Financial makeover: How to plan happy retirement

When the paychecks stop coming, will you have enough money to enjoy your new stage in life?

In a recent survey by the Federal Reserve, 31% of non-retired respondents said that they didn't have any retirement savings or pension. Worse yet, nearly 20% of those respondents were 55 to 64 years old, highlighting a growing concern that many Americans are ill-prepared for their golden years.

Why should I save?
Gone are the days in which pensions and Social Security served as comfortable cushions for retirement. Thanks in part to an increasingly older population, it's crucial to start preparing for retirement as early as possible, by contributing to 401(k) plans and Individual Retirement Accounts (IRAs)or thinking about alternative sources of income.

If you haven't done so, it's not too late to get started. NerdWallet, a company dedicated to helping people save money, recently ran a Financial Makeover Contestin which winners were paired with financial planners to evaluate their retirement savings plans.

Delia Fernandez , a Southern California certified financial planner, went one-on-one with contest winner Jack. He plans on retiring in the next year or two and wants to make sure that he and his wife will be financially comfortable once he stops working.

The conversation between Fernandez and Jack shed light on several important things to consider when building a retirement fund.

Know how much money you'll need each year
First things first: Fernandez advises anyone thinking about hanging up their boots to begin by determining how much money they'd like to spend each yearduring retirement. Consider health costs, mortgages, insurance, and travel costs. Don't hold back: Include anything that you may need or want to spend money on during retirement.

Now, to see if that annual amount is affordable, examine all possible sources of income, such as pensions, savings plans, assets and investments.

Maximize your pension
Although it would be nearly impossible to rely exclusively on your pension during retirement, it's important to make the most of what you have.

Jack, for example, has two pensions from the two main jobs that he's held in his career. The larger of the two will pay about $300 a month if he starts taking monthly distributions at age 62.

When thinking about how you want to receive your pension, you're probably going to decide between a lump sum distribution and monthly installments.

It comes down to whether both spouses are comfortable managing money, Fernandez says. If so, go with monthly distributions. If, however, one spouse feels like he or she is better at managing money than the other, then a lump sum distribution might make more sense—it would allow the savvier money manager to decide what to do with the pension funds (that is, if and how to invest) while he or she is still in good health.

Factor in 401(k) plans and Individual Retirement Accounts (IRAs)
Ideally, a retiree will be able to withdraw money from his or her 401(k) plan and/or IRA(s) once he or she calls it quits. Regardless of the amount of money in these accounts, the sum needs to be taken into consideration when calculating how much money you'll be able to spend each year during retirement.

It's worth noting that there is an early withdrawal tax and penalty for taking money out of a 401(k) plan before age 59½. If at all possible, keep contributing to your account until you reach that age. After decades of smart, careful saving, you'll want to avoid unnecessary fees whenever possible.

Consider your assets
Along with savings from 401(k) plans and IRAs, assets like houses, cars, and other pieces of property can be great sources of money during retirement.

Jack, for instance, owns two homes and plans to sell one in the coming years. The money spent on mortgage payments could then be put toward something like medical insurance, which can be quite costly. Jack spends about $2,000 a month on medical insurance for himself and his wife.

Be prepared to shake up your investment strategy
Part of enjoying a financially sound retirement is revisiting – and probably revising – your investment portfolio. Retirees are often advised to shift asset allocation toward bonds, which aren't as risky as stocks.

That doesn't mean that you have to stop investing altogether, though.

Jack admits that "almost all" of his funds are in the stock market. While Fernandez says she's "comfortable" with how Jack allocates his funds, she also recommends that he adopt a more conservative investment strategy once he retires. According to Fernandez, Jack "understands the risks he is taking and can manage [his portfolio]."

If you aren't quite as comfortable handling your own investments, a financial planner could go a long way toward ensuring your portfolio isn't too risky.

Anticipate change
It's no one's favorite topic. But it's crucial to set up a trust in case anything should happen to you or your spouse, Fernandez says.

Jack, for example, does not have a trust in place. That means that, if were to pass away within the next year, that house sale would be delayed. Without a trust, this transfer could cost nearly $15,000 in legal fees. With a trust in place, Fernandez says, Jack's wife could avoid these fees and the transfer process would be much quicker.

Building a robust retirement fund is a multi-step process that involves several different moving parts. The sooner you start thinking about it, the better prepared you'll be to relax and enjoy your post-working life.

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