Strategize now to help your financial future

There's no one-size-fits-all approach to retirement planning. Strategies that are appropriate for adults in their 20s or 30s will differ significantly from those for people in their 50s and 60s. That's why it's smart to take a life-cycle approach to retirement planning, says Deborah M. Lavinsky, CRPS^®, CEA^®, a financial advisor in Phoenix, Ariz. "In every decade, there are financial decisions that can affect your future lifestyle. Implementing simple strategies at any age can help smooth out the bumps along the way."

Following is a look at common retirement planning strategies for individuals at four different life stages: early adulthood, middle age, near retirement and in retirement.

- Build an emergency fund. Make your first priority to have between three and six months of living expenses tucked away in a liquid savings account (like a money market account) as protection against losing your job or some other unforeseen financial setback.

 - Save as much for retirement as possible. The first big mistake many young people make is not starting to save for retirement early on. "They think retirement is so far off that they can wait to participate in their company's retirement plan or to start funding an IRA," says Lavinsky. Many financial advisors recommend that young adults "pay themselves first" by putting a certain percentage of each paycheck into a retirement savings vehicle, such as an IRA or a 401(k). (See "Start Saving Early" for more on this topic.) During early adulthood, individuals may be able to be more aggressive with their asset allocation by investing a higher percentage of their portfolio in stocks, since they have a longer time horizon in which to make up potential short-term losses.

- Avoid or minimize consumer debt. Racking up excessive credit card and other types of consumer debt early in life can threaten a financially comfortable retirement. There are many potential dangers posed by too much debt, including burdensome interest payments, damaged credit and a lack of financial flexibility. Also, every dollar that goes to paying down consumer debt is a dollar that can't be invested for retirement.
 

- Protect your assets. Accumulating assets is only one side of the equation. It may also be a good idea to explore insurance options--such as disability and life insurance--as an asset-protection strategy. These may help guarantee your income should you be unable to work because of disability or premature death.

- Get your finances in order. Ideally, wills, trusts, estate plans and durable powers of attorney should be established during this stage. This will help ensure that your wishes are honored should you become incapacitated or die, and that your heirs avoid the hassle and expense of probate.

- Max out retirement savings. These are the peak earning years for most people and present the greatest opportunity to save and invest aggressively for retirement. Therefore, taking advantage of all your retirement savings options can prove beneficial. Qualified retirement accounts provide a dual benefit by enabling your investments to grow tax-deferred, as well as possibly reducing your current income (assuming you meet certain criteria).

- Consider purchasing long-term care insurance. This type of insurance can help cover medical costs in retirement. Every individual must decide for him- or herself whether the cost justifies the benefit. For some people, self-funding health care expenditures in retirement may be less expensive, while Medicare may cover the bulk of expenses for others. Purchasing a long-term care policy before age 60 may result in lower rates, and it may also be easier to qualify at a relatively younger age.

- Take advantage of catch-up provisions. Those age 50 and over can make special "catch-up" contributions to their IRAs and 401(k)s beyond the normal contribution limits. For tax year 2009, the catch-up annual contribution limits are $6,000 for IRAs (compared to $5,000 for those under age 50) and $22,000 for 401(k) plans (compared to $16,500 for those under age 50).

- Investigate Social Security and Medicare. Now is the time to project how much money you may receive from Social Security and to start thinking about your Social Security distribution strategies. Also, investigate what you can expect to receive from Medicare and how this will supplement any long-term care or retiree health insurance coverage you may be entitled to from your former employer.

- Begin adjusting asset allocation. During this stage, it's usually smart to begin rebalancing assets in your retirement portfolio to minimize risk. As you near retirement and your time horizon decreases, preservation of capital and reduced risk become more important.

- Set a budget. As you shift from relying on a paycheck to relying on income from your retirement portfolio to meet your everyday living expenses, it becomes critical to set a budget and stick to it. If you're retired now, then you probably have a sense of what your expenses are, but think about potential future expenses as well. One general rule is to plan on needing about 70 percent of your pre-retirement income during retirement, but Lavinsky says early retirees often spend more than this due to more travel, vacations and entertainment, and the purchase of second homes. "Also, keep in mind that health care costs are often minimal in the early retirement years and skyrocket later," she says.

 - Plan portfolio distribution strategies. A well-planned distribution strategy can help you decide how to take an allowance from your portfolio to meet your living expenses in retirement. Two typical distribution options are: withdrawing a set dollar amount or withdrawing a percentage of your account balance each month. With the set-dollar strategy, the amount of withdrawals is more predictable and may make budgeting easier. However, the percentage strategy gives you more control over the rate at which funds are withdrawn and, hence, the overall drawdown of your portfolio.

 - Consider part-time work. If you find that the numbers aren't quite adding up, you might need to think about working at least part time during retirement. Finances aside, many retirees decide to do part-time and volunteer work in order to stay active and contribute to their communities.

"Everyone desires a comfortable retirement that enables them to maintain their standard of living," says Lavinsky. "If you've worked hard and diligently saved to get to this point, these years can and should be some of the most enjoyable."