How to Create your Own Financial Retirement Plan

Self-Help for Retirement Planning

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Relatively few people are prepared financially for retirement. One study has reported that more than half of American adults planned to depend entirely on Social Security for retirement income. Another reported that most Americans do not save regularly at all.

To make retirement years enjoyable, planning must start early. With longer life expectancies and a growing senior population, planning and saving for retirement should begin by the 30s. With adequate planning seniors will not outlive their savings and become financially dependent.

There are three steps to retirement planning:

  • Estimating retirement income
  • Estimating retirement needs
  • Deciding on investments

Estimating Retirement Income

Most people have three available sources of retirement income: (1) Social Security, (2) pension payments, and (3) savings and investments. Determination of income from savings and investments is doable after estimation of income from Social Security and pension plans.

Social Security

A planner can estimate how much to expect from Social Security retirement income by filing a “Request for Earnings and Benefits Estimate” with the Social Security Administration (SSA). Request this form on the SSA website or with the SSA toll-free phone number 800–772–1213–FREE.

The amount of Social Security benefits depends on time worked, age at which benefits start, and total earnings. Waiting until full retirement at age 65 to 67 to start receiving benefits maximizes the monthly amount payable.

Planners should be aware that Social Security benefits may be subject to income tax. The basic rule is that if adjusted gross income plus tax-exempt interest plus one half of Social Security benefits exceed $25,000 for an individual or $32,000 for a couple, some portion of the benefit will be taxable and will increase as the adjusted gross income level rises.

Pension Plans

Estimate how much to expect from a traditional pension or other retirement plan. Ask for a projection of what to expect from continued work until retirement age or from an earlier termination. Estimate any lump sum available from a 401(k), profit-sharing, or Keogh plan or a simplified employee pension at retirement age. The employer or plan administrator should be able to help with this estimate.

Estimating Retirement Needs

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Determine how much income will suffice after retirement, then calculate how much to set aside for a fund large enough for a desired income level. Many people don’t realize that retirement can last as long as a career, 35 years or longer. The fund may have to last much longer than might be expected, and the earlier the retirement, the more money it will need. Retirement at age 55 costs much more than at age 65.

A general guideline is to have at least 70 percent of the preretirement income stream. For special needs or desires the percentage is greater. The 70-percent figure is no substitute for a thorough analysis of future income needs, only a general guideline.

Suggestions for estimating an income stream needed after retirement:

  • Consider current annual expenses. From checkbook, credit card, and bank records over a year, add up payments for insurance, mortgage or rent, food, household expenses, and so on.
  • Consider how expenses may change after retirement. Will the mortgage be retired? Will commuting expenses continue? How much will health insurance cost? Will life insurance coverage increase or decrease? How much will travel expenses be? Will hobbies cost more or less after retirement? Will children be financially independent by retirement time? Will income taxes be lower, higher, or the same?

The answers to these questions indicate estimated annual expenses post-retirement. Then subtract from this estimate annual income anticipated from already-established sources. The difference is the anticipated annual deficit to be financed.

How much to save each year to accumulate a sufficient fund by retirement age? Assuming an after-tax return of five percent per year, multiply the accumulation required by a savings rate multiplier for the number of years until retirement:

Years until Retirement Savings Rate Growth Rate



















Example: A planner 40 years old who wants to retire at age 65 needs $350,000 to fund an anticipated annual deficit. To find out how much to save each year, multiply $350,000 by the 25-year savings rate of 2.1 percent, which indicates a need to save $7,350 every year for 25 years.

Subtract from this amount any lump sums anticipated at retirement. To project the value at retirement of a present asset, multiply its current value by the growth rate for the number of years until retirement.

Example: The current value of a 401(k) plan is $75,000. To project how much that amount will grow in 25 years, apply the 339-percent growth rate, which indicates $254,250 to subtract from the $350,000 needed to fund the anticipated post-retirement deficit. Multiply this $95,750 difference by the 25-year savings rate to see that, after factoring in the projected 401(k) lump sum, the planner still needs to save $2,010.75 per year to accumulate $95,750.


Generally, the more time until retirement, the more savings the planner should invest in vehicles with growth potential. If very close to or at retirement age, low-risk investments may be best, but this rule is subject to individual financial profiles in risk tolerance, income level, other retirement income sources, and unique individual needs.

Advantages and disadvantages of retirement-savings investments:

  • Tax-Deferred Retirement Investments. Deposit as much as possible in a 401(k), individual retirement account, Keogh, or some other form of tax-deferred savings plan. This money grows tax-deferred, and, if deposits are deductible, they reduce the planner’s income tax base.
  • Low-Risk Investments. Money market funds, certificates of deposit, and treasury bills are all conservative investments, but only the treasury bills offer rates that adjust to economic inflation. Most individuals saving for retirement should invest only small portions of their savings in them.
  • Bonds. The fixed-income rate from corporate and government bonds is higher than that from treasury bills. Bonds fluctuate in value with interest rates and so are riskier investments. For conservative investing, short-term may be preferable to long-term bonds to minimize value fluctuation.
  • Stocks. Corporate common stock is riskier still but offers potentially greater returns.
  • Mutual Funds. Mutual funds are good retirement savings devices. A balanced mutual fund portfolio can achieve a high return but not entirely without risk. The prospectus, the fund’s selling document, offers information about fund costs, risks, performance history, and investment goals. Planners should read the prospectus and exercise judgment carefully.

For more information or help with your own retirement planning check out Certified Financial Planner Maple Grove. They are a fee-only financial advisor that can help you achieve your retirement goals.