Financial Planning for Retirement: Charting Your Course

By Matt Mormino, CFP® | Jan 25, 2024 |

Whether retirement is around the corner or decades away, it’s never too early (or late) to start financial planning for retirement. A solid financial strategy is the key to achieving “vocational freedom” – the ability to pursue your passions without relying on a paycheck.  

Master these fundamentals, and you’ll be well on your way to creating a customized plan for the retirement lifestyle you envision. 

Savings vehicles for financial planning for retirement

The first step is understanding the different account types available for retirement savings: 

  • Pre-Tax Savings. Retirement account contributions are made pre-tax, meaning no taxes are paid upfront. All growth is tax-deferred, meaning ongoing income from investments is nontaxable. This includes 401(k)s, 403(b)sk, IRAs, etc. The tax reduction upfront helps cash flow and allows more investment, but taxes apply on withdrawals, which can only be made after age 59.5 without incurring penalties. 
  • Roth Savings. Retirement account contributions are taxed upfront, but all growth and withdrawals are 100% tax-free. Excellent for savers with a long time horizon or those who anticipate paying lower tax rates now vs. in the future. Withdrawals must be after the age of 59 ½ to avoid taxes and penalties. (Note: heirs do not pay income taxes on withdrawals.) 
  • Post-Tax Savings. Investments made using money already taxed into non-retirement accounts like brokerage accounts. There are no restrictions on use, but taxes are due on ongoing investment income like interest and capital gains. It provides flexibility since it is fully liquid.  
  • Utilizing a mix maximizes benefits and provides flexibility to manage taxes on withdrawals. Pre-tax maximizes upfront investment value. Post-tax provides liquidity. Roth provides tax-free growth. Blend based on your situation. 

Defining vocational freedom

“Vocational freedom” means having the financial independence to work because you want to, not because you have to. Retirement no longer means idle relaxation – today’s retirees seek purpose and meaning. Your vocational freedom plan funds pursuing what fills your soul, whether a new career, giving back, travel, family time, or anything else. 

Income planning

A key exercise is defining your target annual retirement income. This helps size the savings required to generate that income. Some base guidelines commonly used: 

  • 70-80% of current income. Assumes no more taxes or retirement savings are needed. 
  • Consider your “income replacement rate” to reach your target, filling the gap after Social Security, pensions, rental income, etc. 

Avoid blanket assumptions. Build your unique plan by: 

  • Inventorying current expenses and deciding which continue (e.g., housing, food) or discontinue (e.g., commuting costs, children’s expenses) in retirement. 
  • Adding any new pursuits like travel or hobbies that require additional funding. 
  • Inflate expenses over time for cost increases. Healthcare costs may rise faster than general inflation. 
  • Updating as your vision evolves. Revisit at least annually. 

Manage cash flow

Knowing your current cash inflows and outflows is crucial for financial planning for retirement. Track your: 

  • Income sources and amounts 
  • Essential non-discretionary expenses (housing, food, insurance) 
  • Discretionary expenses that can be adjusted 

This reveals how much you can devote to savings and adjust spending to align with your goals. 

Accounting for growth

Two key factors are inflation and investment returns. Inflation gradually reduces purchasing power – those who remember spending $5 on a movie ticket know what I mean. Target “real” investment, meaning how much your investment return exceeds inflation, based on the risk profile of your investments. Conservative portfolios may target 2% above inflation, while aggressive investors could seek 4-6% or more. 

Utilize retirement calculators

Retirement modeling tools project your likelihood of funding goals based on the following: 

  • Time horizon   
  • Estimated expenses 
  • Anticipated income sources  
  • Current savings 
  • Expected growth rates 
  • Savings additions 

Remember that garbage in/garbage out applies as much to retirement models as anything else. Input realistic assumptions to see if you’re on track or need to adjust savings, expenses, or investment strategy — and revisit regularly. In many ways, you simply want to ask, “Am I ready to retire?

Pitfalls of financial planning for retirement

Engage in thoughtful retirement planning and consider these factors to achieve a secure and comfortable retirement.   

  • When planning for retirement, it’s essential to base projections on realistic returns rather than overly optimistic ones. Even if retirement seems far off, starting to save now allows you to leverage the power of compound growth over time. 
  • When changing jobs, consider consolidating retirement funds. Keeping investments consolidated will help you manage them more effectively. 
  • Diversifying your investments is crucial. Avoid putting all your money in “guaranteed” low-risk investments that may not keep pace with inflation over the long term or plowing your savings into a few high-risk investments.
  • Avoid chasing past returns, as they do not reliably predict future performance. Investment decisions should be based on a well-thought-out strategy aligned with your financial goals and risk tolerance. 
  • Withdrawing from retirement savings should be reserved for true emergencies. Premature tapping into these funds can jeopardize your long-term financial security. 
  • When planning retirement income, it’s important to account for tax implications. Understanding the tax consequences of different income sources can help optimize your overall financial plan. 
  • Develop a Social Security claiming strategy tailored to your situation. Maximizing Social Security benefits requires careful consideration of factors such as your age, health, and overall financial picture.  

Seven retirement action items

Get started with these quick action steps: 

  1. Outline your retirement goals, vision, and ideal activities.  
  2. Calculate your target retirement income based on current expenses and desired changes. 
  3. Assess gaps between estimated Social Security, pensions, and savings vs. income needed. 
  4. Craft savings and investment strategies to fill the gap over time. 
  5. Model different scenarios adjusting variables like retirement age, savings, and market growth. 
  6. Automate pre-tax and/or Roth contributions into retirement plans to max out allowable amounts. 
  7. Review retirement accounts to validate proper investment mix, fees, and beneficiary designations.  

Retirement planning can seem daunting, but breaking it down into manageable milestones makes it easier to start building your vocational freedom. Consistent progress compounded over the years is what counts, not perfection.  

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