Retirement Is as Simple as 1-2-3
If you boil it down to the basics, it's not as complicated or as daunting as you might think.
Many people think climbing up the mountain is the greatest challenge to a climb. However, getting down the mountain is something many people underestimate. A successful climb doesn’t end at the peak; it ends when you get back home safe and sound.
Retirement is very similar in a lot of ways. Everyone gets excited to see you reach retirement, but staying retired with money left over is the true accomplishment.
There is an entire industry established to help people get ready for retirement, but oftentimes it leaves investors more confused. Retirement planning can be complicated and has many elements, but at its core it is really quite simple. Let’s look at the three steps for planning a more confident retirement.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
No. 1: Evaluate Expenses
This is absolutely the first step to retirement planning. You must get an accurate picture of your cash needs in retirement.
Too often the retirement budget starts with a pen and paper, projecting what people think they will spend when they’re retired. These are dangerous projections, because they almost always underestimate one’s true monthly outflows.
Every month there will be some surprise expense that folks dismiss because “I’m not going to have to replace my refrigerator every month.” Wrong. While you might not buy a new refrigerator every month, other things will pop up. Graduation gifts, house repairs, the car you planned on driving for another five years, but the transmission just went out on … and so on.
Instead of guessing what your expenses will be, find out how much you actually spend. It’s much easier than you think.
Look at your checking account and add up the direct deposits that drop in every month. Back out any systematic savings, and that number you’re left with is what you need to live off of in retirement.
This is one of those financial planning tricks that is both simple and effective.
No. 2: Add Up Income
Now that you know how much you will likely spend each month in retirement, it’s time to replace your paychecks. The first thing you should do is find out how much money you will get from various sources. Here are some examples of the more common and obvious ones:
Keep in mind the effect taxes will have in retirement. Don’t assume your Social Security income will be tax free, because up to 50% or even 85% of your benefit could be taxable. (For more, see 5 Ways to Avoid Taxes on Social Security.) The same goes for pension income (or nearly every source of income for that matter!).
Take a look at your expenses and then compare them to the total of income from the sources above. If you have a shortfall, and most people do, here’s how to fill the gap.
No. 3: Manage Investments
Any retirement income funding shortfalls are met with investment draws. Retirement used to be a three-legged stool of Social Security, pensions and a little bit of investments if needed. However, most folks would have a tough time retiring on Social Security alone (the average benefit is under $1,500 per month), don’t have pensions and will rely on investment heavily.
A lot is made of what a “safe” investment distribution percentage is. It largely depends on how the investments are positioned and the age of the individual or couple. As most investors get close to retirement in their 60s, in my experience, typically they have close to a 60% stock and 40% bond portfolio. At that age and portfolio composition, a widely accepted distribution of 4% seems prudent.
If you, or perhaps a spouse, plan on retiring much earlier, consider dropping the distributions down to 3%. If you plan on retiring later and/or have health concerns, than a 5% distribution might be OK.
The money can last longer if the distributions can be decreased in times of market turbulence. Drawing money from portfolios during downturns has a much larger effect than when you were accumulating money and buying into market drops. This is called the sequence of return risk, which is a vast topic to cover another time.
The flexibility offered by adjusting distributions can go a long way in the success of a retirement plan. Lastly, here’s a bonus item that needs to be factored into everyone’s retirement.
The Ability to Adapt and Change
I see too many retirees fail in retirement because they refused to change. The markets, and life in general, can throw many curveballs. It is important to adapt to the changing environment around us, rather than stay on a sinking ship.
If there were errors in calculating how much you will need in retirement, make the tough decisions to cut expenses while you can still save your retirement. The longer you wait to make these decisions the harder it is to recover.
Is retirement as simple as the 1-2-3 above? Yes and no. Yes, it is simple on a fundamental level, but it can be challenging due to the varying obstacles many people face and the sheer overwhelming amount of options and information clouding our plans.
If you can understand your true expenses and have a realistic plan for how to meet those needs, you’ve conquered the hardest part for most investors. Create a sustainable system of replacing your paychecks and you should be able to retire comfortably.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through SFG Wealth Management, a registered investment adviser. SFG Wealth Management and Synergy Financial Group are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
- Social Security: Get your most recent Social Security statement for up-to-date projections.
- Pensions: If you’re lucky enough to still have access to a pension, ask your company for an updated income options breakdown.
- Rentals/Royalties: Do you have any other residual income that will continue?
-
S&P 500 Hits New High Before Big Tech Earnings, Fed: Stock Market TodayThe tech-heavy Nasdaq also shone in Tuesday's session, while UnitedHealth dragged on the blue-chip Dow Jones Industrial Average.
-
4% and Chill? Find Out If This Distribution Rule Fits Your RetirementTake this simple quiz to discover whether the 4% Rule will work for you in retirement.
-
Oregon Tax Kicker in 2026: What's Your Refund?State Tax The Oregon kicker for 2025 state income taxes is coming. Here's how to calculate your credit and the eligibility rules.
-
I'm an Estate Planning Attorney: These Are the Estate Plan Details You Need to Discuss (And What to Keep Private)Gen Xers and Millennials would like to know if they're going to inherit (and how much), but Baby Boomers in general don't like to talk about money. What to do?
-
I'm a Financial Adviser: This Is How You Can Minimize the Damage of Bad Market Timing at RetirementPoor investment returns early in retirement on top of withdrawals can quickly drain your savings. The ideal plan helps prevent having to sell assets at a loss.
-
'You Owe Me a Refund': Readers Report Challenging Their Attorneys' BillsThe article about lawyers billing clients for hours of work that AI did in seconds generated quite a response. One law firm even called a staff meeting.
-
7 Questions to Help Kick Off an Estate Planning Talk With Your ParentsIt can be hard for aging parents to discuss estate plans — and for adult kids to broach the topic. Here are seven questions to get the conversation started
-
Down But Not Out: 4 Reasons Why the Dollar Remains the World HeavyweightThe dollar may have taken a beating lately, but it's unlikely to be overtaken as the leading reserve currency any time soon. What's behind its staying power?
-
What Not to Do After Inheriting Wealth: 4 Mistakes That Could Cost You EverythingGen X and Millennials are expected to receive trillions of dollars in inheritance. Unless it's managed properly, the money could slip through their fingers.
-
'The Money Prism' Solves Retirement Money's Biggest Headache: Here's HowThis simple, three-zone system (Blue for bills, Green for paycheck, Red for growth) helps you organize your retirement savings by purpose and time.
-
No, AI Can't Plan Your Retirement: This (Human) Investment Adviser Explains WhyAI has infinite uses. But creating an accurate retirement strategy based on your unique goals is one place where its possibilities seem lacking.
