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Hitting your retirement goals is a bit trickier in today’s world than in the past.

In the 1940s, for example, retirees were expected to live about 13 more years. Their Social Security benefits, pensions, and savings easily saw them through those years.

Today, people retiring can expect to live at least 20 more years. Pensions are all but extinct and even Social Security needs continuous government intervention to prevent its depletion.

It’s more important now than ever to take your retirement into your own hands.

Retirement Planning Basics

When making a retirement plan, these are the steps you should take:

  1. Determine your retirement goals
  2. Calculate your target retirement income
  3. Estimate your future expenses
  4. Figure out what funds you’ll have available
  5. Address any shortage between available funds and your target income

The sooner you start to plan, the easier it will be to save up. You’ll need to make educated guesses as to what your expenses and assets will be if you’re still 20-30 years away from retirement.

As you get closer to retiring, it’ll be easier to make more accurate income and expense estimates. Reviewing your retirement plan annually is important to make sure you’re still on track.

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1. Determining Retirement Goals

How do you wish to spend your retirement years? These are some common goals:

  • Travel
  • Shop
  • Enjoy summer and winter homes
  • Enjoy time with family and friends
  • Volunteer
  • Take up leisure hobbies like gardening or golf
  • Work part-time
  • Move closer to family
  • Move to a retirement community

Some of these goals are quite inexpensive or even free while some come with a hefty price tag. This is why determining your goals is the first step in retirement planning.

2. Calculating Your Target Retirement Income

Financial planners often recommend a target retirement income equal to 70-80% of your pre-retirement income. However, if you want to be very active and live large in retirement, then you may need 100% of this income.

Once you determine how much it will take to fund your goals, you also need to consider the fact that cost of living is increasing, health care costs increase with age, and we’re all living longer than past retirees.

People who are just a few years away from retirement can estimate their target income rather easily.

Example:

Tim is 63 years old and earns $89,000. He expects to be earning $92,000 when he retires in four years.

Tim’s target retirement income is 80% of his pre-retirement income; therefore, he wants enough income to provide $73,600 each year of retirement. If he is expected to live another 20 years, he’ll need over $1.4 million dollars, not taking inflation into consideration.

For people who are still at least 10 years away from retirement, estimating your future retirement income needs are a little trickier.

Example:

Alexandria is 45 and currently earns $56,000 annually. She expects to receive a 3% raise every year. Therefore, her annual salary at retirement is approximately $107,000.

Her target retirement income is $85,600 (80% x $107,000). However, Alexandria needs to review these numbers every year and recalculate if necessary.

3. Estimating Your Future Expenses

You need to consider not only the costs to meet your retirement goals, but everyday things like food, clothing, transportation, etc.

Some retirees will have paid off their mortgage, some will not. But even if the mortgage is no longer a concern, there are many other costs associated with home ownership like utilities, insurance, repairs and maintenance, and taxes.

In retirement, you may also begin paying for new expenses that you weren’t previously. Do you still want to continue shoveling snow and mowing the lawn, or do you want to hire someone for these services? If you now have a winter and summer home, who is maintaining the second home when you’re not there? These are the types of additional costs you may need to consider.

Typical Expenses in Retirement
Costs that increaseCosts that go unchangedCosts that decrease
  • Medical costs
  • Hobbies
  • Groceries and cleaning supplies
  • Personal items like toiletries
  • Transportation (no longer a daily work commute)
  • Clothing and dry cleaning (no longer needing business attire)

4. Figuring Out Available Funds

Once you have a target income, it’s time to figure out where the money will come from. Retirees typically live off money from many different sources, such as:

  • Social Security benefits
  • Pensions
  • Personal assets (investment property, returns on investment accounts, part-time work during retirement)

Every worker pays into Social Security in hopes of being able to rely on this income in retirement. Social Security benefits replace a certain percentage of pre-retirement income depending on your income level.

According to the Social Security Administration, a person who plans on retiring in 2022 at Full Retirement Age can expect the following benefits:

  • 75% of pre-retirement income for very low earners
  • 40% of pre-retirement income for medium earners
  • 27% of pre-retirement income for maximum earners

Using the mySSA calculator at www.SSA.gov, you can see a personalized estimate of your future monthly retirement benefits. You can use this number as a starting point to figure out how much you will need from other money sources to fill in the gap to reach your target retirement income.

For example, if the SSA estimates you will receive an estimated monthly retirement benefit of $2,100 and your estimated monthly income needed in retirement is $6,000, then you need to figure out where the supplemental monthly income of $3,900 will come from.

