Don’t get me wrong, planning your retirement is a complex endeavor. However, the following 4 step framework is designed to put the myriad details in context and make the process easier and more meaningful without too much financial jargon, detailed formulas, or complicated strategies.
Whether you are using an advisor, or building your plan on your own, these four steps are more easily accomplished if using the NewRetirement Planner, a comprehensive tool that goes beyond savings and investments to help you build and maintain a personalized and reliable plan.
Step 1: Determine What You Need and Want to Spend in the Future
Think about it, you can’t know what you need to do now and the resources required for retirement unless you have figured out how much you want to spend in the future.
Budgeting for your future life is the most important and meaningful part of retirement planning. This exercise focuses you on the kind of life you want to be living and insures that you define what you want to be doing, where, with whom, and what it is going to cost.
- Start with making sure you have documented any mortgage, other debt, medical, and long term care costs.
- For recurring expenses, you can use the PlannerPlus Budgeter to register your proejcted spending in over 75 different categories and subcategories. Or, you can use the Basic Budgeter for spending totals. Be sure to log how any of these recurring expenses will change over time.
- And, be sure to enter any big one-time expenses that you might incur in the future.
- You’ll also want to set your desired retirement date and probable longevity age.
- NOTE: Most taxes are calculated automatically by the NewRetirement Planner.
These are the important factors for starting to plan your retirement.
Step 2: Establish Your Retirement Income Sources
So, once you know what you want to spend, it’s time to figure out how you are going to pay for that future. To do this, you’ll want to document your income and savings.
It is important to document all of your income sources and when each will start and end. Possible income sources include:
- A pension if you have one
- Social Security
- Any work income you might earn from a retirement job
- Passive income from real estate investments, hobbies, or other sources
- Your savings and investments and the rate of return on those accounts so that the system can calculate the future value of that money
- Annuities you have purchased
- Any potential windfalls like an inheritance you might receive in the future
- If you plan to downsize or otherwise release home equity to help fund retirement expenses, you may want to document this future move
- Any sales of assets like a car or second home that would occur in the future and be added to your savings and investments
Step 3: Determine if You Have Adequate Resources to Cover Your Retirement Spending
Now comes the moment of truth. Given everything you know and are doing now, do you have enough resources to cover the amount of spending you desire? (For you and your spouse and any other family members who you want to support in some way.)
You want to look at a variety of analyses in your Insights Library, including:
- Chance of success score
- Lifetime income projections
- Cash flow analysis
If you can’t cover your expenses, you’ll want to revisit steps 1 and 2. You can adjust either your spending, savings, or income sources until you can cover a level of spending you are comfortable with.
If yes, you’ll want to move onto step 4.
Step 4: Protect Your Future from Potential Risks
Being able to cover your known expenses is a huge step toward the future you want, but your plan isn’t done yet. Now you’ll want to take steps to control for risks to your plan.
From inflation and stock market crashes to personal health crises and natural disasters, there is a lot that can go wrong. Your savings and income could go down and expenses could could go up.
The good news is that you have many options to protect your finances. And, the NewRetirement Planner can help you understand many of them. You’ll want to:
- Review your Chance of Success
- Use Scenario Comparisons to compare your Chance of Success and many other metrics under optimistic, pessimistic, and average assumptions
- Review the Monte Carlo analysis that runs 500 potential rate of return scenarios and determines the potential value of your savings
- Take a close look at your longevity age and make sure that you are planning for your maximum longevity
Most importantly, explore key risks that may impact your security. Review 21 things that could go wrong and what to do about them.
BONUS, Step 5: Optimize for Greater Wealth, Spending, and/or Security
Finally, you can optimize your plan to maximize your security, wealth, or spending.
There are a wide variety of financial strategies and products that can strengthen your financial plan in a way that is right for your goals and what you value.
If you have your expenses covered and have a reasonable plan for risks, then you may want to optimize your financial plan for:
Greater Wealth
With everything covered, you may be able to take more risks with investments in order to grow your net worth.
Or, perhaps you want to reduce your expenses by limiting the taxes you pay through Roth conversions or other tax strategies like investing in HSAs, 529s, charitable giving, and other ways to reduce taxes.
More Spending
If you have excess money after covering the expenses you’ve documented, you may want to splurge. Many retirees boost their travel budgets. Others opt to spend on children and grandchildren.
Some retirees have the goal of spending their savings and assets down to zero by the time they die. If this interests you, try the maximize spending option under Money Flows > Withdrawals Strategy.
Added Security
Protecting your lifestyle from any possible risk is a goal for some retirees. Strategies include:
- Guaranteeing adequate income for as long as they might live (no matter how long that turns out to be) through the purchase of lifetime annuities. Learn about annuity pros and cons.
- Maximizing insurance for all aspects of life
- Planning carefully for long term care either through insurance, purchase of an annuity, or funding through savings or the sale of a home. Explore long term care insurance costs and look at long term care insurance alternatives.
- Diversifying income and investments – maximizing the number of different types of accounts and money that is available to use under different circumstances
- Having more than adequate cash on hand for emergencies
