Retirement planning is one of those things that is relatively easy to do (a little forethought and effort go a long way) and yet easy to postpone and regret later.

The best time to start planning for retirement is today. The earlier we start, the better we can take advantage of value appreciation and compounding, especially for tax-deferred and tax-free investments.

Factors to Consider

Here're some of the things to keep in mind when planning. These will help estimating how much money we need during retirement.

Our Post-Retirement Lifestyle

We'll be taking a conservative view of our post-retirement lifestyle. In other words, we assume that we want to continue more or less the same lifestyle as we have now. There'll of course be changes (we'll spend much less in a few areas, and more in a few other areas). However, expecting to live well allows us to ensure that we're not shortchanging ourselves in terms of our fund needs and prevents our funds running out during our time.

Health Trajectory

Things to ponder on:

• How healthy are we and our family today?
• What are the chronic health issues creeping up, that we feel we might need to "manage" long term?
• If our living habits (diet, activity) is similar to our parents', there's a chance that we might be susceptible to health issues similar to theirs in their old age.

Additional Responsibilities

• For example, who else do we need to support financially? This could be aging parents, children/grandchildren that haven't flown the coop yet.
• Any long-term debts that we created or inherited.

Estimating Funds Needed

We assume that our expenses during retirement will be at least 80% of our current expense. This is due to several reasons:

We'll be Spending Less

• Some of our retirement income may come from post-tax IRAs. This reduces our taxes.
• We may be on our way to paying off our big loans (home mortgage, cars, etc.), so our monthly loan payments would have reduced.
• We might downsize to a smaller home, reducing both our mortgage and home maintenance costs.

We'll be Spending More

• Some of our retirement income may still be taxable (401k, social security income, investment gains, etc.).
• We may be travelling more.
• We may be spending more on healthcare as we age.
• We want to maintain the same lifestyle as pre-retirement. Cost of living generally goes up over time.

Steps

Here's a structured way to work on planning our retirement:

1. Guidelines
2. Decide when to retire
3. Compute annual income needed post-retirement
4. Compute how much we need to invest into our retirement accounts by the time we retire
5. Identify investments

1. Guidelines

One of our guidelines might that we won't touch our emergency reserves. It's purpose doesn't change during retirement. It continues to act as a time buffer for us to recover financially if things go south.

2. Decide When to Retire

This is very personal. Though mainly decided by us, our retirement age is also affected by unexpected life events. For many of us, it is not a straight line.

3. Compute Annual Income Needed Post-retirement

Things to consider:

• How much money do we need annually for daily and periodic expenses?
• We include a 10% cushion.
• We'll assume that the income is taxable, so add taxes (20-30% is a good number).

We're deliberately being conservative about how much money we'll need and thus including buffers, so that we don't end up falling short.

4. Compute How Much We Need to Invest

Now that we know how many years we have till retirement (from step 2) and how much we'll be spending annually post-retirement (from step 3), we are ready to compute how much money we need to invest.

The question we're essentially asking is: How much should we have saved/invested by the time we retire such that the income from those savings/investments is sufficient to support us for the rest of our life?

• We assume that we'll want our investments to continue to grow as we withdraw from them for our expenses. This, again, is conservative. We could, alternatively, structure our investments such that we use both the gain and the principal from the investments. Doing so will allow us to invest a bit less. However, we run the risk of outliving our investments.
• We also assume a conservative estimate of 8% average annual growth. In reality, the rate of growth varies by investment.

5. Identify investments

We now have all the information to implement our retirement strategy. This is the step where we'll need a good financial planner. Trying to do this on our own is tedious and error prone. The information we've gathered in the earlier steps will help a planner create a strategy optimized for us. A professional planner will be able consider many aspects:

• Any existing investments (rental properties, life insurances, annuities, etc.)
• Any government-provided / employer-provided retirement benefits: social security, health care, pensions, etc.
• Inflation rate.
• How to reduce existing debt so that we enter retirement with minimal debt.
• Different kinds of investments: equity, money market, rental income, etc.
• Low/high risk/return, and taxable/tax-free investments.
• Withdrawal strategies: this could vary as time goes by; we might start off with using our annuity and then switch to equity investment returns, or vice versa.
• Do we want to leave the "principal" in the investments to our next generation or are we planning to spend it all on ourselves? Or a bit of both?
• Strategy to minimize taxes. This is especially true if we plan to spend part of the year in a different country.
• Minimizing the amount of effort required to manage our investments: some of the investments could be set on "auto pilot" — once set up, money from those magically show up in our bank account. Others might require active monitoring or hand-holding.

Summary

Planning our finances for our retirement is not just to feel good that we've done better than 80% of the population. Knowing that we have a strategy and setting the wheels in motion to implement the strategy eliminates anxiety about our finances and guarantees that our retirement will be peaceful from a financial perspective.