To live a comfortable, and secure retirement, you need to prepare the financial plan that will fund it all. Planning for retirement begins with focusing on retirement goals. For that, you need to look at various types of retirement accounts that can help in raising the money to save your future. There are many ways available to minimize the retirement tax while you save for the future and to continue the process when that day arrives and you do retire.

Start your planning by learning the five steps that everyone should take, no matter what their age, to build a strong retirement plan.

Understand Time Horizon

Current age and expected retirement age build the initial groundwork of an effective retirement strategy. If you’re young and have 30-plus years in retirement, you must have the majority of your assets in riskier investments, such as stocks. 

In general, the older you are, the more your portfolio should be focused on income and save your income for the future. You must break up your retirement plan into multiple components. A multi-stage retirement plan must include various time horizons, along with similar needs, to determine the optimal allocation strategy. 

Determine Retirement Spending Needs

Having realistic expectations about retirement spending habits will help you define the required amount of retirement expenses. Most people believe that after retirement, their annual spending will amount to only 70% to 80% of what they spent earlier. Such a type of assumption always helps people to be planned, especially if the mortgage has not been paid off and if some medical expenses occur. 

Sometimes, you might need more money than you think if you are planning to purchase a home or fund your children’s education post-retirement. That outlay has to be covered in the overall retirement plan. Try to update your plan once a year to ensure you are keeping on track with your savings. 

Calculate After-Tax Rate of Investment Returns

Once the expected time of retirement and spending requirements are determined, the after-tax real rate of return must be calculated to assess the feasibility of the portfolio producing the needed income. 

Depending on the type of retirement account you have, investment returns are typically taxed. But, the actual rate of return must be calculated on an after-tax basis. Moreover, predicting your tax status when you begin to withdraw funds is a crucial component of the retirement-planning process.

Assess Risk Tolerance vs. Investment Goals

Whether it’s the normal person or a professional money manager who is in the decision for investment decisions, a proper portfolio allocation that balances the concerns of risk aversion and gives objectives is arguably the most important step in retirement planning. 

You need to make sure that you are comfortable with the risks being taken in your portfolio and know what is necessary and what is a luxury. This is something that should be seriously talked about not only with your financial advisor but also with your family members. 

Stay on Top of Estate Planning

Estate planning is another important step in a well-prepared retirement plan, and each aspect needs the expertise of different professionals, such as lawyers and accountants, in that specific field. Life insurance is also an important part of the retirement-planning process. Having both a proper retirement plan and life insurance coverage to make sure that your assets are distributed in a manner of your choosing and that your loved ones will not experience financial problems following your death. A carefully designed plan also contributes to avoiding an expensive and often lengthy process.

A common retirement-plan investment approach depends on producing returns that meet yearly inflation-adjusted living expenses while protecting the value of the portfolio. The portfolio is then shifted to the beneficiaries of the deceased. You should prefer to consult a tax advisor to determine the correct plan for the individual.

The Bottom Line

The burden of retirement planning is affecting individuals now more than ever. Few employees can have a count on an employer-provided defined-benefit pension, especially in the private sector. 

One of the most challenging aspects of creating a perfect retirement plan is to create a balance between realistic return expectations and a desired standard of living. The best solution is to focus on creating a flexible portfolio that must be updated regularly which helps in reflecting changing market conditions and retirement objectives.