What is Retirement Planning?

Planning for retirement starts with thinking about your retirement goals and how long you have to meet them. Then you need to look at the types of retirement accounts that can help you raise the money to fund your future. As you save that money, you have to invest it to enable it to grow. The surprise last part is taxes: If you’ve received tax deductions over the years for the money you’ve contributed to your retirement accounts, a significant tax bill awaits when you start withdrawing those savings. There are ways to minimize the retirement tax hit while you save for the future—and to continue the process when that day arrives and you actually do retire.

Getting Ready for Retirement

Step 1: Define Your Retirement

You probably have some idea of how you'd like to spend retirement. Here's where you write your objectives down, listing the most important goals first. For now, don't focus on budget. Focus on ideas, and be as specific as you can. For example, instead of "travel," list "trips to the lake" or "walking tours of foreign countries."

Step 2: Determine When to Collect Social Security

Most of us will need the Social Security benefit we'll receive — both to pay for basic essentials and to support our retirement dreams. The age at which you choose to start collecting Social Security will have a direct impact on how much you'll get in monthly benefits.

Step 3: Decide How Much You Want (or Need) to Work

This is the classic cost-benefit equation: Unless you are financially set for life, you will have to either stretch limited money and give up some retirement dreams or stay in the workforce (in some capacity) to help pay for those dreams. As you write down your retirement goals, take into consideration how much work is necessary.

Step 4: Determine Retirement Spending Needs - Create a Retirement Budget

Your budget needs to include:

How much money is coming in.
How much it will cost to reach the goals you identified in step 1.
How much debt you have.

Start by tracking your income and expenses for a couple of months. Next, figure out how much money you'll need in retirement to support your chosen lifestyle. You'll also need to do a financial checkup of your investments. Make sure you are diversifying your money into multiple investments, investing in things you understand and going with those investments that won't cost you a ton in fees.

Step 5: Find New Ways to Cut Your Expenses (Start Saving More)

Your retirement may be right around the corner or years away. Regardless, saving more now will always make you better prepared. That doesn't mean all of your extra cash has to go into savings, but now is the time to find new way to cut your expenses. Start by listing your bills and then figure out ways to trim them. Maybe you don't need 100 cable channels or to eat out three nights a week. Even cutting one movie night a month can bring you closer to your retirement goals.

Step 6: Understand Your Time Horizon

Your current age and expected retirement age create the initial groundwork of an effective retirement strategy. The longer the time between today and retirement, the higher the level of risk your portfolio can withstand.

Step 7: Assess Risk Tolerance vs. Investment Goals

Whether it’s you or a professional money manager who is in charge of the investment decisions, a proper portfolio allocation that balances the concerns of risk aversion and return objectives is arguably the most important step in retirement planning. How much risk are you willing to take?

Step 8: Prepare for the Unexpected

Few of us head into retirement expecting the worst. But sometimes it happens. Prepare for the unexpected now and you won't get caught off guard later. Taking time to consider how you'd pay for — and respond to — everything from minor issues like a roof leak to serious ones like a grave illness will help you weather those storms when they come. Discuss the big issues with your family or those closest to you. How much would it cost to make major repairs? What would you want to do (or what care would you want) if there was an illness in the family?