Whether you are young and getting an early start or a bit older and trying to play catch-up, starting a retirement plan from scratch can present some unique challenges. While the ultimate prescription for success may change depending on age, the process itself does not change. 

Doing Inventory

Step one is to take an inventory of your finances. While this would certainly include any assets that you might have already accumulated – like savings, investments or a work-sponsored retirement plan – it should also include several other key components.

If you have not yet started saving but have a job, contact your employee benefits department and get an idea of what types of plans are offered by your company. You will want to find out details such as whether your employer will match your contributions, and if so, by how much. Also, if it does offer a match, ensure you understand how it’s calculated since this might impact how aggressively you use it or whether you might choose to use your spouse’s plan instead (or in addition). Other details that you will want to know about your company plan include whether there is a Roth option available, what funds are offered, and the vesting schedule. If your company does not offer a retirement plan, familiarize yourself with the types of IRA accounts that exist or find a CFP® who specializes in that area.

If you are working with a CFP® professional, you will also want to have your most recent tax returns available. Most competent advisers use this information to help determine what types of savings and investments might be best suited for you, but also to uncover any possible tax windfalls that might be used to bolster your savings/planning efforts.  

The last major step in compiling your inventory includes the bad stuff as well: do you have debt? If so, what types (credit card, home equity, etc.) and what are the interest rates and repayment terms? Another question that an adviser is likely to ask is how you came to have this debt. Your answer to this question will provide valuable feedback regarding your relationship with money and may figure prominently into the ultimate plan that you end up with. The answer to these questions also brings us to the next topic, which is budgeting.

Budgeting

Simply taking an inventory is not enough to create a viable retirement plan, since success or failure will depend largely on your future cash flow and what you choose to do with it. One of the most important aspects of budgeting is honesty – honestly with yourself and honestly with your adviser, if you are using one. For instance, when I work with a client, I want to know if their situation is bleak because it will affect how aggressive my recommendations will be.

If you aren’t sure how to go about creating a budget, a CFP® professional should be able to help. Having an accurate budget is not only necessary as indicated above, but also becomes the lynch-pin of our next step.

Setting Goals

Goal-setting is as important to the retirement planning process as any other aspect, and in some cases more so. Setting goals includes items such as how much income will you need in retirement, when you would like to retire, and whether or not there are any additional considerations (like what kind of estate you want to leave behind). Your goals become your yardstick to measure progress and ultimately success. As the years go by, you should be able to demonstrate that you are getting closer to making your dreams a reality.

Making Assumptions

One final, major issue to consider includes the assignment of assumptions. A retirement plan will only be as good as the assumptions that are used to create it.

A brief review of history will highlight some pretty tragic flaws regarding assumptions that many investors have made. For instance, millions thought that the high flying, tech-driven stock returns of the late ‘90s represented a reasonable assumption (that it would continue) and many others thought the same about real estate in the 2000’s. My suggestion here is that a good financial plan should not only use historical assumptions markers as suggestions for rates of growth, inflation and taxes, but should also make other assumptions as well. For instance, what will happen to your plan if the stock market does worse than the historic average? How about if it does better? The same can be said for inflation and other factors.

A well-thought-out plan does not use a single set of narrow assumptions to attempt to predict the future. Rather, a well-thought-out plan provides guidance regarding a large number of possible outcomes highlighting those which are more likely to occur.