You made it to retirement! Now what?
How do you plan to pay all the expenses you’ll have for the rest of your life? This can be a daunting task. Many retirees simply open their monthly statements, check the balance, and hope that it’s enough. Hope is not a plan. Those with a plan will have better options and more choices regardless of what happens in the next twenty or thirty years. The outcome will be impacted by many known and unknown variables between the beginning and end. An effective retirement plan will require some time, effort, optimism, and a realistic view of the future. Most importantly, you’ll need to stick to the plan to make it effective and be prepared to adjust along the way. So, where to begin?
Step 1: Essential Living Expenses
An effective retirement plan begins with an understanding of spending, not your savings. It’s helpful to start with the expenses you require to meet your basic needs. If you begin here, you’ll use this number as your fallback budget when times get really tough, and markets are tumbling. Once you have that number, begin your plan and add in an inflation factor somewhere between 2% and 3% to start with. Before 2022, that was the most recent ten-year average.
Step 2: Medical Expenses: Pre- and Post-Medicare
The cost of private health care before Medicare often throws a wrench in the plan for early retirees. Remember to understand your options and be realistic about the costs here. Be sure to plan for insurance, and routine medical care including preventive medicine, dental, vision and hearing. Make sure you have enough cash on hand to cover the maximum out-of-pocket cost. The inflation factor applied here will need to be twice that of regular living expenses. Long-term care and home health care should be considered, at least as a contingency. This can be planned for by reserving some funds, or planning to liquidate assets.
Step 3: Lifestyle Expenses
Plan to enjoy your retirement and consider what these lifestyle expenses will be. Planning this as a separate line item allows you to adjust along the way. After good years in the market, you can bump up this spending level and plan to cut back in the off years. Some planners refer to this as the “go-go, slow-go, and no-go” phases of retirement. Plan for more activities early on and realize life will naturally slow down over time.
Step 4: Income & Withdrawal Planning
Once the initial spending plan is laid out, it’s time to check it against your income and your assets. You can’t spend any more than your income and a sustainable withdrawal rate can support. That’s the real key to retirement planning and it is the point where sophisticated software can help with the forecast. The financial planning professionals may have an edge here using the latest software. Generally speaking, you could plan on spending your annual income plus a starting withdrawal of 4.5% or so from a moderate portfolio.
Step 5: Asset Management
If you are withdrawing 4% of your initial account balance every year, the other 96% needs to be positioned for income and growth to offset inflation. Asset management requires an allocation plan, diversification, rebalancing plans, and tax planning. It’s a good idea to get advice on all of this if you are not sure how to do it. This is where a professional portfolio manager, ideally a fiduciary, will earn their fee.
Step 6: Contingency Plans: “What If’s”
Having a contingency plan within your retirement plan will give you the flexibility and choices you’ll need to prepare for the unexpected. Having an emergency fund in retirement is just as important as it was before retirement. If you happen to need a new A/C and a new roof in the same year, you can easily drain an entire year’s withdrawals and upset your allocation or tax plan. Sometimes, the unexpected expenses come from under someone else’s roof. Stay in touch with your children and your parents to keep an eye out for times when you may be called on to help.
Step 7: Review & Repeat
Once your plan is in motion, your work is not done. You need to review it at least annually. Back-test your expenses to your budget and update your withdrawal plan. Is the market up where you can take out a little more next year, or is it down and it’s time to cut back a little? Make sure your investment plan adjusts to any changes in your withdrawal plan.
Managing your finances with a lifelong perspective is much different from the month-to-month planning that gets you to retirement. Even if you are a DIY investor, consider talking with a financial planning professional for input. Financial advice is worth paying for if it leads you to a better outcome. Establishing a plan early in retirement will help ensure it feels like a long-term vacation, not old age unemployment.
About the Author
Vice President, Senior Trust Officer
Rich utilizes more than 30 years of experience in banking, finance, and investment management to help ensure his clients achieve their desired financial objectives for themselves and their heirs.
Investments are not a deposit or other obligation of, or guaranteed by, the bank, are not FDIC insured, not insured by any federal government agency, and are subject to investment risks, including possible loss of principal.