What is a Retirement Plan?

What is a Retirement PlanA person who wants to save for their future may wonder, “What is a retirement plan?” This idea refers to saving money or investing during one’s working years so that there is a stash of money available when the person is living on their Social Security benefits or employer-provided pension. Social Security is not meant to cover a person’s entire living expenses upon their retirement from employment, which is why people need to save for the future.

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Determination of Retirement Income Needs

A plan for retirement begins with a determination of how much income a person will need to live the life they want to live. After a person retires, they may have lower expenses for clothing, transportation, or professional engagement. However, a person might decide they want to travel a lot, which would necessitate a considerable amount of money for transportation and lodging. Planning for retirement involves a total study of cash flow.

Management of Assets and Risks

Planning for retirement also involves the management of assets and risks. Assets include money in a retirement investment account, such as a 401(k) or an IRA. It also involves managing other assets, such as property, savings bonds, certificates of deposit, and more. Planning for retirement also requires a person to manage risks. Every investment has risks. The stock market could crash. Property values could plummet. A property could even become a liability, costing a person more than what it is worth.

Establishment of Savings Goals

Retirement planning also involves the establishment of savings goals. It is widely known that the earlier a person starts to save money for their retirement, the more money they will have. This is due to the compounding of interest. A person could save a lower amount per month or per year if they start at a young age, such as immediately upon graduating from high school or college, and they could end up with as much money or even more than a person who waits until the age of 40 or 50 to start saving for their retirement and who saves a higher sum per month or per year but for a shorter amount of time. Each person’s savings goals will be different, depending on the lifestyle to which they are accustomed living.

Assessment and Reconfiguration of Assets and Goals

Planning for retirement does not end. It is a cyclical process, explains Investopedia. Many different things an affect a retirement plan. For example, the early death of a spouse might change how much a person is able to save for retirement. A chronic illness or diagnosis of a severe health condition could also affect savings and income needs for retirement. A downturn of the economy could cause the value of assets to plummet, which in turn could postpone when a person is able to retire from employment. Any of these things require a reassessment and reconfiguration of assets and goals for retirement.

As Americans live longer but in poorer health, they are going through their retirement benefits at a fast pace. People who do not have enough money to cover their living expenses may find themselves facing a dire situation during what should be their golden years. Knowing the answer to, “What is a retirement plan?” helps a person take action in order to prepare for a financially-sound future.