Today we are going to take a look at the Steps for Retirement Income Planning.
Let’s dive right into the different steps in the retirement planning process.
Step 1: Estimate Retirement Income Needs
This step in the retirement planning process is to determine the amount of income that will be needed annually to support your expected standard of living during retirement. This amount will, of course, vary among retirees, and will depend upon the projected retirement age, life expectancy, inflation, and a variety of other family and economic factors.
There are two methods typically used to determine the amount of income needed: the replacement ratio method and the projected expense method.
The replacement ratio method simply applies a percentage of a person’s preretirement income, to estimate how much he or she will need during retirement. This ratio typically ranges from 60 to 80 percent of your income before retirement.
The projected expense approach is a more detailed and precise method of projecting income needs than the replacement ratio method.
With this approach, future living expenses are estimated by comparing them directly to current living expenses which may include housing, utilities, transportation, food, clothing, vacations, and other expenses.
The projected expense method provides a more precise estimate of future income needs because it is based on your actual household expenses.
Step 2: Consider Your Sources of Retirement Income
Traditionally, people have relied on three primary sources for their retirement income:
· Social Security
· an employer-sponsored pension or retirement plan, and
· personal savings and investments
These 3 sources are considered the cornerstones of a person’s retirement income.
Retirees can use the image of a 3-legged stool to refer to these combined income sources.
A senior’s retirement security rests firmly on this stool when all three sources are in place. If one leg of the stool is missing or weak, you may not have adequate income, unless steps are taken to strengthen the other legs. The income that is generated by these three sources will, in large part, determine how comfortable a person’s golden years will be.
Generally speaking, an individual has the most control, only over the last component, their personal savings, and investments.