Bauer Wealth Blog

What is retirement planning? (a beginner investing guide)

Jan 3, 2020 2:14:13 PM / by Stephen Heitzmann

What is Retirement Planning?

Retirement planning is the process of planning a person’s life for when they retire and will no longer receive an income. Retirement plans have a set of goals chosen by the retiree to achieve by the time retirement comes that will keep them comfortable for the remainder of their life. Retirement planning does not only determine one’s financial life after retirement, but also many other aspects of life such as where to live during retirement and how to spend their time.

Planning for retirement involves determining the income goal at retirement age along with the process of achieving that goal. In addition to the income goal, there are many other aspects to retirement planning such as estimating expenses, managing assets, and implementing savings account programs.

Throughout a person’s life, there are different phases of retirement planning which should start as early as possible during their working life and, ideally, end as late as possible. Saving for retirement throughout the course of decades pays off during the distribution stage where accumulated assets can start being used.


Retirement Planning Objectives

The importance of saving for retirement early has dwindled in recent years and many retirees are not saving enough money to live a standard lifestyle during retirement. Although there are multiple ways to calculate how much money you need for retirement, financial advisors commonly suggest saving over $1 million in order to live comfortably.

The goal of retirement planning is to start saving as early as possible to attain the amount of money necessary to live your desired lifestyle when you quit working. Taking advantage of a financial planner’s expertise at an early age can help you calculate the exact amount of money you must save to live the way you would like to.  

There are a number of questions to ask yourself when planning for retirement. Some questions you should ask yourself include:

  •         At what age do I want to retire? Do I see myself being capable in the future to work beyond retirement age?
  •         How much money do I need to save by retirement age?
  •         How much money needs to be set aside each money for retirement?
  •         What things do I want to do in retirement?
  •         Which types of retirement accounts should I use?
  •         What should I invest in that will benefit my retirement account?


A Timeline of Retirement Benefit History

Planning for retirement and its specifics are constantly evolving- so much, that plans offered today are drastically different than what previous generations have/had. For how much it changes, retirement planning is a relatively new practice in America. Today, one of the main goals of having a career is to save enough money to live comfortably in retirement.

  • Mid-1800’s: Prior to this time period, there was no such thing as retirement- let alone retirement savings plans. People were expected to work and earn a living until they died. During this same time, however, the Roman Empire came up with the idea to generate pension plans for military soldiers- but this idea did not include the aspect of discontinuing work. Even the military were expected to keep working after their service for the rest of their lives. The concept of receiving a pension along with discontinuing work in a person’s senior years did not come along until well into the 19th century.
  •  1875: The first private pension plan was created by The American Express Co. which was offered to elderly workers and workers with disabilities.
  • 1926: By this time, there were over 200 pension plans offered by major employers across the United States. The earliest pension benefits had very low payouts and were not designed to replace an entire income. World War II was what triggered the demand of defined benefits in retirement. If not forever, people stayed at their jobs much longer than they do today because of the lack of benefits offered at the time. Today, so many companies offer competitive benefits that employees stay with a company for an average of 4-6 years. 
  •  1935: Social Security made the decision to declare age 65 as the full retirement age.
  • 1961: Social Security begins allowing reduced benefits at age 62.
  • 1970: There was such a substantial growth in retirement savings popularity that by 1970, 45% of all workers in the United States were covered by some type of pension plan. Employees were so content that 43% of the 45% were still covered under the same plan by 1990. Also in the 1970’s, American’s first began to experience the effects of inflation.
  • 1974: The Employee Retirement Income Security Act (ERISA) passed. This federal law provides protection to individuals by setting minimum standards for the typical, voluntary established retirement and health plans. This law requires employers to provide hard copies of plans to their employees that lists all imperative information and plan features. ERISA also sets the minimum standards for participation and sets any other necessary elements to the plan.  
  • 1978: Congress passed The Revenue Act of 1978 where Section 401(k) cleared the way for establishing various new types of defined contribution plans. It was simply a groundbreaking idea that employees could contribute to a tax-advantaged savings plan and the employer would match the contribution.  
  • 1978 – Today: Over the last 40 years, retirement planning has continued to evolve with thanks to The Revenue Act of 1978. Defined contribution plans have become more categorized by employee type. For example- 401(k) plans have remained for private sector employees, 403(b) plans have been created for nonprofit and public education employees, 457(b) plans have been created for state and municipal employees, and TSP plans for federal employees. Pensions are now starting to phase out and be replaced with newer plans. In 2000, the Social Security Act amended to reward individuals who work beyond age 67.


What are the most important things to consider when planning for retirement?

