Retirement security is something every American deserves, but sadly there are millions of current and future retirees who won't have the funds they need to provide financial stability. While there are many factors affecting retirement readiness, one of the big problems is that far too many people haven't put a solid plan in place.
In fact, according to a recent report from The Transamerica Center for Retirement Studies, just one in four workers has taken a simple but essential step to preparing for life after leaving the workforce. That step is making a written plan.
Why you need a written plan for retirement
A written plan for retirement provides you with a roadmap to follow to get to your destination. You wouldn't set out on a drive across the country without a map showing you where to go, so why go on the most important journey of your life -- the one to retirement -- without an idea of how to arrive where you need to be?
With a written retirement plan, you'll know how much you need to avoid living a life of financial insecurity as a senior. You can work backwards from there to set savings and investing goals for yourself and can monitor your progress throughout your career to make sure you're on track.
If you don't have this, you're flying blind and it's impossible to know if the amount you're saving is sufficient, if your asset allocation is appropriate, or if your investments are eventually going to provide enough income for you to enjoy your later years.
How to create a written retirement plan
The good news is, creating a written retirement plan doesn't have to be complicated. In fact, you can do it in 10 minutes or less by following these steps:
- Set a retirement savings goal: There are a few ways to do that, but one of the easiest is to assume you'll need a nest egg valued at 10 times your final salary. Figuring out what you'll be making right before you retire does involve a little math, though -- you should take your current salary and figure it'll increase about 2% every year until retirement. So, if you're 10 years away from leaving work and make $45,000 now, figure you'll make $45,900 next year and $46,818 the year after, and so on. Once you've done that calculation, just multiply by 10.
- Determine the annual and monthly amount you need to save to reach that goal: There are calculators online that make that process really easy. Use one so you can break your big goal down into small ones and see how much money needs to come out of every paycheck to stay on track.
- Figure out where you're going to put your retirement money: For many people, investing in a workplace 401(k) is the easiest option. But if you don't have a 401(k) or want to supplement that source of savings, there are other accounts such as IRAs and HSAs that you can open with online brokers and get tax breaks for investing in.
- Determine an appropriate asset allocation: This refers to where you'll put your invested funds. As a general rule, you should subtract your age from 110 to determine the percentage of your portfolio to put in stocks (so a 30-year-old would be 80% invested in the market). Then decide if you want to research and buy individual stocks, or opt for index funds as Warren Buffett recommends for those who don't want to spend hours doing investment research.
Once you've written all this out, you'll know exactly how much you need to invest and where your money is going. You can automate your investment process so the right amount of money comes out of your paycheck and is invested where you need it to be, and you can sit back and watch your wealth grow.
Of course, you will need to check in on your plan at least once a year to adjust your asset allocation for your age and make sure you're hitting your targets. But that won't take much effort once the framework of your plan is in place.
Don't go into retirement unprepared
Going into retirement with too little funds is a recipe for disaster, and the chances of that happening are far greater if you don't have a plan you're sticking to. Now that you know why planning for the future is so important and have some guidance on how to do it, you can sit down and create your roadmap to success today.
When your plans come to fruition and you have ample funds in your retirement accounts, your golden years will be a lot better for it.