There are so many books, articles, podcasts, and shows about planning for retirement that it might seem overwhelming to you. With so much information coming at you, it’s possible to lose sight of your overall strategy and not see the forest for the trees. To help you focus on the most important decisions, you’ll want to prepare a realistic retirement plan that can guide you to a financially secure retirement.

The first step is to complete your retirement homework. This homework includes thinking about your goals for retirement, including when you want to retire. The homework also includes preparing a budget of your living expenses in retirement and taking an inventory of your financial resources.

Once you’ve finished your homework, you’re ready to create your financial plans for retirement. Be aware that it might take a lot of time and effort, but that’s ok, given what’s at stake.

Your Retirement Financial Plan A

It’s critical to determine if your retirement income will be sufficient to cover the estimated living expenses that you developed from your retirement homework.

The first step is to estimate the amount of retirement income you can expect from Social Security at the age you want to retire. Be sure to include the income from your spouse or partner, if applicable.

It’s important to note here that most experts advocate delaying the start of your Social Security benefits as long as possible but no later than age 70. Delaying your Social Security benefits helps maximize the part of your retirement income that’s protected against inflation and stock market crashes.

As a result, if you plan to delay starting your Social Security income after the age at which you want to retire, you’ll want to develop a strategy to replace the Social Security income that you’re delaying.

The next step is to decide how you’ll deploy your retirement savings to generate lifetime retirement income. You have a few choices, each with their pros and cons:

  • Use a portion of your savings for a Social Security bridge strategy, which is one way to help optimize your Social Security benefits.
  • Invest your savings and use a systematic withdrawal strategy to regularly withdraw a specified amount from your savings. You could withdraw principal, interest and dividend income, or instead just live on the interest and dividend income alone.
  • Buy an annuity from an insurance company that will pay you a monthly retirement income for the rest of your life.

Your job is to learn the pros and cons of each approach and then estimate how much total retirement income you can generate from your retirement savings.

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Finally, if you’re eligible for a traditional pension, you’ll want to estimate the regular income you can expect to receive. Most pension plans have online calculators that will help you estimate your retirement benefits.

Now you’re ready to add up all the sources of regular retirement income you can expect, to determine if you can cover your estimated living expenses and also have a comfortable margin for unexpected events.

If your retirement income does cover your expected living expenses, you might be comfortable concluding that you can afford to retire when you want. But if your income doesn’t cover your estimated living expenses, then you’ll need to move on to …

Your Retirement Financial Plan B

Plan B involves exploring alternate strategies you can use to increase your estimated retirement income, decrease your living expenses, or some combination of the two. Here are some possible strategies:

  • Delay your retirement age. This allows your savings to grow with investment earnings and can also increase your Social Security benefit.
  • If you delay retirement until age 65, when you’re eligible for Medicare, you might significantly reduce the money you’ll need to pay for medical insurance.
  • Work part time for a while to generate additional income.
  • Reduce your living expenses. For most retirees, housing represents their largest living expense, so moving to a less expensive area or house can significantly reduce your living expenses. You could also consider reducing your transportation expenses by owning a less expensive car or using public transportation.
  • Deploy your home equity. If you have substantial home equity, you could sell your home, realize a gain, and use the money to increase the part of your retirement savings that can generate retirement income. Another possibility is to use a reverse mortgage, which will increase your cashflow that will help pay for your living expenses.

For most people, these strategies are the most significant levers you can pull to balance your income and living expenses. Of course, there can be other ways to improve your retirement finances, and for those, you’ll need to do a bit more homework.

Once you’ve finished the basics of your Retirement Financial Plans A and B, it’s a good idea to move on to more advanced planning. This includes considering how you’ll protect yourself in your later years when you might become frail and need help with daily living. You’ll want to determine how you might pay for help that you’d need and also want to adopt strategies to protect your finances from any mistakes you might make or from being a victim of fraud.

If you haven’t done this thorough retirement planning yet, it’s time to make it a priority. You—and your family—will thank you for it.

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