10 Commandments of Retirement Planning

Getting to the promised land

When it comes to retirement planning, sooner is always better than later.

Consider this illustration in the importance of time in retirement planning: a 25-year-old who saves $5,000 every year for 40 years will retire with nearly $1 million, assuming a 7 percent rate of return. A 35-year-old who begins saving $5,000 annually will turn 65 with around $472,000.

To get close to $1 million in 30 years rather than 40, the 35-year-old would have to save twice as much as her younger counterpart.

Consistent saving as early as possible is key, but other factors will contribute to the success of your retirement plan. To ensure that you arrive at the promised land of retirement flush with cash, incorporate these 10 simple guidelines into your financial planning.

I. You shall get out of debt

Certain types of debt are toxic to building wealth. High-interest credit card debt can fester in your finances and cost more than can possibly be regained through saving and investing. Still, if you have access to a retirement account at work, take advantage of it. (See Rule V.)

"If it's costing you a rate of interest and you're not getting a deduction for it, that would be the first order of business before you do any significant saving," says Brian Kuhn, Certified Financial Planner at Retirement Planning Services in Millersville, Md.

Mortgages and student loans score a pass due to the deductibility of the interest, but car loans and credit cards can sport interest rates well above yields on aggressive investments.

Pay off expensive debts and then accelerate retirement savings in earnest.

II. You shall have an emergency reserve

Getting out of debt and saving for retirement will be tough if you have to whip out a credit card to cover every crisis. That's why an emergency fund is the cornerstone of every financial plan. The general rule of thumb is to save three to six months' worth of living expenses, but that target can be hard to nail down, says Kuhn.

"We aim for a fixed dollar amount. The fixed dollar amount is whatever number you decide makes you comfortable, like $10,000 cash in the bank," he says.

Pick an amount, save it up and then don't touch it -- until, of course, the inevitable emergency arises.

III. You shall have a budget Budgets are not the most exciting topic in finance, but your budget will underlie all of your wealth-building efforts and keep you on track with everyday expenses and savings.

Just knowing the regular expenses and bills can help pin down where your money is going. There may be some fat that could be cut, which could translate to more savings.

To further increase savings, pay yourself first. Savings, retirement and nonretirement, should be in the category of necessary expenses that must be paid every month, just like water and electricity.

"Our clients that chose to set themselves up with the checking account debits that automatically take money from checking to savings -- those people tend to always have more money," says Chris Reilly, Certified Financial Planner, senior vice president and retirement planning specialist at Firstrust Financial Resources in Philadelphia.

"The people that choose to wait and see how much money they have left over at the end of the year -- the odds are not in their favor."

IV. You shall have a financial plan

Your financial plan will be the road map to retirement.

Don't get overwhelmed, though. "Once you get through some of the basic variables in the beginning, it's really not that hard," Reilly says.

Some of the basic variables include the amount you currently have saved and how much money you'll need to retire.

A rule of thumb is to assume you'll need 80 percent of your current annual income in retirement. Subtract any known retirement income such as a pension or Social Security, and you have the amount you'll need per year in retirement.

According to the Social Security Administration, the normal retirement age is about 66 years. Many financial planners recommend running your financial plan to age 100, which means workers need to plan on financing about 34 years on average.

Socking away money probably won't get you to retirement by itself. That's where wise investing comes in.

Use Bankrate's return on investment calculator to find the approximate rate of return your portfolio needs for you to reach your retirement goals.

The asset allocation of your portfolio will be based on rate of return as well as your time frame and risk tolerance.

V. You shall use tax-favored retirement accounts

The government encourages saving for retirement with special accounts that give you tax breaks.

Funds can be invested before taxes for investors who expect to pay a lower income tax in the future. Or money can be invested after taxes, as with a Roth account, where contributions and earnings can be taken out tax-free during retirement.

Investors can open an individual retirement account, or traditional IRA, or the Roth version. These accounts allow contributions of up to $5,000 per year.

Some employers also offer retirement plans. There are several types of employer-sponsored plans, but the most common is the 401(k) plan. It allows workers to save up to $16,500 per year.

Some companies don't offer retirement plans. Workers do have other options.

"There are non-employer-sponsored retirement accounts, such as municipal bonds, Roth IRAs and annuities -- both variable and fixed," says Reilly.

A trusted financial adviser can tell you if a cash-value insurance policy would make sense for your situation. If you've maxed out all of your retirement-saving options, it may be a possibility.

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