Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program and managing assets.
BREAKING DOWN Retirement Planning
In the simplest sense, retirement planning is the planning one does to be prepared for life after paid work ends, not just financially but in all aspects of life. The non-financial aspects include lifestyle choices such as how to spend time in retirement, where to live, when to completely quit working, etc. A holistic approach to retirement planning considers all these areas.
The emphasis one puts on retirement planning changes throughout different life stages. Early in a person's working life, retirement planning is about setting aside enough money for retirement. During the middle of your career, it might also include setting specific income or asset targets and taking the steps to achieve them. Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying in; instead your decades of saving are paying out.
Retirement Planning Goals
Remember that retirement planning starts long before you retire -- the sooner, the better. Your “magic number,” the amount you need to retire comfortably, is highly personalized, but there are numerous rules of thumb that can give you an idea of how much to save.
Some people say that you need around $1 million to retire comfortably. Other professionals use the 80% rule, i.e., you need enough to live on 80% of your income at retirement. If you made $100,000 per year, you would need savings that could produce $80,000 per year for roughly 20 years, or $1.6 million. Others say most retirees aren't anywhere near saving enough to meet those benchmarks and should adjust their lifestyle to live on what they have.
Whatever method you, and possibly a financial planner, use to calculate your retirement savings needs, start as early as you can.
These 3 simple personal finance rules that you can start with are here, to see where you stand today.
Debt to Income Ratio
Ideally, your debt to income ratio should not be higher than 30%. Because then it would mean you are spending more than 30% of your income on paying loans / interest on loans.
Savings to Income Ratio
Ideally, you should be saving at least 20% of your monthly income to save and invest.
Contingency Reserve
You should set aside 6 to 24 months of living expenses as a contingency fund to be used only in times of emergencies.
