The First Stage of Retirement Planning

The first stage of the retirment planning is the period when you first enter the workforce and begin setting aside funds for later in your life and ends when you actually retire. A consideration in choosing an employer should be the amount they will contribute to your retirement savings and if they have a pension plan. Sign up for the 401(k), 403(b), or 457(b) plan if offered and contribute the maximum allowed as soon as you start working. In 2007, less than 32 percent of workers under age 35 participated in plans when they were offered at work, according to the Congressional Research Service.

Additionally, this is the time when you earn credits for Social Security and private pension benefits. The amount you receive from Social Security is calculated on the amount you contribute over at least 40 quarters during your working years. When self-employed individuals maximize deductions to avoid taxes, they may not realize they are also cutting back on payroll taxes which, in part, determine how much they will receive from Social Security in retirement. Typically, private pension payouts are determined by years of service and your 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 awhile. 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.

Because you have a number of savings goals (not just retirement) it is tempting to postpone getting started on earmarking savings for retirement. However, it is wisest to acknowledge that the new normal requires retirement savings rates for most Americans to 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.