Retirement Preparation: The Critical Financial Components

If you’re choosing to invest in a retirement plan of any sort, then you likely have aspirations of retirement someday; maybe you’ve already retired.

Whether it’s 30 years from now or was 3 months ago, the financial finish line of retirement holds great promise as a reward for decades of hard work and deferred gratification. So it begs the question, “What does it take to retire?”

Many so-called experts have attempted to apply a savings rule-of-thumb to the question of how much money is enough for a secure retirement. Unfortunately, those rules of thumb are not terribly accurate because everybody has very different needs and aspirations in retirement. In other words, it depends. But there are a number of common financial components necessary for successful retirement preparation. We’ll discuss a few of these here, with the intention of showing you the end game, the result of all of your planning.

Components in a successful retirement plan:

Social Security Income – Approximately 39% of the average retiree’s income comes from Social Security. Learning how to maximize your benefits can be a valuable education if you’re nearing retirement.

Pension and Annuities – Accounting for just 20% of a retiree’s income, pensions and annuities once comprised a much larger portion than they do today, and that number is shrinking rapidly as more companies are shifting from pensions to 401(k) plans. This puts the control in the hands of the individual, and also requires a much more active role on the worker’s part to ensure money is actually being set aside.

Income From Assets – This would include 401(k) money, IRAs, brokerage accounts, CDs, bank savings, etc. Approximately 11% of a typical retiree’s income comes from these sources.

Earnings From Part-Time Work – The average retiree either chooses to or is ‘required’ to work part-time to supplement their income, representing a substantial 28% of retirement income. This reality may account for the rise in flexible working arrangements for older people. If retirees want to or need to work, more companies are welcoming them to come on board.

Other – Just 2% of a retiree’s income, this could mean any income not included above.

Once a retiree secures sufficient income to meet their essential retirement expenses, it’s equally imperative that attention is paid to various risks that could threaten long-term security. Those risks include the possibility of a long-term health care need, inflation, loss of spouse, market losses, increasing interest rates and more.

As you can see, there are a lot of components to consider when building a retirement plan. For younger workers, it’s most imperative to establish the habits of regular saving. For an older worker, it’s critical to begin assembling the various pieces to ensure a successful planning outcome. It’s no longer enough to arrive at retirement age and assume all will be well. There are many resources available to aid the aspiring retiree, but the most critical first step is to decide on action.