If you’ve been saving diligently for retirement, then congratulations are in order. You’re certainly doing the disciplined part of setting aside your hard-earned money to enjoy the best of your golden years.
But there’s more to retirement planning than an automated deposit in your 401(k) and investment accounts. To ensure you’re ready for a secure and comfortable retirement, you’ll want to do some additional preparation before you get there.
Here are five tips for developing a well-rounded retirement plan that meets or exceeds your expectations.
1. Define Your Retirement Lifestyle Goals
People tend to focus on the numbers side of retirement planning. There’s often a lot of emphasis on saving a set amount of money, without understanding how or why they arrived at that number.
If you fail to think about what you want to do in retirement and the lifestyle you want to live, then it may be harder to come up with a realistic financial target.
So, when you envision your retirement, what do you think about? Consider the activities you want to do or where you plan to live. Once you define your overall retirement expectations, you can start drilling down into the specifics. Your lifestyle decisions can include goals like traveling, completing home renovations, buying a second home, or giving a set amount to your favorite charity every year. Include them in your overall financial plan.
Of course, as you reach different stages of your life, you might find your lifestyle and financial goals will change. That’s why retirement planning should be an ongoing and evolving process that can adapt with you.
2. Get a Handle on Your Finances
Before you can estimate how much you’ll need for a comfortable retirement, you must understand your current financial circumstances.
There are two essential components to consider when taking a snapshot of your financial picture: your net worth and cash flow.
Net worth
Your net worth is the difference between what you own (your assets) versus what you owe (your liabilities). To determine your current net worth, start by making a list of each, which may include the following:
| Assets | Liabilities |
| Checking and savings account balances and cash | Mortgages and other real estate loans |
| 401(k)s, IRAs, and other investments | Auto or personal loans |
| Antiques, property, cars, and other valuables | Credit card debt |
You can track these using a pen and paper, spreadsheet, or download our financial statement tracker to help calculate your net worth.
Cash flow
You can think of your cash flow as your budget or spending plan. To determine your cash flow, you’ll want to review your monthly net income (how much you take home) compared to your expenses. Here are several examples of the income and expenses to consider:
| Net income (after tax) | Expenses |
| Salary and any part-time income | Housing costs: Rent/mortgage, taxes, insurance, utilities, etc. |
| Earned interest | Car expenses: Loan/lease payments, gas, insurance, maintenance, etc. |
| Dividends | Food, clothing, and other necessities |
| Investment or other income | Debt payments, savings, and investments |
For a more detailed spreadsheet, you can download our cash flow worksheet.
Remember, once you retire, you’ll no longer receive your full-time salary, which is likely your biggest source of income.
Therefore, one way to gain more flexibility in your cash flow is to pay off all or as much debt as possible before retirement. You don’t want to be in a position where you have to take from your saved assets to pay for debt.
If you have a sizable liquid savings account, consider whether it would be worthwhile to use some of it to pay for any outstanding debt. While it might seem nerve-wracking to pull from savings, consider this: The average interest rate for credit cards and personal loans is 19.88%1 and 11%2 respectively, while the average savings rate is around 2%.3 That means your debt is costing you well over what you’re earning on your savings.
3. Learn to Use Tax Laws to Your Advantage
We all have to pay our fair share of taxes to the IRS and state government each year. But understanding tax laws can help you minimize your tax bill and ensure you don’t miss out on saving opportunities.
Here are several ways to reduce your tax burden:
- Choose more tax-efficient investments. For instance, mutual funds distribute capital gains annually, which can drive up your tax bill, even if you hold your shares. Exchange-traded funds (ETFs), on the other hand, offer a more tax-efficient investment opportunity.
- Lower your taxable income. You can do so by contributing to tax-deferred retirement accounts, like a 401(k) or traditional IRA, or eligible health savings or flexible spending accounts.
- Maximize tax deductions. When filing your taxes, don’t forget to deduct expenses like state and local income taxes, mortgage interest paid, medical costs, and charitable donations.
If you expect to leave assets to your children or family, then also consider ways to minimize the tax burden of their inheritance. For instance, 401(k) and Traditional IRA accounts may require your heirs to withdraw funds within a certain timeframe or take RMDs — and they’ll be required to pay any necessary taxes when they do.1 Therefore, you may wish to convert more of your retirement money into Roth accounts, so your loved ones can withdraw the money as needed tax-free.
4. Allocate Assets Properly and Adjust as Needed
A set-it-and-forget-it mindset may work for many things, like paying utility bills. But your investments will require just a bit more attention. You’ll want to review your investment allocations regularly to ensure they remain aligned with your goals.
As you get closer to retirement and your time horizon shortens, you may wish to consider whether it’s time to adjust toward a more conservative risk tolerance. However, this doesn’t mean you have to liquidate everything and keep it in a savings account. In fact, doing so could cause you to miss out on long-term growth. Instead, you can gradually reallocate a portion of your money into lower-risk assets.
5. Start Early and Seek Professional Guidance
The sooner you start retirement planning, the more room you’ll have to maneuver around pitfalls and make improvements.
There are certainly a lot of moving parts of retirement planning, but luckily, a financial advisor can be your ally. A professional advisor can offer education, experience, and additional perspective you may not have on your own.
Working with an advisor can also help you take a hard look at all the above steps while assessing your plans according to milestones and market movements.
Create a Well-Rounded Retirement Plan
If you’re ready to take the next step in your retirement planning journey, then a financial advisor can help.
At Trinity Wealth Management, we’re here to help you plan for a secure and comfortable retirement and help you stay on track.
Contact us to get started on a personalized retirement plan that’s as unique as you are.
The commentary on this website reflects the personal opinions, viewpoints, and analyses of the Trinity Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Trinity Wealth Management, LLC or performance returns of any Trinity Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Trinity Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Sources:
1 “Average Credit Card Interest Rates,” WalletHub, Oct. 2022
2 “What’s the Average Personal Loan Interest Rate?” Bankrate, Oct. 7, 2022
3 “9 Best Savings Rates of October 2022,” NerdWallet, Oct. 11, 2022
4 “Publication 590-B (2021), Distributions from Individual Retirement Arrangements (IRAs),” IRS
