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The Ultimate Safety Net

Good planning does more than let you retire when you want. It can also help you avoid financial catastrophes.

Coming up with a financial plan for your retirement involves a lot of work. You'll start out by thinking about your goals and dreams for the future. You'll also need to make lots of assumptions about how much you'll be able to save, how much you'll earn on your money, and what sorts of expenses you'll have both during your working years and after you retire. Coming up with reasonable guesses for those numbers can be intimidating.

Unfortunately, life often gets in the way of those assumptions. But even if unforeseen circumstances force you to change your plan, you'll still be much better off than if you'd never started planning in the first place.

Get started now
The longer you wait, the harder it gets to put together a good retirement strategy. Building a habit of saving and investing early in your career gives the power of compounding returns the maximum amount of time to work for you. As time goes by, increasing responsibilities often make competing demands on your income, making it harder to carve out a piece of your paycheck for retirement.

Workers who are nearing the end of their careers face a number of tough financial decisions. Companies making cutbacks often target higher-paid experienced employees for layoffs or early retirement. Recent packages offered to employees at UPS (NYSE: UPS  ) , DaimlerChrysler (NYSE: DCX  ) , and Ford (NYSE: F  ) are just the latest in a long string of early retirement offers to employees around the country.

A successful financial plan makes these decisions easier. If you've saved throughout your working life, you can choose when or whether to stop working based on your own wishes rather than economic necessity. A severance package could become icing on the cake. But without a good plan, if your job is your only source of income, you could be in serious trouble.

Happy now, happy later
A common objection to retirement planning is the belief that you have to make big sacrifices now for the sake of a better future. But early planning can actually help you avoid making huge reductions in your lifestyle.

For instance, say you want your savings to grow to $1 million and can earn 10% on your investments. If you start when you're 30, then it'll only take about $280 per month to get there by age 65. On the other hand, if you wait until you're 50 -- as many people do -- then you'll have to save almost $2,400 every month.

The other thing early planning does is provide a nest egg for other unexpected emergencies. A serious injury or illness is enough to devastate many families, especially if they don't have comprehensive health insurance that provides sufficient coverage. The combination of lost wages and big medical bills can make it impossible for many families to dig themselves out of their troubles. Bankruptcy is often the only solution.

But even if you're nowhere near retirement, the savings you've built up can save you from this terrible fate. An emergency fund can give you the cash you need to pay expenses while you recover, while hardship withdrawals from IRAs or 401(k) plans may be available to meet more extensive needs. In short, a strong financial plan gives you options that many others simply don't have.

A simpler life
You might be closer to your goals than you think. When you first create a plan for retirement, you might believe that you need to replace most or all of your current income. Yet you may later decide that you don't need an extravagant lifestyle in retirement to find happiness. Planning to cut expenses in retirement lets you consider alternatives that are often otherwise unavailable, such as retiring early or working on a part-time basis.

Most importantly, realize that your goals are unique. By embracing your own wishes, dreams, and priorities, you'll see that retirement planning is more than just plugging numbers into a spreadsheet and hoping things work out. A great plan for retirement will put you in a whole new mindset, opening your eyes to a whole new level of potential happiness both now and in the future. All you need is the will to get started.

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If you're looking for help in coming up with a good plan for retirement, look no further. The Fool's Rule Your Retirement newsletter has already done a lot of your homework for you, including information about retirement benefits, projected expenses, and how to create a budget you can live with. Try it out free for 30 days and see how Rule Your Retirement can help you successfully plan for your retirement.

Fool contributor Dan Caplinger is on track for retirement, at least for now. He doesn't own shares of the companies discussed in this article. UPS is an Income Investor recommendation. The Fool's disclosure policy will help you reach your goals in style.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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