Guide to Retirement Planning in Libertyville, IL

Guide to Retirement Planning in Libertyville, IL

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Chapter 1

Why is Retirement Planning Important?

Almost any complex task can benefit from planning, and this is especially true in the case of retirement. This applies to pre-retirees in Libertyville, Il, Lake County, Il, and throughout the country.

Because saving and investing for retirement involves so many moving pieces, failing to draw up a plan detailing how you intend to reach your financial objectives is a sure way to decrease your chances of achieving those goals.

What's Your Plan for Retirement. small wooden board with chalk on the table.To improve the likelihood that you can retire when you want, where you want, and how you want, planning is essential. 

Once you’ve made the decision to get serious about drawing up a retirement plan, or to reevaluate your existing plans, what comes next? 

Answering a series of questions crucial to effectively planning for retirement. 

These often include:

  • How much do you need in retirement savings to live the lifestyle of your choice?
  • How much you can afford to set aside from your current income into retirement savings? 
  • How will you invest your retirement savings?
  • What type of accounts should you place your retirement savings in?

Each of these questions can involve significant research and analysis to ensure that you are doing everything possible to make your retirement dreams come true. 

The key takeaway from answering these questions is that retirement planning is not something to do on the fly. Whether you do it yourself or work with a financial advisor such as a CERTIFIED FINANCIAL PLANNER™ Professional, giving the planning process the time and attention it needs is essential.

What is the downside to failing to plan for retirement? 

Potential negative consequences include the following:

  • Delaying retirement so you can keep working until you amass sufficient savings to retire.
  • Delaying retirement until reaching the age where you are eligible for government programs such as Social Security and Medicare. 
  • Downgrading your retirement lifestyle to reflect lower than expected retirement income.
  • Having to move to a less desirable location in order to be able to afford to retire.

Planning ahead for retirement can help reduce the chance that any of these outcomes occur by giving you enough time to change your approach to saving for retirement if necessary. 

If you wait until retirement is imminent before adjusting your plans, you may find that there is simply not enough time to make whatever changes are necessary to generate the savings required to enable you to live your chosen retirement lifestyle.

This is why planning is such a crucial element of being able to retire on your own terms, rather than being forced to make compromises to your desired retirement lifestyle as a result of a lack of financial resources.

Chapter 2

Taking the Mystery out of Retirement Planning

While retirement planning can seem like a mysterious process, given that it involves preparing for an event that is often decades away and involves various estimates about future conditions and preferences, it doesn’t have to be perplexing. 

The key to taking the mystery out of retirement planning centers on identifying and modeling the key factors which will determine whether you are able to achieve your retirement savings objectives.

Once you’ve analyzed these factors, you can then determine what changes, if any, you need to make to your current lifestyle, planned retirement lifestyle, savings amounts, or investment strategy to increase your chances of successfully meeting your objectives.

What are these key factors? They include the following:

  • Figuring out what your expenses are likely to be in retirement.
  • Determining how much in savings you will need to fund your desired retirement lifestyle.
  • After calculating your retirement savings number, determining how much of your current income you need to set aside on a regular basis to reach that number.
  • Choosing an investment strategy to guide your retirement investments.

Taking the time to analyze these key retirement factors doesn’t guarantee that you will achieve your retirement savings objectives, but doing so can significantly improve your ability to successfully fund your desired retirement lifestyle.

You can find a number of retirement planning calculators online to help you figure out how much money you need to set aside to reach a certain savings goal, or how much in savings you will need to fund a specified retirement income amount, given certain return and withdrawal parameters.

Another step you can take to eliminate or significantly reduce any mystery associated with planning for retirement is to use financial planning software to model various retirement-related scenarios. This software can graphically display a range of results derived from the financial inputs you provide. 

This gives you a way to stress-test your retirement plans by showing how they stand up to different investment results based on historical data. Known as a Monte Carlo analysis, these stress tests can involve hundreds and even thousands of hypothetical results. The goal is to provide you with a comprehensive analysis of likely results give your retirement planning assumptions.

If those results show that you are likely to meet your objectives from 70% to 90% of the time, they can be said to fall into what is often called the Comfort Zone, giving you a high degree of confidence that your financial planning is on the right track. If they don’t reach the 70% level, you may want to change your financial assumptions, for instance, by increasing your retirement savings or taking a different investment approach.

Many CERTIFIED FINANCIAL PLANNER™ Professionals have access to financial planning software of this type and can help you in using the software to test your retirement planning assumptions. If you are doing your planning by yourself, many of these programs can also be purchased for individual use.


Chapter 3

How Much Money Is Enough to Retire On?

