How to Create an Investment Plan for Retirement

by Miranda Marquit · 10 comments

You know that if you want to make it through retirement, you need to plan now. And that planning should involve an investment plan. Your goals and individual needs will be a big part of the kind of investment portfolio you have to get you through your retirement years. Here are some steps to take in order to create your retirement investment plan:

  1. Assess your risk: The first thing you need to do is consider your risk tolerance. This includes your emotional risk tolerance as well as financial. Decide how much risk you can handle, and consider your likely sources of income. Your asset allocation should be based around how much risk is appropriate as you work to build your investment portfolio.
  2. Consider getting help: After assessing your financial situation, you need to determine whether or not you need help making a plan. There are plenty of free online calculators and tools that can help you, but you might feel more comfortable getting professional help. You need to decide, at that point, whether you just need a one-time session to work out a plan, or whether you need long term wealth management help.
  3. Look at your possible withdrawal rate: Think about your expenses now, and estimate your expenses in retirement. Think about your goals, and what you want to accomplish. Figure out how much money you will need each month in order to meet your expenses — this includes insurance premiums, utilities, travel expenses and other expenditures. Most financial experts recommend that you withdraw 4% of your assets in year one of retirement, and then adjust for inflation going forward. But your needs may be different, so consider this carefully.
  4. Consider possible income streams: When building a retirement portfolio, you will need to consider the income streams that will cover your expenses. You can cushion your withdrawal rate by cultivating income streams such as businesses and web sites. You can consider Social Security and any pension or inheritance you might have. Look at your portfolio and determine whether you will need to shift some of your assets into income investments like dividend paying stocks and bonds. Some even purchase an immediate annuity to help provide an income stream, but you should carefully check to make sure such products are best for your situation. A part-time job or hobby can also provide some of the income you need.
  5. Look at your liquidity: Make sure you have an adequate cash cushion in relatively liquid cash accounts such as CDs, high yield savings accounts, money market accounts and some bond funds (if appropriate for your situation). There might be some instances in which you need immediate access to cash.
  6. Remember taxes: Finally, consider the tax implications of your retirement accounts and investments. Some retirement investment accounts, such as Roth accounts, grow tax-free, meaning you won’t be taxed on the withdrawals. Other, traditional, retirement accounts grow tax-deferred. This means your withdrawals, when you make them, are taxed as regular income. You will also have to consider capital gains taxes on other investment accounts. Consider withdrawing from tax-deferred accounts first, or rolling those accounts into Roth accounts and getting the taxes out of the way before taxes rise.

As you begin investing in your future, make sure you put money into tax-advantaged accounts first. You’ll get more bang for your buck this way. Also, as the years progress, take stock of your retirement portfolio, and decide whether your asset allocation needs to be tweaked according to changing circumstances in income and risk tolerance. Many people shift their assets around as retirement approaches, preparing to live off their investments, rather than focusing on growing them.

Once in retirement, it is still important to take stock of where you are at, and make sure that you are spending your money in such a way as to ensure that you don’t outlive your funds.

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{ 10 comments… read them below or add one }

Kristine March 30, 2010 at 11:28 am

Part of the investment plan I have is I invest and finance major purchases using the infinite banking concept. This process utilizes dividend paying whole life insurance as the vehicle to build wealth through cash value and to allow it to grow as my own personal “bank”. The cash value grows at a guaranteed rate, is liquid, safe, grows tax advantaged, and provides wide flexibility. This money is guaranteed during my retirement years, and when I die, provides a death benefit to my loved ones.

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D.L. January 16, 2013 at 6:59 pm

Please explain “infinite banking concept”. I never heard of it. Also never heard of “dividend paying whole life insurance” – please explain aso.
Thanks.

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Andrew March 30, 2010 at 12:06 pm

Wait wait, on the last sentence, shouldn’t it instead say:
“make sure that you are spending your money in such a way as to ensure that you _don’t_ outlive your funds.”
??

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Miranda Marquit March 30, 2010 at 12:26 pm

Good catch. You’re right. We’ll see about getting that fixed. Sorry about my omission :/

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George@Invest-it-Yourself March 30, 2010 at 12:55 pm

If you decide not to get ongoing professional help (step 2), I think it’s important to document your investment plan. I recently updated my Investment Policy Statement – it’s a document that outlines my investing goals, philosophy, target allocation, etc. As a DIY investor, it acts as my bad behavior gatekeeper, keeping me on track and helping me avoid many of the harmful behavioral biases that destroy investment returns.

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Tracy March 30, 2010 at 4:06 pm

I strongly advice documentation too. It helps keep you in check, especially during times of stress. Write down how you plan to invest, with which investments and why so you can refer back to it whenever you feel like you are off track.

Then, periodically, update the plan instead of making changes directly with your investments. You will be glad you do this next time there’s a financial crisis.

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Jonny | thelifething.com March 31, 2010 at 1:59 am

Is it just me or does saving not seem the worse possible way of planning for retirement. You get taxed for the money going in and you then get take on the money coming out. Lets presume one is in the higher taxing band and get taxed up to 50%. Thats half the earned money taxed before it goes in and then 50% on what come out late on. We then pay tax on food, housing, travel and the like.

To me, saving seems like a smucks games, surly better to leverage?

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MoneyNing March 31, 2010 at 9:00 am

Actually, you are either taxed on the way in (via Roth) and then not need to pay tax, or you aren’t taxed up front (in almost all other types of tax advantaged accounts).

For taxable accounts, you are being taxed only on your earnings. For example, if you put in $100 and your account grows to $110, you are only taxed on the $10. Nothing is really taxed twice.

Leverage is a whole other arena, and you shouldn’t compare it to savings. Even with leverage, you still need to save. Leveraging $1000 is still going to give you a higher amount than leveraging $500, given the same amount of risk taking.

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financial management services April 1, 2010 at 4:48 am

Actully I have croosed 35 years of my age. And I am looking for a retirement plan now. Because life is uncertain and atleast from saving point of you I must think for it. How much tax advantage one can have? Which is the best financial service provider in UK these days.

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Belmont Thornton April 6, 2010 at 11:08 pm

Good piece of information for the senior people.Building a retirement corpus is not an easy and short term task.It takes careful planning and advice.The ideal time to start investing is between 25-30 years.Tax implications should also be kept in mind.

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