts. 

The Internal Revenue Service (IRS) imposes heavy tax penalties on early withdrawals. If you withdraw funds from a traditional 401(k) plan or traditional Individual Retirement Account (IRA) before the age of 59½, you’ll be hit with a 10 percent early withdrawal penalty. 

You’re also required to include the withdrawn funds in your gross income for the year of withdrawal, so will pay income tax on your withdrawn money as well. 

One of the most pressing questions in retirement planning is determining how much you need to save. A good rule of thumb is to assume you’ll need roughly 80 percent of your pre-retirement income. Some expenses, after all, are likely to drop (such as commuting-to-work costs). 

What if you’re in your 20s and don’t have a firm handle on your likely pre-retirement income? Many advisors recommend that you save 10 percent to 15 percent of your income for retirement. As your golden years draw closer, you can fine-tune your forecasts and change your savings rate accordingly, if needed.

Your ultimate goal in retirement savings, of course, is to withdraw those savings once you’re retired! A handy rule of thumb exists here, too. Retirees can withdraw 4 percent of their retirement savings annually and expect it to last for a 30-year retirement. 

If you have saved $1 million for retirement, in other words, you can withdraw $40,000 per year comfortably, because $1 million x 4 percent = $40,000. (When calculating your retirement income forecasts, be sure to factor in Social Security, any pension and other potential income.)

How much do you need to save to reach a cool $1 million? While it may sound daunting, if you save $500 every month beginning at the age of 27, you’ll actually exceed it, hitting $1.2 million at the age of 67. This assumes you invest in stocks that rise 7 percent annually, on average – a more than reasonable expectation, as the U.S. stock market has appreciated 10 percent annually, on average, over nearly a century.

Keep in mind that it’s always best to save more than you think you need because you never know what might happen. Performing a stress-test on your retirement plan can help ensure that you are equipped to meet life’s uncertainties.

Does figuring out a budget and how much to save every month sound complicated? Frankly, it is. 

As a result, many people consult a financial planner to help. Financial planners can help you figure out how much to save for retirement, discuss the retirement vehicles available and help you ensure that you maximize your options.

In fact, many people hire financial advisors to help them manage all aspects of their financial life. A comprehensive financial plan includes creating and managing your budget, retirement planning, investments, children’s educational savings, risk management (such as insuring your assets) and estate planning. 

The next question, of course, is where to put your money. Broadly speaking, there are three categories of retirement plans:

• Employer-sponsored
• Individual
• Self-employed

Employer-Sponsored Plans

These plans include:

• 401(k) offered by private companies
• 403(b) offered by educational, religious and nonprofit organizations
• 457(b) offered by governments

They offer several advantages (in addition to the potential employer match already discussed). First, contributions on traditional funds are taken out pretax, so they offer tax advantages. Second, they appreciate tax-free as well, which maximizes potential growth. (You pay taxes in retirement when the funds are withdrawn.)

Roth 401(k)s are also available, although less common than traditional funds. Roth 401(k)s also offer tax advantages, but they occur at a different stage of life. Contributions to a Roth are not made pre tax, although the contributions grow tax-free. The trade-off? They are not taxed when you withdraw them at retirement.

Individual

If your employer doesn’t offer a plan, you can open an IRA. Like 401(k)s, IRAs are available as traditional or Roth accounts. The contributions in each grow tax-free. Contributions to a traditional IRA are tax-deductible (you’ll pay tax on your withdrawals at retirement). 

Contributions to a Roth IRA are not tax deductible. Your tax advantage comes at retirement, when withdrawals are tax-free. 

Self-Employed

Self-employed folks can open IRAs. However, there are also a number of retirement plans available to business owners and the self-employed that allow much higher contributions than IRAs. 

• Simplified Employee Pension (SEP)-IRA
• Savings Incentive Match Plan for Employees (SIMPLE) IRA 
• Solo 401(k)

If you choose either of the self-employed IRAs, your employees must also be covered. The tax advantages for SEP-IRAs and SIMPLE IRAs are very similar to those for traditional IRAs, while a Solo 401(k) offers tax advantages similar to a traditional 401(k). 

It’s prudent to consult a financial advisor for more information on self-employed retirement plans, which can be complicated.

Once you decide on the best retirement plans for you, start thinking about your investments. 

Broadly speaking, retirement portfolios can invest in two asset classes, stocks and bonds. (Both are available individually or as part of mutual funds.) Investments are allocated based on investment goals, performance, and risk tolerance.

Stocks

Stocks offer investors by far the highest potential return at roughly 10 percent, on average, every year. But stocks also fluctuate: they can dip as well as soar. In fact, some years, such as the 2008-2009 period, see steep declines in the value of stocks. On the whole, the stock market recoups the losses in subsequent years, but the fact is, stocks are volatile – and that’s a potential drawback, especially for investors facing retirement soon. 

Bonds

Bonds are a method of countering the potential volatility of stocks. They provide stability in a portfolio because they are not subject to the same volatility as stocks. Bonds are debt instruments issued by governments or corporations. Bond funds receive, effectively, their interest payments, plus payment at maturity. 

But bonds too have a drawback: low returns. Bond yields provide only 2 percent to 3 percent per year, much less than stocks.

Investment Portfolio Allocation

Portfolio allocation is the business of determining the percentage of assets that allow you to benefit from maximum appreciation of your money while protecting you from risk. Portfolio allocation changes over time because the closer you get to retirement, the less chance you’ll have to recover from drops in the stock market.

A handy rule of thumb for portfolio allocation is to subtract your age from 110. The result is the percentage you place in stocks. The amount left is the percentage you place in bonds. 

In other words, a 30-year-old would place 80 percent in stocks (because 110 – 30 = 80). The 20 percent left over becomes the bond allocation. But a 65-year-old would invest just 45 percent in stocks (because 110 – 65 = 45), while placing the remaining 55 in bonds.

Bear in mind that rules of thumb, while handy, are not set in stone. People vary in their risk tolerance. While stocks can maximize your returns, you need to assess your own comfort level with their risk potential. Talk to a financial advisor to determine your risk tolerance.

Revisiting and Rebalancing Investment Portfolios

Investors should revisit their portfolios at least once a year for two reasons. First, your portfolio should be adjusted in accordance with your age. Second, your allocation will change as market conditions change. 

If stocks rise 25 percent in a year, for example, you will end up with a higher percentage of stocks in the portfolio than your allocation indicates. The process for bringing your funds back into alignment with the allocation is termed “rebalancing.” 

A financial planner can provide much-needed advice on retirement planning. What’s the best method of finding a retirement planner in Buffalo Grove? 

First, look for a financial advisor who adheres to a fiduciary standard. A fiduciary standard is one in which the advisor must put your financial interests above their own. A financial planner who is a broker and not a fiduciary, for example, may be tempted to put your retirement funds in stocks that provide a commission – which is not necessarily in your financial interest.

Second, choose those whose fee structures are transparent and easily understandable. You want to know and understand how your financial advisor earns their daily bread and how much you are paying for their services.

Third, try to find an advisor who offers holistic financial planning. These advisors will work to understand your complete financial picture, and then tailor their advice to your unique financial landscape and retirement goals.

Finally, when seeking help with retirement planning, identify a financial advisor who has demonstrated experience with people of your career stage and net worth level.