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Investment Planning for Retirement 101

4 Mins read
Photo Credit: View more by RomoloTavani from Getty Images

There is a Chinese proverb that says the best time to plant a tree was 20 years ago. Essentially, it means that our future is built upon the things we do today.

The proverb provides an excellent argument for launching into retirement planning as soon as possible. Those who start early have the power of compound interest on their side, which can result in exponential growth in retirement accounts, while those who delay can find themselves looking back with regret as they struggle to fund their retirement.

The following are steps you can take to optimize your investment planning for retirement. By developing and implementing a solid strategy, you sow the seeds that will bear financial fruit as you enter your retirement years.

Establish goals for your retirement

Identifying your retirement goals is a critical component of investment planning. When planting a tree, it’s wise to consider where you want the shade to fall. Investment planning for your retirement requires the same type of consideration to determine what you want your investments to cover and you will identify your goals.

Defining your retirement lifestyle is one step in determining how much money you will need to accrue, though this can vary greatly based on where you want to retire, what you plan to do in retirement, and how many people you may need to support. Retiring in Hawaii, for example, can be twice as expensive as retiring in Mississippi.

Recent reports show that $1 million in an investment account is a good rule of thumb for funding a comfortable retirement. However, there are factors such as health care costs and long-term care that can lead to spending at a faster-than-expected rate. Once you have identified all of your retirement goals and contributing factors, a financial planner can help you pinpoint the amount you need to fund them.

Assess your overall financial picture

Investment planning for retirement also requires assessing your investment capabilities in light of your other financial obligations. If you are planting your retirement tree early, you’ll most likely have other expenses that need to be addressed at the same time, such as school loans, car loans, and mortgages.

Adding retirement investing to your other financial obligations can seem daunting, but even a modest amount can make a big difference when contributed consistently over the long term. If you begin at age 25, for example, a $200 per month contribution earning 6 percent annually will result in more than $550,000 at retirement age. Wait until you are 35 to start and the same amount and interest rate will only result in $274,000 for retirement.

If your income increases or you pay off some debt, consider designating more funds for retirement investing. Increasing your contributions from $200 to $300 at age 35 can increase your earnings from $550,000 to over $650,000.

Explore all available options

Selecting the right type of requirement accounts requires weighing several options, as some individual retirement accounts (IRAs) are better for higher earners because contributions are tax deductible. Others involve after-tax dollars, which means withdrawals made after retirement are tax-free.

If you work for a company, you may have access to an employee-sponsored 401(k) plan, and these accounts are often eligible for matching contributions provided by the employer. Employer matching — which is typically limited to a certain amount — provides an excellent opportunity to accelerate your retirement contributions.

In addition to identifying the type of account, you’ll also need to consider the type of assets you will focus on in your investing. It is common for retirement investing to involve a diversified blend of stocks and bonds, but there is a wide range of other assets that can support healthy retirement planning. Fixed index annuities (FIAs) are an example of an asset class that can be beneficial to retirement investing because they are a low-risk, income-generating option that shares many of the characteristics of bonds.

Understanding the fees associated with retirement accounts is also important, as even a small fee can have a significant impact over time. Certain asset classes, such as FIAs, do not involve the fees common to other types of accounts.

Commit to long-term engagement

Looking at investment planning for retirement as a “set it and forget it” exercise will not allow you to maximize your earnings. Much like planting a new tree, your investment strategy needs proper care over time.

As mentioned above, you can improve your gains by increasing your giving as your financial resources mature. Many investors practice rebalancing over time, moving from a more aggressive investment strategy during their younger years to a more conservative strategy as they approach retirement. In addition, new investment opportunities, such as Bitcoin ETFs, might emerge, providing a possible asset class for your retirement portfolio.

If you are behind in your retirement planning, as many in the US claim to be, don’t let frustration or disappointment keep you from engaging in investment planning for retirement. The Chinese proverb also advises that the second best time to plant a tree is now.

— Aaron Cirksena, Founder and CEO of MDRN Capital, is a 2011 graduate of the University of Maryland, College Park, where he studied economics. Since then, he has devoted his entire career to financial planning, distribution planning, and managing client money. He first worked with multiple $1 billion teams at Morgan Stanley and independent firms, and eventually created his own independent services firm in MDRN Capital, which is revolutionizing retirement planning by offering a comprehensive range of services, including income planning, investment management, tax planning, healthcare, and estate planning, all with a greater degree of effectiveness compared to traditional providers. As a fully digital firm, MDRN prioritizes efficiency and convenience, providing remote consultations and digital account opening.

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