Many people think that retirement planning is focusing on reaching a specific number that will be considered their nest egg. But is that all there is to retirement planning? Although having a retirement number or a nest egg is important, there are several other components that are a part of a retirement plan.
A comprehensive retirement plan should address the following factors:
Life expectancy. If you save a specified amount for retirement, how long will that income last? If this income is earmarked to last 20 years, what happens if you live past those 20 years? You want to make sure your retirement plan includes a strategy that provides an income for a lifetime, not for a specific number of years.
Medical expenses. If you are in great health at the start of your retirement, are you prepared for possible health concerns that may come at a later time? Your retirement plan must include health care that will cover the cost of medicine, medical care/hospitalization and long-term care needs.
Taxes. If your portfolio only consists of deferred tax contribution accounts, you must be prepared to share your nest egg with your uncle, who is waiting patiently to collect once you start taking distributions. Your plan should include strategies that provide tax free withdrawal options.
Inflation. Where do you have your nest egg invested? Is it earning enough interest? Your plan must grow and match or exceed inflation. Remember, what a dollar buys today may not be the same as what it will buy in the future.
Market volatility. Once again, where do you have your nest egg invested? Does your funds go up and down like a roller coaster? Your plan should include safe money strategies that will keep a portion of your money safe and not subjected to market losses.
Risk tolerance. Last time, where do you have your nest egg invested? What percent of your nest egg is subject to market loss? Your plan should address protecting your nest egg as you get closer to retirement. You do not want your retirement date pushed back because you experienced a loss and now you have to re-build your funds.
Manageable budget (including daily living expenses, debt management, travel/leisure expenses and emergency funds). Have you paid down debt so that you are not carrying that into your retirement days? Do you think your living expenses will be less during retirement days? Your plan should include a monthly budget that anticipates how much you will need to make ends meet. Remember, you will have more leisure time, which means more time to spend more money. Also, retirement time is a time known for increased travel plans. Your plan should reflect the lifestyle that you have dreamed of living.
Estate planning. For all the years you have worked hard to accumulate your nest egg, where does the nest egg go when the unexpected happens? Do not leave it up to a court appointed stranger to distribute your funds, your plan should include instructions that will distribute your funds to your exact specifications.
Instead of exclusively focusing on the size of your nest egg, create a retirement plan that will hold up under different life scenarios ranging from extreme market conditions to unexpected life events. You want to be sure that your plan covers all the bases and does not leave you unprepared.
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