The Five Phases of Retirement Planning

Retirement has changed radically over the last several decades in America. Years ago, you expected to work most of your life for a single, large employer and you then count on a pension. "Retirement planning" meant figuring out how to use your free time. Today, in all likelihood you will be living in retirement on money you, yourself, saved. "Planning" means calculating rates of return and deciphering tax rules.

Without question, the core strategy to succeed in having enough for retirement is living well within your means. Keep in mind, there are significant differences in approach depending on your priorities, age, circumstances, income, and tax bracket. One size does not fit all. But generally speaking, you gain more flexibility and choice the earlier you start putting aside funds for retirement.

Explained below are the five phases of retirement planning and the key aspects of good planning to be carried out during each phase.

PHASE I: Accumulation

This period begins when you enter the workforce and start setting aside funds for retirement and ends when you actually retire. When choosing an employer, you should consider the amount the employer will contribute to your retirement savings (if any) or if the employer has a pension plan. If your employer offers a plan, such as a 401(k), 403(b), or 457(b) plan, sign up for it right away and contribute the maximum allowed as soon as you start working. As of 2012, less than a third percent of Millennials participated in plans when they were offered at work, according to Pew Charitable Trusts.

Because you have a number of savings goals (not just retirement) it is tempting to postpone earmarking savings for retirement. However, retirement savings rates for most Americans should exceed 10 percent, according to the Financial Planning Association. The lower your income, the more of it needs to be saved for retirement because low-income individuals will need to live on 90 to 100 percent of their current income in retirement as opposed to 70 to 90 percent for higher-income individuals.

During PHASE I you are also earning credits for Social Security and private pension benefits. The amount you receive from Social Security is calculated on the amount you contribute to Social Security over at least 40 quarters during your working years. If you are self-employed and maximizing deductions to avoid taxes, you may not realize you are also cutting back on payroll taxes which, in part, determine how much you will receive from Social Security in retirement. Typically, private pension payouts are determined by years of service and the last several years of wages.

This initial stage of saving for retirement can easily last 30 years or more. Therefore, it is tempting to do nothing for quite a while. However, because of the power of compound savings (taking the interest earned and reinvesting it along with regular additional contributions) you gain a great deal by getting started as early as possible.

PHASE II: Pre-Retirement

This phase occurs during the final years of the accumulation phase and should begin when you reach 50 years old or are 15 years away from retiring, whichever happens first. Now is the time to get your plan in place, making sure your finances are lined up correctly for retirement day so nothing will be left to chance. If you work for a company with a benefits specialist, arrange an appointment to become informed about the various ways you can convert your employer retirement savings into a stream of income or an IRA. Give yourself time to learn the ropes before you need to make decisions. Also, you may want to research relocating to another part of the country, downsizing, or transitioning to another type of work.

Using a tool known as "scenario planning" can be quite helpful. In this approach, you identify several attractive ways in which you could see your life playing out through retirement. You also list unlikely, but possible, eventualities that would pose serious difficulties. You come up with a plan to handle each scenario. The more "what ifs?" you consider, the better prepared you are for any eventuality.

Start learning about Social Security and your options for beginning to receive retirement benefits. Be sure to factor other income sources into your decision of when to start collecting benefits. Familiarize yourself with the basic forms of Medicare and start getting acquainted with Medicare's rules. You should also start following the news on changes in the law.

Another important task is to understand how to reduce risks to your retirement savings and at what point to begin shifting to a more conservative mix of investments. Contemplate insurance products, such as long-term care insurance, that can help you in retirement. You should consider purchasing long-term care insurance when you are in your 50s and your health is good because premiums may be less. One of the more difficult aspects of this pre-retirement planning phase is thinking about end-of-life provisions. The more openly end-of-life issues and your wishes are explored with loved ones, the more prepared everyone will be when the time comes.

All this takes effort, research and preparation, and all the more so if you are still raising children.

PHASE III: Early-Retirement

This phase lasts from the day you retire until you are 70 years old. For those who do not plan to retire until well into their 70s, the first two tasks of this phase may occur later. A key purpose of this phase is to create a clear communication channel with your family so information can be shared, questions asked and answered, and decisions made in a calm, supportive way. If inter-generational communication around money has not been part of your family culture, it may be useful to enlist the help of a third party to get the process going.

There are three primary tasks during this phase. One is to assess how well your finances are working now that you are using your retirement savings. Do you need to modify your investment strategy? Do you need to make changes in your living circumstances? Have unexpected events occurred that require re-evaluating your approach?

The second task is to fine-tune your income and expense projections. Although the life expectancy of someone who is 60 years old is estimated by the Congressional Research Service to be 83 years old, many financial planners suggest projecting cash-flow out to age 100, just to be safe. This projection, which includes assumptions about growth of savings, inflation, taxes and living expenses, is an important tool in managing your finances and in making decisions.

The third task involves taking into consideration how you will meet minimum distribution requirements from your tax-deferred accounts -- IRAs, 401(k)s, etc. -- when these required withdrawals kick in at age 70. Even if you have not retired by this point, minimum distributions must begin.

PHASE IV: Mid-Retirement

This phase begins at age 70 and lasts as long as you are able-bodied and high-functioning. Despite your good health, it is helpful to begin looking at what steps you would like your family to take should your condition decline significantly. In most cases your ability to make all your own decisions, care for yourself, engage with the world on your terms, and manage your affairs does not vanish in a split second. The loss of abilities is the natural consequence of the aging process and often happens gradually. At the same time, it is our nature as human beings to resist letting go of our autonomy. Even talking about the possibility is avoided. It takes courage to dive into a conversation about giving up and transferring control.

During this phase, it is common that one member of a couple will be the primary caretaker for the other whose health has already declined. If you are that caretaker, communicate with family members and build a team of professionals around you to advise and help as needed.

PHASE V: Late-Retirement

This phase begins when your health has taken a turn for the worse and there is little likelihood of it being fully restored. You require significant help to function day to day. The hope is that by this point all the planning done in prior years makes this transition as manageable and life-affirming as possible. No one knows ahead of time how his or her life will come to an end. It is that uncertainty that contributes to not taking any action. However, if you have done some scenario planning earlier on --- a technique where you lay out and consider a range of possibilities from worst-case to best-case --- then you may have anticipated the course your life is taking. At this point much of the decision-making over your life is either shared or entirely in someone else's hands.