Planning for Retirement: Where to Start

There are two keys to retirement: planning and starting early. And it seems as if the younger generations have taken note.

According to a 2012 survey by TD Ameritrade, 59% of Gen X (ages 36-47) and 56% of Gen Y (ages 23-35) make regular, automatic contributions towards retirement savings compared to 46% of non-retired baby boomers.

The study also notes that both Gen X and Gen Y started saving for retirement on average in their mid- to late- 20s versus baby boomers, who started saving on average at age 35.

While it can be hard to visualize life post-working world, it’s important to realize retirement planning strategies will likely change in many ways over the course of time, says Jerome Golden, president of Golden Retirement Advisors, LLC.

“The first plan you create, whenever that is, is going to be based on a bunch of variables and estimates that as you move closer to retirement, then the estimates get closer to the truth, your savings are real numbers and so on,” he says. “The key is that planning is a process, not a onetime event.”

To figure out how to create or adjust an existing plan, here’s how experts say to start identifying retirement goals and how to effectively plan for life after the workforce.

Setting a Timeline

Establishing a realistic timeframe will ultimately be an integral part in the decision to retire, but the experts say it’s less significant to focus on a specific date when starting to formulate a strategy.

For those in their late 20s and early 30s, keep in mind there’s a longer time frame for funding and variables will likely change over time, says Pat O’Connell, executive vice president of the Ameriprise Advisor Group.

“It’s more important to come up with a rough estimate, not only of when you want to retire but also what those expenses might be and then projecting those expenses out and then getting started, realizing that with any financial planning process, you’re going to do some tweaking and adjusting as you go along,” he says.

Estimate Necessary Retirement Income

Whether it’s travelling the world, starting a new business or taking up a more relaxing way of life, experts recommend estimating the amount of income it will take to make retirement dreams a reality.

Breaking down anticipated costs into essential (food, clothing, mortgage/rent payments) and estimated lifestyle expenses can help to figure out the amount of income needed.

A general rule of thumb is to take at least 70% or more of current income, says Jeff Rose, certified financial planner and author of Good Financial Cents.

“Obviously, this all depends on the day that you actually retire, how your healthcare coverage is going to be, and where you actually reside,” he says.  “To be on the safe side, I always suggest planning to need at least 80% of your current income to survive in retirement.”

While it’s good to get an idea of the expense side as soon as possible, it’s also important to consider how savings and social security fit in as well, says Golden.

“You’re very likely to identify a gap between what you’re saving, plus what your ongoing savings can produce, and then you have to decide how you might fill that gap with saving more,” he says.

Consider Risk Tolerance

Figuring out and defining a level of risk tolerance is essential in the process of planning and saving up for retirement, says O’Connell.

“The only way [some] define risk is a fluctuation up or down with investments, but there are things like interest rate risk and purchasing power risk that you really need to take into consideration as well, especially for someone who is going to be saving for 20, 30, 40 plus years,” he says.

“Someone in their late 20s to mid 30s should be significantly less focused on the short term fluctuation and more focused on some of those longer term risks that they may not think about in the short term.”

Particularly for those who are not risk averse, it’s important to factor that into investment strategy, says Rose.

“If you constantly stress because of market swings, then don’t put all your money in the stock market; just realize that your return will probably be less because of this and you’ll either have to sell more or work longer.”

When it comes to achieving long term goals, the experts recommend working with a knowledgeable advisor and making sound decisions based on systematic savings and diversifying investments, says O’Connell.

“People who stick to that kind of approach accumulate really large sums of money, not over a few years, but over a few decades, and that’s really amazing to watch.”