A coin in a glass bottle Image blurred background of business people sitting counting money and a retro white alarm clock, Investment business, retirement, finance and saving money for future concept.Determining how much money you need to save to retire can be a challenging task. To do so you must consider not only what your retirement expenses are likely to be but also take into account factors such as inflation and where you plan to live in retirement. 

Within the U.S., there can be significant differences in living expenses within different states and even within regions within states. Those looking to retire outside the country can find even greater disparities in living expenses. 

By the same token, the difference in purchasing power lost to inflation between even a seemingly small difference in inflation of, say, 3% instead of 2%, can be substantial. As a result, the inflation rate built into your retirement plan assumptions, especially if you have many years to go until retirement, can be crucial when it comes to determining whether your purchasing power in retirement meets your expectations.

Factors to consider when working on calculating your retirement savings target include:

  • What type of lifestyle do you envision yourself living in retirement? One rule of thumb says that you can generally expect that your expenses in retirement will be around 80% of what they were pre-retirement. However, this may not be the case if you plan to live a retirement lifestyle that involves potentially expensive pursuits such as doing a lot of traveling or spending significant funds on expensive hobbies, fine dining, entertainment, etc. Medical expenses can also be a wildcard; for instance, unexpected medical costs can put a major dent in your budget to the extent they are not covered by Medicare or other health insurance. Similarly, long-term care expenses can mount up quickly if you find yourself staying in an assisted living facility for an extended period of time.
  • Where will you live, and will you be making mortgage payments? Costs can vary widely from region to region, as mentioned earlier. While many retirees have paid down the mortgage of their house prior to retirement, if this is not the case make sure to take into account mortgage payments when calculating expenses.
  • What other income sources, if any, will be available to you outside of income from your retirement investments? It’s important to calculate all of the income you will receive in retirement from sources such as Social Security, pension plans, annuities, etc. to get an accurate idea of how much money you will need your investments to generate.

The following steps can be used to calculate your retirement savings target:

  1. Determine your expected monthly expenditures based on your desired retirement lifestyle. This should include all of your basic living costs as well as a figure for monthly discretionary spending for eating out, spending on hobbies, entertainment, etc.
  1. Add up your expected monthly income from sources other than your retirement savings such as pensions, Social Security, etc.
  1. Subtract the second sum from the first number. This is the amount of money you will need to generate each month from your retirement savings.
  1. Use the amount generated by subtracting the second sum from the first sum to determine how much in savings you will need to amass to adequately finance your retirement. To calculate this number, you will need to decide whether you want to try to generate enough savings so that your income will come only from the interest and dividends paid on your savings, or, if not, what level of yearly principal drawdown you plan to use.

One rule of thumb is to draw down 4% of principal each year from your retirement savings in the expectation that this should enable them to last for approximately your life expectancy according to the actuarial tables.

To avoid outliving your income, some CERTIFIED FINANCIAL PLANNER™ Professionals recommend a modified form of the 4% approach, which involves adjusting your withdrawals depending on investment performance. If your investments perform poorly in one year, for example, you might reduce the amount of funds you withdraw that year to avoid prematurely depleting your savings. 

Read our blog articles:

How to Stop Worrying About Running Out of Money

Afraid of Running Out of Money? 6 Ideas to Consider

Chapter 4

Important Steps in Retirement Planning

Following a step by step checklist can boost your chances of achieving your retirement savings objectives. The list below outlines retirement planning items covering the key steps of the process: 

Step 1: Decide if you will work with a CERTIFIED FINANCIAL PLANNER™ Professional or other financial advisor: While some people have the time and knowledge to perform the process themselves, many people can benefit from the expertise of a professional who has the expertise and experience to guide them through the process.

Step 2: Determine how much income you need to live on in retirement: As covered previously, this involves taking into account both fixed costs and expected discretionary spending.

Step 3: Calculate how much in savings you need to amass to meet that income amount: This requires first accounting for other income sources such as Social Security, pensions plans, annuities, etc.  

Step 4: What type of investment strategy should you pursue to achieve your investment savings goals? When selecting an investment strategy, it is important to take into account your risk tolerance and time horizon as well as your savings goal.

Step 5: What steps will you take to protect your income and assets from an accident? An accident that prevents you from being able to earn a living and continuing to contribute to your retirement plan can seriously disrupt your retirement plans? Acquiring disability insurance is one way to protect your ability to continue funding your retirement savings.

Step 6: Make adjustments to your plan as needed: Retirement plans, like any other, are subject to change as your circumstances change. As a result, regularly reviewing your progress towards your retirement savings objectives is recommended to improve your chances of achieving those goals.

