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Retirement Planning: 3 Questions You Need to Answer


Credit: Keoni Cabral, Flickr.

When it comes to your retirement planning, you may think that between your employer-provided 401(k) plan and Social Security, you have everything covered. If so, you're doing your retirement a disservice, because there's more to retirement planning than that.

Here are some questions you should ask yourself, as the answers can shape how you approach your retirement planning.

How much money will you need?

Part of your retirement planning process should include crunching numbers to get a sense of how much income you'll need (or want) in retirement and how big of a nest egg you'll need to support that that sum. The answer to this question is different for everyone and depends on factors such as your planned activities (e.g., globetrotting versus reading library books), your health, your local taxes, and so on. Some say it's best to retire with $1 million, but that might not be the right number for you.

Start with figuring out when you plan to retire. You might want to factor in how long you expect to live, too. If a lot of your relatives have lived into their late 90s and you plan to retire around 60, then you may be looking at 40 years of retirement. Such a long period will probably require a hefty nest egg.

Don't just assume that the often-suggested "10% of your income" rule will work for you, especially if you're starting late. For a comfy retirement, you might need to sock away much more.

Where will that money come from?

For most of us, Social Security will play a significant role in our retirement planning, though few of us will want to rely on it alone in retirement. It's important to have an idea of the benefits you might ultimately collect from Social Security in retirement, and the Social Security Administration helps with its Retirement Estimator.

Deciding when to start collecting your benefits can be complicated, but it's crucial to think hard about it and make an informed decision. Collect early, and your checks will be smaller, but you'll get more of them. Delay past your expected retirement age (which is now 67 for many of us), and your monthly check will rise 8% for each year you delay, up until age 70. If you're able to delay collecting and you expect to live a long time, the bigger monthly checks will go further. The Social Security Administration can help you decide when to start collecting benefits.

If your employer offers a 401(k) plan or something similar, you should consider contributing the maximum amount allowable, or at least contributing enough to collect any matching funds. Traditional IRAs and Roth IRAs can be even more powerful retirement planning tools.

Most Americans no longer have pensions available to them at their workplaces, but if you do have pension income in your future, check with your current and/or former employers to get a sense of how much pension income you can expect in retirement. You can also create pension-like income for yourself via an annuity. Variable annuities are problematic in many ways, but immediate or deferred annuities might serve you well.

Are you investing effectively?

Savvy investing is an important part of retirement planning. You don't want to be too aggressive, taking big chances on high-risk stocks, but you also don't want to be too conservative. You may think you've chosen the safest retirement planning path by keeping all your money in certificates of deposit, but CDs grow slowly.

For long-term capital appreciation, it's hard to beat stocks. The stock market's long-term average annual growth rate is close to 10%, but to estimate conservatively, you might plan for 7% or 8% growth for your stock investments.

You can use The Motley Fool's "What will it take to become a millionaire?" calculator (listed first under "Savings") to help with your number-crunching. The "How much, at what rate, when?" calculator is also helpful. They will shed light on how much you need to save depending on how much you've already accumulated, how long you have before retirement, and how quickly you expect your nest egg to grow.

Don't panic

If you haven't saved much yet, know that you're not alone. And know that some strategic actions can change your circumstances dramatically. Working just a few more years, for example, can make a big difference.

It's not too late to shape a better retirement for yourself. Devote some time to your retirement planning -- and then take action.

How to get even more income during retirement

Social Security plays a key role in your financial security, but it’s not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 08, 2014, at 8:23 PM, HarryGr wrote:

    The best chance to retire on your terms is to start planning and saving/investing early in life, do it with every paycheck and take advantage of any opportunity to increase your nest egg (employer matching plans, catch up contributions when you reach 50,etc.). I use several sites for retirement information including Dividendchannel, ETFchannel and Tthe site Retirement And Good Living which provides information on investing, planning, downsizing, frugal living. retirement locations and many other retirement topics that can help those who are planning for retirement or are already retired.

  • Report this Comment On August 10, 2014, at 3:18 AM, RxPro wrote:

    My advice: Don't even take Social Security into account when planning for retirement. Think of it as a bonus if you are fortunate enough to be able to collect it and use that bonus for spending/fun-money.

  • Report this Comment On August 10, 2014, at 6:47 AM, Mathman6577 wrote:

    The best advice on retirement planning was written by Moshe Milevsky, a York University professor and called "The 7 Most Important Equations for Your Retirement."

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Selena Maranjian
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Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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