Many professional financial planners will tell you that it's almost impossible to handle retirement planning on your own. But the simple truth is that by understanding a few basic principles, you can plan for your retirement without letting yourself get sidetracked by all the potential complications that could derail your finances.
The basics of retirement planning
At its core, retirement planning involves just a few basic goals:
- During your career, you need to set aside some of your financial resources in order to prepare for a future in which you no longer earn as much.
- A large number of retirees face many of the same specific financial challenges after they retire, and taking steps to protect yourself from the potential damage that those challenges can wreak on your retirement savings can help you avoid problems down the road.
- Given the uncertainties of life expectancy, you want to make sure you won't outlive your money, yet you also want to make the best use of the financial resources you do have, both for your own benefit and for the benefit of your loved ones.
From there, of course, it's easy to go into incredible depth in covering each of these basic goals. For instance, saving for retirement can get extremely complex, as you navigate through tax-favored accounts like 401(k) plans and various types of IRAs. Different investment strategies can produce very different results, leading to large disparities in long-term returns that can produce nest eggs of much different sizes. Your own unique reactions to changing market conditions can lead you to take different actions than another person with exactly the same financial circumstances, also resulting in much different outcomes.
Similarly, protection from financial hazards and uncertainty can take many different forms. Some retirees will want to pursue solutions that involve life insurance, annuities, long-term care policies, and other insurance products to address the risks that they face. Others will be more comfortable assuming the financial risk themselves rather than paying insurance companies to take on that risk for them.
Keeping it simple
Even though retirement planning can get complicated in a hurry, the key to remember throughout much of your career is that it's impossible to plan for every contingency you'll face. As a result, the simpler way to handle planning for retirement is to address the threats that you can control while maintaining as much flexibility as possible to handle the threats you can't control -- or might not even be aware of. A few examples include:
- Some advisors will suggest that you're giving up big potential returns if you don't pick individual stocks. But a portfolio that relies on the broad-based ETFs Vanguard Total Stock Market (VTI 0.13%), iShares Core Bond Market (AGG 0.17%), Vanguard REIT (VNQ +0.22%), or other similar ETFs from other fund companies will get you most of the way to the returns that you need in order to retire comfortably. These three ETFs are particularly useful because they come with low fees, but as long as the ETF you choose doesn't charge too much, there are plenty of strong options to pick from.
- Insurance coverage can be extremely difficult to understand, and the costs involved can be high. Sticking with basic insurance early on and later adding features as you become more familiar with the risks involved might not always be the least expensive solution to your insurance needs, as in some cases, the earlier you get coverage, the less it costs. Moreover, you won't always qualify to get insurance if some event occurs later in life that boosts your risk to the point at which insurance companies won't offer you coverage at all. But the wait-and-see strategy does have the benefit of preventing you from getting coverage that might well be obsolete or unnecessary by the time you seek to use it.
Admittedly, these simple solutions won't always take care of every contingency, and they can leave you vulnerable to certain risks that require advanced planning techniques. But only you can weigh the pros and cons of do-it-yourself planning versus getting professional assistance, and for many people, the costs involved with addressing every potential trouble-spot will outweigh the benefits.
Take control of your financial life
There's nothing wrong with seeking the advice of a good financial advisor to help you with your retirement planning. But you shouldn't feel compelled to get that advice. By doing your own research and getting familiar with basic retirement planning concepts, you can create a plan that will meet most of your basic needs and get you on the path to a comfortable retirement.
