What is retirement planning?
Retirement planning is a process by which individuals / couples create (and follow) a system of savings and investing in order to have enough money to sustain a desired standard of living when they decide to retire.
What is involved with retirement planning?
When you decide to start retirement planning, you need to decide when you would like to retire and what standard of living you would like to adhere to when you reach your desired retirement age. When retirement planning you also need to take into account how much income you are earning now, and the likelihood of your income increasing until you reach your desired retirement age. When retirement planning, the exact balance of 1) retirement age 2) desired standard of living and 3) your income earning potential during your working years, will vary based on what you want to accomplish for your retirement. For example, if someone in their 50s is just starting their retirement planning and wants to retire with a high standard of living in the next 10 years, he would need to put money into high rate-of-return investments (which are typically accompanied with risk of investment loss) and/or maximize his income earning potential during his remaining working years. Another example would be that a couple in their 20s is starting their retirement planning wants and to ensure that they can maintain a modest standard of living when they reach 75 years of age. In this case this couple might choose to put money into investments that offer minimal risk of losing value, but will grow at a moderate rate over the next 50+ years.
When retirement planning you have to make some assumptions.
When retirement planning you will have to assume your investments will make a certain rate of return. Over the long term, there is no guarantee that any of your investment choices will provide you with a specified rate of return. Financial markets change constantly which affect prevailing interest rate levels and the value of investment products. With the exception of government insured savings accounts and CDs at your local financial institution, your investments always have the risk of declining in value, which could cause you to lose money. For this reason many people use the services of a retirement planning professional to help them make informed investment choices. A retirement planning professional can provide you with long-term historical rates of return on many types of investments, which can help you make an assumptions on how quickly your money will grow. When retirement planning you will also have to assume your income earning potential will either decline, increase or stay the same during your working years. For example, if you are just out of college and are making a retirement plan, you would likely assume that your income will increase as you gain more experience in your chosen profession. Or let's say you are starting your retirement planning later in life, have had the same job for several years and plan to stay with that employer. You might assume that you have reached the earnings peak for your profession and that your income will increase moderately during your working years to keep up with inflation. There are no set rules when making these assumptions, you just have make an honest self-assessment of your income earning potential.
When retirement planning, you have investment choices.
When retirement planning most professionals will recommend that you diversify your investments. Money can be invested in stocks, bonds, mutual funds, life insurance, precious metals, your home or other real estate -- just about anything you want. Investment opportunities that offer a high rate of return are typically accompanied by some risk of investment loss. Investment opportunities that are less risky will typically offer a lower rate of return. Depending on your goals for retirement planning, a professional will help you determine an appropriate mix of investments. While you want to maximize the rate of return on your retirement planning investments, you also want to make sure to minimize the chance that your retirement planning investments lose value.
Since there are many things to consider when retirement planning, it is recommended that you consult with an investment professional to help you with your retirement planning.