Since pension plans are rare these days, many employers offer to match a certain percentage of an employee’s contributions to individual retirement accounts, such as 401(k)s. Take advantage of this benefit and make sure you’re contributing at least enough of your income to meet your employer’s match.

Example:

Your employer offers to match 100% of your 401(k) contributions up to 5% of your annual income.

So, if you earn $50,000 each year, the most your employer would contribute each year towards your 401(k) is $2,500. In order to capitalize on this maximum amount, however, you also need to contribute $2,500.

If you only contribute $2,000, your employer only contributes $2,000.

You can contribute more of your income to your 401(k), which isn’t a bad idea, but your employer only matches up to 5%.

Not taking advantage of the maximum employer match is the equivalent of leaving “free money” on the table. Once you’re matching your employer’s contributions, to save more for retirement, you can choose to funnel more of your paycheck into your 401(k) or contribute to other retirement accounts.

Note: Currently, in 2022, employees can contribute up to $20,500 every year to their 401(k).

Individual Retirement Accounts (IRAs) are additional tax-advantage tools to save for retirement. There are two different types: a Traditional IRA and a Roth IRA.

Traditional IRA contributions are tax deductible now, but you’ll pay income tax when you withdraw that money in retirement.

A Roth IRA is opposite. You pay taxes on contributions now, but that income won’t be taxed later. (Roth IRAs have income-eligibility restrictions.

In 2022, single tax-filers’ Modified Adjusted Gross Income (MAGI) must be under $144,000 and married tax-filers’ MAGI must be under $208,000.) In 2022, the maximum amount you can contribute to an IRA is $6,000 annually ($7,000 if you’re 70 years old or older).

Whichever investment companies hold your retirement accounts (e.g. Vanguard, John Hancock, Fidelity, Wells Fargo, etc.),  they likely offer calculators or projection tools to give you an estimate of what your monthly retirement income will be based on the contributions you’re making.

Add these estimates to what you’re estimated to receive from Social Security (if the website tool doesn’t already do this) to find out if there’s a shortage to address.

5. Addressing Retirement Shortage Between Target Income and Projected Funds

If you’ve added up all sources of funds and discover you’re short of your target retirement income then you need to make a decision. Do you want to adjust your retirement goals to something more affordable, do you want to increase your contributions (if allowed), or do you want to want to add an additional tool to your financial portfolio?

If you’re maxing out your retirement account options, there are many other investment vehicles available. Some options to consider are money market accounts, real estate, stocks, bonds, mutual funds, and annuities.

Each of these types of investments has different ranges of risk, liquidity, and potential for capital growth.

Another financial tool to consider is life insurance. In the very least, if you have people relying on you and your income, you need a term life insurance policy to protect their financial futures.

Here at Quotacy, we often say that term life insurance is the best option for most families. This is because it’s an affordable way to replace your income should you die unexpectedly during your working years.

However, if you’ve already got term life insurance and you have extra discretionary income and want to increase the amount of cash you’ll have access to in retirement, then life insurance policies with cash value features can play an important role.

While the first role of life insurance is to mitigate the financial risk for loved ones as a result of your death, some life insurance products can have retirement benefits.

Permanent life insurance products that have the potential to provide competitive returns include:

  • Universal life insurance
  • Variable life insurance
  • Variable universal life insurance
  • Indexed life insurance

The cash value within a life insurance policy grows tax free. And there is no penalty for withdrawing funds “early”. However, if you surrender a policy with more cash value than premiums paid, the excess will be taxed as ordinary income.

» Learn more: How Cash Value Life Insurance Is Beneficial in Retirement

Cash value life insurance can provide supplemental income in retirement that’s easy and quick to access through policy loans or withdrawals.

If you’re interested in permanent life insurance, contact Quotacy directly. Quotes for permanent life insurance are more complex than term life insurance quotes. The type of permanent life insurance product that’s best also varies considerably from person to person depending on your finances and goals.

Planning Ahead for Retirement

When planning for retirement, keep in mind that long-term growth is more important than short-term gains. The longer you let invested money go untouched, the greater it accumulates due to compounding interest. Prior to retiring, only touch your funds designated for retirement if it’s an emergency.

The sooner you start planning for retirement, the better. Talk with a financial planner to make a retirement plan specific to your goals.

This article is for general educational purposes only and is not written by a financial advisor.

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius, CLU

Senior Editor and Life Insurance Expert

Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.