Constructing a Retirement Plan

By: Angela Howard Email
By: Angela Howard Email

Certified financial planner Bruce Hagan has a step by step primer on retirement planning that can help everyone prepare for their golden years.

First, he says, you should determine what is a realistic annual income you and your spouse will need during your retirement years. Often it will be less than in your working years because you will have put the kids through school and hopefully the house will be paid off. However, he says you may want to come up with a bare needs figure and a larger, best case number.

Next, Hagan says you will want to determine what "nest egg" you need to build to provide that annual income. Not all of that has to come from personal savings. You'll probably have social security benefits and some folks may have a pension coming, although that seems more and more restricted to very large company and government employees.

He says you'll need to estimate what portion of your annual income needs those payments will cover. So if you and your spouse need $72,000 per year or $6,000 per month and social security will pay $1,500 and a pension $2,000 you now have to get that remaining $2,500 a month from your nest egg.

He also says there are a large number of factors at work and some of those factors you have limited or no control over, such as life expectancy, inflation, tax rates, and investment returns. So, Hagan says, you have to plug in some figures based on your best guess.

However, Hagan says there are lots of loose ends when it comes to retirement planning, and that's why you must periodically review your results, look where you are on that road to retirement and change routes from time to time. For example, if you're twenty years away from retirement and you've plugged in an inflation rate of 2% and it's actually running 5%, when you plug that new number in you'll come up woefully short of your goal. You'll need to adjust your actions, and we'll talk more about that next time.

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