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How to plan for retirement when you're five, 10, and 20 years away

How to plan for retirement when you're five, 10, and 20 years away

How should you be planning for retirement when you’re five, 10, or 20 years away from leaving the workforce? The National Association of Personal Financial Advisors, an organization representing more than 2,500 fee-only certified financial planners in the U.S., asked its members to create the ultimate to-do list for workers at different stages in their retirement planning.

They’ve given Yahoo Finance a first look. Lauren Locker, a Little Falls, N.J.-based certified financial planner who helped administer the survey, walked us through the results.

Here are the top eight pieces of advice as ranked by NAPFA-Registered Financial Advisors:

20 years before retirement:

Getty Images
Getty Images

The top-ranked piece of advice is building an emergency fund with three to six months of living expenses. It may sound like a small step in the grand scheme of retirement planning, but there’s a reason it ranked so high. One of the most common mistakes workers make is dipping into their retirement fund or tapping their home equity when they run into unexpected financial trouble -- doing so chips away at your longer-term earnings potential.  

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Getting workers to find room in their budgets to prioritize a basic rainy day fund, however, is half the battle, according to Locker. “When I work with a client and ask them if they have a budget, about 85% of them will walk in the door and say ‘no, not really,’” she says. “But we have to be able to track and understand where your money goes in order to know what we can do.”

Even with retirement two decades away, it would be a mistake to think you’re too young to deal with things like estate planning, she says. A living will and a designated power of attorney should be essential. This is less about your financial security and more about protecting your family if you become disabled or pass away.

“If you like your family, you will make sure you have a will, health care and a power of attorney,” Locker says. “If you want to leave them with a mess, then you won’t do anything.”

1. Fully fund an emergency fund of three to six months of living expenses to avoid tapping into your 401(k) or home equity in the event of an emergency.

2. Maximize your earning potential and benefits package now by contributing the maximum annual amount, or at least enough to receive a full employer match.

3. Contribute money to a Roth IRA or other account to make sure you are saving in a tax-optimized manner.

4. Coordinate your insurance needs with your employer’s benefits package to be sure you have adequate coverage should you become disabled (long-term disability) and evaluate the level of life insurance you need.

5.Ensure you have a diversified investment portfolio so that you are investing for growth and create tax diversification by allocating assets across taxable, tax-deferred and tax-free sources. Consolidate multiple retirement accounts and/or brokerage accounts you may have.

6. Make sure you have basic estate planning documents in place (i.e. a will, powers of attorney, possibly a revocable trust, a living will, healthcare proxy, etc.)

7. Set a benchmark “magic number” for an adequate retirement fund and establish a step-by-step plan for reaching your goal.

8. Do not sacrifice your retirement to put your children through college. It is possible to take out loans for college but not for retirement.

10 years before retirement:

Thinkstock
Thinkstock

Planning for retirement is about more than socking away 10% of your paycheck. At this stage, workers should be paying close attention to how tax efficient their investments are (for example, maxing out contributions to tax-advantaged accounts like a 401(k) or 529 college savings plan).

 “Just having investments in the bank is not something that’s going to make me say, ‘Yes you’re on track for a good and healthy retirement,’” Locker says. “What does your insurance look like? What’s your tax situation?”

This is also a good time to sit down with a financial planner and review your asset allocations (ranked No. 5 on this list). With only a decade before you plan to retire, it may be time to decrease exposure to riskier assets like stocks and shift more of your portfolio into conservative investments. “Ten years go by very quickly,” Locker says. “Some people think their 401(k)s have grown and they’re feeling secure and may not be watching them as much as they should.”

Another step often overlooked is reviewing any estate planning documents you may have drawn up years before. A major life event like a divorce, job loss, or inheritance warrant updating your living will and overall estate plan.

1. Be tax efficient with your investments. For example, you should defer as much of your salary as you can to your defined contribution plans.

2. Save to an emergency fund and stay aware of your company’s financial situation. Older workers are often vulnerable during company reorganizations and layoffs.

3. Brainstorm any “big ticket” financial commitments (caretaking for a family member, etc.) for the next 10 years and consider how these items might affect your ability to retire in your preferred timeframe.

4. Take a hard look at any major debts you have and develop a 10-year plan to eliminate them.

5. Reallocate your portfolio based on your earnings timeline with a focus on performance, risk and expenses. Decide when – or if – you should shift to a more conservative asset allocation.

6. Review what your tax obligations may be with your current investments and use tax optimization strategies to benefit your savings.

7. Review your estate documents to ensure the language is still accurate. For example, are the named trustees and beneficiaries still alive and capable?

8. Research when your stock-based compensation might expire and what stock awards you can retain after retirement.

5 years before retirement:

Thinkstock
Thinkstock

With a few years left until your desired retirement date, now is the time to get realistic. Have you saved enough to be able to leave the workforce entirely? Will you want to work part-time, or have to in order to meet your expenses?  “Most people at age 65 now are not going to retire completely, they’re going to do a ‘Part Two’ where they may go back to school or work part-time,” Locker says. “This is when we say, ‘OK, let’s talk about it.’”

Many workers equate retirement with tapping Social Security benefits. It’s your money, you’ve earned it, so why not take it as early as possible? Locker says she spends a lot of time convincing clients not to dip into their Social Security funds too early. “What people don't realize is that for every year they delay taking Social Security after full retirement age, they get a guaranteed 8% rate of return on their money,” she says. “You can’t get that these days.”

  1. Make a list of retirement “needs” and “wants.” If you don’t have enough savings for all your “needs,” make a five-year plan to increase your funds.

  2. Fine-tune your retirement income plans. Review your projected expenses, add up your reliable sources of income and figure out how your investment portfolio will cover the gap.

  3. Run tax projections periodically to make sure you’re taking advantage of opportunities the IRS provides, such as education credits if you go back to school.

  4. Double check your reported Social Security earnings and resolve any discrepancies now. Explore your Social Security claiming options and make sure you understand the timing of applying for benefits.

  5. Ask your HR department about the relationship between your current health insurance and Medicare, as well as what your options are when you reach age 65. Get information about any pension or defined contribution options and any other retiree benefits.

  6. Continually monitor and analyze your asset allocation to make sure it’s the right one for you. Understand whether you should move to a more conservative allocation or continue investing for growth.

  7. Research when stock-based compensation might expire and what stock awards you can keep after retirement. Plan for your retirement date accordingly.

  8. Make sure that all of your estate documents are up-to-date. Verify that your named executors and proxies know your wishes and are willing to act on them if needed.

Have a question about retirement? Ask us anything.

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