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.
