Retirement planning comes with some big financial decisions. The goal, in the end, is to turn all of your savings, pensions, and benefits into lifetime income that can support you after you retire. Making the wrong decisions can have dramatically negative effects on your financial stability. You might not be able to retire when you want to. You could end up running out of money. You might end up having to depend on your children to support you.
Here are five key retirement planning decisions that you’re going to have to make.
1. When Will You Retire?
Most Americans dream of an early retirement, but for most, this dream doesn’t become reality. In order to retire early, you need to plan early so you can be better prepared for an early retirement. You’ll need to minimize your current and future cost of living, so you’ll be able to save more. You’ll have to eliminate all debt, such as home loans, student loans, and credit card debt as these expenses will become even harder to deal with when you have less income after retirement. You’ll also want to ramp up your savings, so you can build the wealth you’re going to need.
Whether you’re looking to retire early, at age 65, or later than that, this is a decision that you should make at least ten years before your last day of work so you can be adequately prepared. Better yet, start as early as possible.
2. How Much Do You Need to Save?
The amount of income you’ll need to save to meet your retirement objectives depend on a number of factors, such as where you’ll live, your health status, and your expected retirement lifestyle. However, the common rule is to have at least 70 to 80 percent of income replacement per year in order to meet your needs after retirement. For example, an executive making $400,000 a year while working would need to generate $280,000 to $320,000 in pre-tax income each year after retirement.
3. Where Will Your Income Come From?
Knowing how you’ll get income after retirement is critical, yet many Americans do not make decisions to open up investment accounts and make other streams of income available until it’s too late. Some of the income sources to consider include an employer-sponsored pension, a 401K, your bank account savings, Social Security, income annuities, part-time work, and interest, dividends, and appreciation from your investment portfolio. You want to have as many streams of income as possible so you don’t run out of money, so make decisions early in your retirement planning so you can set up extra independent income sources.
4. What’s the Worst-Case Scenario?
No one wants to think about the worst-case scenario, but unless you’re uncommonly wealthy, it’s important to consider what adverse life events might devastate your finances while retirement planning. When you consider the worst-case scenario, you’ll be able to take suitable precautions, such as buying additional life insurance or long term care insurance for extra cushion.
Far more important, though, is to think now about what part-time work you might enjoy in retirement. This is a great back-up plan for most planning for retirement. Full retirement is probably not a good idea for most people because it can lead to mental and physical atrophy and even boredom. Finding a part-time gig that you might love (or like, at least), that is similar to your profession or completely different is a great way to remain active and engaged and to add critical extra income in your early retirement years. It will also take a lot of money stress off your shoulders. Are we talking about working until 70 and then part time for another 5 to 8 years? Probably. And that extra income and part-time work schedule has another big benefit. It gives you the cash and time you might need for bucket-list items—trips overseas, hobbies you’ve always wanted to pursue, rentals in warmer climates, etc. If you are healthy at retirement, part-time work is as close to a no-brainer as you will get.
5. Will You Replace or Supplement Your Employee Benefits?
As an executive, you might receive health and dental benefits from your current employer. But a key retirement planning decision you’ll need to make is whether or not to continue using these benefits, if they’re offered after retirement. Keep in mind, they might be cut back when you retire or when you reach a certain age. Or they might not be enough to meet your healthcare needs in the future.
Consider the terms of your employer-sponsored benefits policy and figure out if you should get coverage on your own. For example, your group plan might not offer long term care health insurance, which you should get.
These key retirement planning decisions can be overwhelming and challenging to make, but you shouldn’t put them off. Make decisions early so you can be better prepared for retirement.