  •         Sources of Income

During retirement, people have a different combination of income sources including pensions, social security, part-time work, investments, savings accounts, and rental properties. When planning for retirement, a retiree should consider all their possibilities for sources of income as well as the reliability of each source.

Savings and steady sources of income are typically used on essential living expenses, such as mortgage payments, rent, or groceries. Less predictable sources of income should pay for things that are more wanted than needed in retirement.

  •         Social Security

A person can claim social security as early as age 62, however, will not receive full benefits unless they wait until full-retirement age to retire- which is 67 years old.

A retiree will receive the most benefits by waiting until age 70 to retire. They should consider their health when deciding when to claim social security; living in poor health may prompt a person to claim their social security benefits closer to age 62.

  •         Health Care

Deciding how health care will be paid for is one of the most important aspects of retirement planning. Medicare coverage cannot be obtained until age 65. Health care and other related health expenses generally account for 15% of a retiree’s overall spending.

  •         Expenses

In order to estimate how much money is needed for expenses during retirement, make a list of “needs” and “wants” based on current spending and future adjustment predictions. When “needs” and “wants” are clearly listed, it will help determine how flexible one can be when budgeting for retirement expenses.

It is important to make sure the “needs” are taken care of before focusing on the “wants.” Examples of “needs” include housing and utilities, health care, groceries, and transportation. Things that are not always necessary in retirement but are “wanted” may include traveling, evenings out, hobbies, vacation homes, and giving gifts.

  •         Investments

Like expenses, create a list of current investments and investment goals and think about if it aligns with your anticipated retirement goals. It is crucial to consider early on in your working career if your current investments make sense for the type of retirement you want. The earlier changes can be made, the better.

Also, think about what a comfortable level of risk is for you given your current retirement predictions. When thinking about risk, always consider that you will no longer be working or saving. If your current portfolio relies on allocations to stocks for cash flow, this may not be beneficial during retirement because there will be no paycheck to fall back on.

When planning for retirement, try to strategize in ways that keep you protected during inflation. For example, place more importance on bonds or other types of investments with fixed income securities. Smaller allocation of stocks helps provide growth that will, hopefully, keep up with market highs and lows.  

Additional details of planning for retirement.

There is an overload of information and options that come with retirement planning, but it is not just about saving into 401(k) plans and planning for how much you need. There are other large aspects to consider that align with your overall financial picture:

Your Home: The average American’s largest asset is their paid for home. Unfortunately, it is less common today for a financial planner to see a person’s home as an asset. Due to the housing-market crash, many homeowners enter retirement and are still in mortgage debt- sometimes due to home equity loans and lines of credit.

Decide whether or not you plan to stay in your home when you retire. Many retirees downsize to communities with less taxes and less room since children are grown. Downsizing homes not only cuts living expenses, but several other expenses that come with owning larger homes.

Insurance: Since assets grow as you age toward retirement, it is crucial to make sure your assets are protected and you have a life insurance policy. As medical expenses increase with age, you will need to be well-versed in the Medicare system. Long-term care should be considered as well.

Estate Plan: Refers to the plan that explains what happens with your assets when you die. First, always make sure you are working with an estate planner that you trust is shielding you from unnecessary estate taxes in order to leave your family with as much money as possible.  Choose a family member that you trust to be the executor of your estate that will take charge in managing your estate when you are gone.

Tax Efficiency: Unfortunately, taxes can become complex during retirement. When you begin collecting retirement distributions, your accounts will start being taxed as ordinary income if held in a Traditional IRA or 401(k). Distributions from a Roth IRA are generally tax free as money contributed to them is after tax. Roth IRA’s are highly suggested to people who believe they will make the most money later in life.


Use a wealth manager to help with retirement planning

If you want a sustainable and reliable retirement plan you can truly trust - you probably need to bring in a professional. A wealth manager & adviser will help you understand the details and steps required to reach your goals. It's important to recognize your current level of assets/income and calculate a realistic goals you can start TODAY. The longer you wait, the more difficult it is to create/maintain a proper retirement plan.

Meet with a pro at Bauer Wealth if you'd like to build a plan to stay wealthy and healthy through your golden years.

Topics: Financial Planning

Stephen Heitzmann

Written by Stephen Heitzmann

Stephen Heitzmann is the CEO of Bauer Wealth Management, a Wealth Management Firm, based in Colorado Springs, CO. Bauer Wealth Management is a Registered Investment Advisor (CRD#: 152977/SEC#: 801-71090) with the Securities and Exchange Commission. This article does not represent an investment recommendation or endorsement of any kind. Please consult with your advisor regarding your specific situation. Investing in securities does involve risk of loss that clients should be prepared to bear. The risks can range from failing to keep pace with inflation to losing some or all of the money you invest.