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What Is Retirement Planning?

Retirement planning involves determining the retirement income you’ll need and what it’ll take to achieve that goal. Retirement planning also includes defining your goals, identifying sources of income and developed a savings program to meet those goals. Future cash flows are estimated to see if the goal is possible or not.

Retirement is likely to be the last major milestone of your life. It may also be the longest period of time you’ll be living on your own, so take steps now to make sure you are ready for retirement when it happens.

Understanding Retirement Planning

In the simplest sense, retirement planning is what one does to be prepared for life after paid work ends. This isn’t just financially but in all aspects of life.

Retirement planning encompasses the non-financial aspects of retirement including lifestyle choices, where to live, and how much time to spend working. Retirement is a significant transition in your life and requires careful planning before you retire. It’s important to understand how much money you’ll need, what types of investments make the most sense for you and how these decisions will impact your long term financial health.

The emphasis that one puts on retirement planning changes at different stages of life. For instance:

  • Early in a person’s working life, retirement planning is about setting aside enough money for retirement.
  • During the middle of your career, it might also include setting specific income or asset targets and taking steps to achieve them.
  • Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying into your retirement account(s). Instead, your decades of saving begin paying you out.

1. You don’t know what you don’t know

You probably know a lot about many things in life.

But, when it comes to retirement planning, there are literally thousands of factors that can impact your ability to maintain financial security.

Hopefully, you’ll only retire once. But, this also means you lack the experience necessary to identify critical questions and answers that can contribute to a successful retirement.Retirement planning can help fill in the gaps and answer key questions such as:

  • What’s the right mix of mutual funds or investments?

  • Should I take my pension as a lump sum?

  • How much income can I generate from my portfolio when I retire?

  • Which retirement accounts should I draw from first in retirement?

  • How can I reduce volatility in my portfolio?

2. Better health due to lower levels of stress

Money problems are a major source of stress. According to the American Psychiatric Association, over 70% of adultsworry about money, and that can take a toll on your physical health.

Financial stress is linked to physical conditions such as diabetes, heart disease, migraine headaches, and poor sleep. Not only that, money worries can cause anxiety and depression, robbing you of peace of mind to enjoy your life today.

Taking steps today to get your retirement planning on track is an important step in your overall financial wellness—which can only be good for your physical and emotional health.

3. Send less money to Uncle Sam

No one likes paying more taxes than necessary.

Unfortunately, retirement is a period when taxes can destroy a major part of your income and savings if you aren’t careful. Avoiding those taxes is a major reason why retirement planning is important.

Your tax strategy for retirement should start during your working years. But the tax strategies you use while working will change drastically once you retire. Both are important, but how you approach them is very different.

When you are working, your income is relatively stable and you may not have control over your income sources. As a result, finding deductions and tax credits to reduce your taxable income is paramount.

Upon retirement, the more control you have over your income sources, the more likely you will be able to reduce your taxes. If planned appropriately, you’ll want to have three buckets or sources of income in retirement from a tax standpoint:

  • Tax Deferred – Includes pension plans, social security, 401 (k)s, and pre-tax IRAs.

  • Tax Free – Includes Roth IRAs, Health Savings Accounts (HSAs), and Municipal bonds.

  • Tax Managed – Includes standard brokerage accounts with tax-efficient investments like index funds.

Since it’s impossible to predict tax policy in the future, diversifying your income sources in retirement could save you tens of thousands of dollars in taxes upon retirement.

As you can see, reducing taxes is an excellent reason why retirement planning is important.

4. Big-picture context helps you make better career and financial decisions

Life hands you a lot of important questions as you get older. More often than not, the answers aren’t always black and white.

For example:

  • Should you stay with your company or start your own?

  • Does it make sense to pursue a new degree or professional path late in your career?

  • Should you pay for your child’s college or fund it another way?

  • Can you afford to buy a vacation home at the beach?

These life decisions have a major impact on your finances and can’t—or shouldn’t—be made in a vacuum. Knowing where you are with your retirement plan gives you essential context to make big decisions with confidence.

Making better financial and life decisions is another major reason why retirement planning is important.

5. Enjoy a happier marriage

It’s no surprise that money issues are a leading cause of divorce.

Mismatched financial priorities, high levels of debt, and the inability to work toward a common financial goal all cause marital strife.

When you and your spouse are on the same page with retirement planning, you eliminate some major sources of discord in your marriage.

Take money out of the retirement equation and you can focus your efforts on more exciting decisions—such as where you want to retire.

Hiring a financial advisor who can provide objective, non-emotional counsel may do wonders for your marriage. Maintaining a healthy relationship with your spouse can be a great reason for why retirement planning is important.

6. Forced early retirement won’t be so scary

Retiring at 55 is great when it’s part of your plan; being forced out of your job early isn’t. Unfortunately, nearly half of all current retirees aren’t retired by choice. Most were laid off or forced to leave their jobs, and a smaller number had to leave work prematurely to care for an ill or aging parent or spouse.

If you have to leave work before you’re expected retirement age, you’ll be in a much better position if your retirement plan is already in place.

You might not have your nest egg completely built up, but having money set aside for retirement gives you more options and time to adjust your plans if you need to retire early.

7. You won’t worry about being a burden to your kids

Have you heard of the “sandwich generation?”

That’s the name for the group of people who are simultaneously supporting their children and one or both parents.

About 44% of middle-aged adults with children at home have at least one living parent who could potentially need care; 15% are full-fledged members of the sandwich generation who financially support both parent(s) and children.

A comprehensive retirement plan includes saving for medical costs and potential long-term care costs. When you know your expenses are covered, you won’t have to rely on your family to fill the gap.

8. You can be a really cool grandparent

A good retirement plan not only keeps you from being a burden to your kids, it gives you the resources to be an amazing grandparent.

Wouldn’t it be nice to take the entire brood on an annual trip or host your whole family at your spacious vacation home every year?

Even if your grandparenting goals are a bit more modest, having adequate income means you can visit more often and be present for all their milestones and special events.

It gives you the resources to buy those special birthday gifts or help cover the costs of their college tuition. Money won’t be an obstacle to a close relationship with your grandchildren

9. Continue your legacy of charitable giving

Most people cut their living expenses in retirement but continue their habits of charitable giving, according to a recent study. We see this a lot with our clients.

If you’ve been a generous giver during your working years, it’s probably important to you to continue supporting your church and favorite charities once you leave your job.

Financial planning for retirement can optimize your charitable giving three ways:

  • It helps provide the income you need for charitable giving throughout your life

  • It ensures your estate plan aligns with your legacy goals.

  • It allows you to reduce your tax burden, if appropriately structured.

The Bottom Line

Everyone dreams of the day they can finally say goodbye to the workforce and retire. But doing so costs money. That’s where retirement planning comes into play. And it doesn’t matter at which point you are in your life. Sure, you may have Social Security benefits, but that may not be enough, especially if you’re used to a certain lifestyle. Setting aside money now means you’ll have less to worry about later.

As you can see, there are many reasons why retirement planning is important.

Achieving your retirement goals takes a proactive approach. If you start planning for retirement early, the better off your retirement will be in the future. If you are nearing retirement, there literally dozens of strategies available to help you make the most of your next 25 years or more.

Retirement is such a great milestone in life. At Rockfin Wealth Management, we believe retirement planning is an essential part of your financial wellness. Working together, we help you clarify your expenses, prioritize your goals, and build a portfolio of assets that sustains a long and fruitful retirement.

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