Chapter 5

Types of Retirement Accounts

While many people save funds for retirement in standard, taxable accounts, the existence of tax-favored retirement accounts offers you a chance to take advantage of government-approved tax breaks on your retirement savings. These accounts generally offer tax-deferred or tax-exempt growth, enabling you to build up greater savings for retirement than would be the case if you had to pay taxes on your realized gains every year.

Commonly used retirement account types include:

  • Traditional IRA: These accounts enable individuals to set aside up to $6,000 per year, $7,000 for those 50 and up Contributions are tax-deductible as long as you aren’t covered by an employer’s retirement plan and your income is below certain thresholds. Aside from special exemptions, you must wait until you are at least 59 ½ to remove funds from a traditional IRA without paying an early withdrawal penalty to the IRS as well as all applicable taxes. Required minimum withdrawals must be taken from these accounts starting at age 72 for those born on or after July 1, 1949. For those born before that date, withdrawals must begin during the year they turn 70 ½.  
  • Roth IRA: While Roth IRAs don’t feature tax-deductible contributions, they do allow for tax-free withdrawals if all applicable rules are followed. Contribution limits ($6,000/$7,000) are the same as those for regular IRAs. The tax-free withdrawal feature makes these accounts especially attractive if your tax rate is expected to remain high even after you retire.
  • SEP-IRA: These plans are available to self-employed individuals and small businesses. They generally must cover all full-time employees at a business and allow for larger contributions than traditional or Roth IRAs, with a $58,000 contribution maximum for 2021.
  • Simple IRA: These plans can be offered by small businesses with 100 or fewer employees. Employers have the option of making non-elective contributions of up to 2% of an employee’s salary or a dollar-for-dollar match of an employee’s contribution up to a maximum of 3% of salary. For employees, the contribution limit for 2021 is $13,500, with a $3,000 catch-up limit for those 50 and older.
  • 401K wooden blocks chart on desk401(k): Employer-sponsored 401(k) plans allow for both employees to contribute a portion of their wages to a retirement plan on a tax-deductible basis and employers to match those contributions to at least some degree. The maximum employee contribution amount for 2021 is $19,500, with a catch-up allowance of up to $6,500 for those 50 and older. If your employer does offer such a match, for instance, on all employee contributions up to 5%, it is advantageous to contribute to at least that level to maximize your retirement savings. 
  • Defined Contribution plans: These plans allow employers to set aside a certain percentage of an employee’s wages in a retirement account on a yearly basis. The maximum employer contribution to such plans is $58,000.
  • Defined Benefit (pension) plans: These plans are much less common than they once were. They enable employers to provide their employees with income payments in retirement based on salary while employed and years of employment. High-earning self-employed individuals can also utilize these plans. The maximum annual benefit for these plans stays at $230,000 for 2021.
Chapter 6

How to Get Started

The earlier you start planning and saving for retirement the more likely you are to reach your retirement goals. Getting started can be as simple as contacting a financial advisor to help you open a retirement account or going directly to an investment sponsor such as a mutual fund firm or a brokerage firm that offers retirement accounts to individual investors.

If you work with a financial advisor, they will typically assist you in the process of determining retirement savings, deciding how much to set aside to meet those goals and how to invest these funds, and opening your retirement accounts. Working with a CERTIFIED FINANCIAL PLANNER™ Professional offers the peace of mind of knowing that your advisor has had to meet rigorous standards of financial knowledge to both achieve and retain the CFP® designation.

CERTIFIED FINANCIAL PLANNER™ Professionals must pass stringent tests demonstrating their knowledge of the full spectrum of financial planning expertise, including retirement planning, investment management, insurance, taxation, estate planning, and more. They must also meet the high ethical standards required of each advisor holding the designation to qualify for and keep the certification.

Whether you work with an advisor or do it yourself, the first step to planning for retirement is to write down your plans – your goals and objectives and the numbers underlying them – either on paper or computer. Once you’ve written down your plans and stress-tested them via online calculators or financial planning software simulations, the next step is to choose what type of retirement account or accounts to set up.

This will depend on a variety of factors including both your current and expected retirement tax rates. Generally, if you can benefit from the tax break now, setting aside funds in a traditional IRA or 401(k) if available is recommended. However, if your tax rate is expected to remain elevated in retirement, placing at least some funds in a Roth IRA is a good way to provide yourself with tax-free income when you retire. 

After you have decided on an account type, the next step is to determine your investment strategy. This is an aspect of the process where your financial advisor can offer valuable assistance by explaining different investment approaches and helping you find the one that best fits your investment objectives, risk tolerance, and time horizon. A financial advisor can also help you monitor the performance of your retirement plan implementation over the years to make sure you remain on track to achieve your retirement savings goals so you can afford to live your desired retirement lifestyle.

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