3 Phases of Successful Retirement Planning

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By Robert Berger

Successful retirement planning is not one size fits all. Retirement planning for a millennial just doesn't fit retirement planning for a baby boomer who is nearing retirement. There are several reasons planning should be custom fit.

First, there are several economic unknowns for those many years away from retirement. From market returns to inflation and Social Security to Medicare, it's simply not possible to make reliable predictions decades into the future. Second, personal circumstances that affect retirement planning are impossible to predict. Whether a couple will remain married and whether the mortgage will be paid in full at retirement are just two examples of unknown outcomes for those just starting out. And that says nothing of an individual's career path.

However, these uncertainties should not prevent successful retirement planning. Instead, we should adapt retirement planning to our stages of life.

Early birds. For those just starting out, retirement planning is generally the easiest. There's no need to evaluate whether you are on track to meet your retirement goals because you are just starting. While assumptions can be made about future inflation, market returns and expenses in retirement, such guesswork 40 years or more into the future is of limited value. Further, it's nearly impossible to make reliable predictions about whether your home will be paid off before retirement or what other debt you may have in 2050.

While these unknowns may make retirement planning seem harder, the opposite is true. The one thing millennials do know for certain is how much money they are making today. With that number, it's easy to follow what I call the 10-15-20 rule. Saving 10 percent of gross income for retirement is the minimum, saving 15 percent is the sweet spot and saving 20 percent is a home run.

Mid-lifers. For those in their late 30s to early 50s, retirement planning takes on a few added dimensions. While it may still be difficult to reliably estimate retirement expenses a couple decades into the future, mid-lifers now have more information to evaluate. For starters, we can now assess whether an individual is on track with their retirement savings.

My favorite tool for this exercise is investment adviser Charles Farrell's money ratios. %VIRTUAL-article-sponsoredlinks%To replace 80 percent of pre-retirement income, Farrell believes one needs to have amassed 12 times annual income in savings by retirement. While we should not accept a financial rule of thumb uncritically, the 12 times your income objective seems reasonable. To reach the 12 times income goal at retirement, Farrell calculates that one should have saved 1.4 times their annual salary by age 35, 2.4 times by age 40, 3.7 times by age 45 and 5.2 times by age 50. With this information in hand, one can make mid-course corrections in their retirement savings.

In addition, mid-lifers know more about their debt. They may be able to estimate if they will have paid off the mortgage and other debt by retirement. They likely have a better idea of the trajectory of their career and income. Mid-lifers also know how they handle finances and investing, both key factors in successful retirement planning. In addition, personal circumstances such as divorce or health issues may have a significant influence on retirement planning. While this information may not fit nicely into a retirement calculator, it can significantly shape planning for your golden years.

Near retirees. For those within 10 years of retiring, planning should get far more detailed. Unlike retirement planning 20 to 50 years earlier, near retirees should begin to focus on actual expenses in retirement rather than using income as a proxy. Depending on circumstances, retirement expenses may be significantly less than what a near retiree is earning.

For starters, there is no need to save for retirement during retirement. In addition, many people will have paid off their mortgage and other debts. Other expenses such as commuting costs and raising a family typically vanish during retirement. Those nearing retirement should be armed with the information necessary to finely tune exactly what they will need when they accept the golden watch and punch the clock for the last time.

Those nearing retirement also have a clearer picture of their savings. Whether they have fallen behind or have more than they will need, they can begin to make the necessary decisions in light of their savings. Finally, those nearing retirement have a clear picture of their Social Security and Medicare benefits. While these benefits may change in the future, they are unlikely to change for those in or near retirement.

Retirement planning is not an exact science. However, we can use the information available to us in each stage of life to make reasonable assumptions and choices to better prepare us for our golden years.

Rob Berger is an attorney and founder of the popular personal finance and investing blog, doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing, and the host of the weekly Dough Roller Money Podcast.

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3 Phases of Successful Retirement Planning
Where you live can have a huge impact on your tax bill in ways that may surprise you. Some states are more tax-friendly for retirees than others -- particularly if you are living on a fixed income -- can have a big impact on how much you have left over to spend.

Click through our gallery to see which states qualify as "heaven" and which are "hell" for income tax, pension, social security benefits, sales tax and property tax.

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Next: States With No Income Tax
Don't assume that a state with no income tax qualifies as a tax haven. High sales and property taxes can more than offset the absence of an income tax.

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South Dakota
(N.H. and Tenn. tax only dividend & interest income that exceeds certain limits.)
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Only three states exempt virtually all retirement income (including public and private pension benefits, 401(k) and other retirement-plan distributions, and IRA withdrawals) from state income taxes.

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Five states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, but most of them also have fairly high top tax brackets.

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36 states and the District of Columbia don't tax Social Security.

36 States That Are Heaven
Alabama, Alaska, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin and Wyoming
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The remaining 14 states tax Social Security benefits to some extent.

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Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. (Iowa will gradually phase out its Social Security tax by 2014, starting in 2008)

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