Most people, particularly those in or near retirement, are concerned (and for good reason) about what the market performance in December did to their retirement plans. My friends, knowing what I do, ask me, “So, what do you think about the market?”
My answer to them is, “We’re OK, but the kids will inherit less from my retirement accounts if my wife and I are hit by the proverbial bus tomorrow.” In other words, my income is safe and relatively unaffected by market results even as my overall account has slimmed down.
If your New Year’s goal is to “Fix my retirement plan,” this article will give you five steps to accomplish your resolution. You’ll be able to “set it and forget it,” so you don’t have to make it again year after year.
Step One – Find your retirement income potential
As a first step, take a few minutes to determine your Income Power. It’s a simple calculation that shows you how much income your retirement savings can generate — starting at your retirement, increasing over time, and continuing for life. I explain it in full here.
At the same time, update or find your latest Social Security projection. Combine the two for an idea of your potential income. Of course, you’ll need the right kind of retirement plan to reach your full potential.
Income Power example
A female 62 with $2,150,000 in retirement savings looking to retire in six years has the following Income Power:
- Starts at $142,000 per year
- Increases to $255,000 per year at age 85
- Totals nearly $4,800,000 if she survives to 90
- Totals $2,150,000 at a minimum however long she lives
Her Social Security starting at age 68 is projected to be $30,000 per year, so she looks to start retirement with over $170,000 per year in income.
Step Two – Create your retirement budget
Once you determine how much income you expect, it makes sense to figure out how much you plan to spend. Add up your rent, food costs, transportation, insurance and gifts for the kids and grandkids. Here’s a sample retirement expense worksheet.
Don’t forget to plan for unreimbursed medical and caregiver expenses, which can be large, and usually increase as you get older. If you can, create a budget for today and an estimate for 10 years from now.
With those budget numbers in hand, do you have an excess of income over budget? If there’s a wide deficit, take a good look at your Income Power. Saving more between now and retirement can boost your income. If there’s a surplus, maybe with the right retirement plan you can invest some of your retirement savings in something you’ve always wanted but didn’t know you could afford. Or set it up as rainy-day fund.
Step Three – Prioritize the Three L’s
Your retirement plan will need to address your personal objectives since they will drive your investment strategies and other tactics. When you prepare and prioritize the Three L’s – lifetime income, legacy
The Three L’s defined
- Lifetime Income: Will your money run out if you spend at your budgeted amounts?
- Legacy: Will there be money left for children or grandchildren at your passing?
- Liquidity: Will money spent on unbudgeted events or lost in market downturns spoil answers to above?
Thinking through the answers to these questions will help you evaluate your retirement plan. Even with this research and prioritization, you will have to make decisions based on some information that is unknowable: How long will I live? What will the market do over the next 20 years? What unexpected events will challenge even the best retirement plan?
How do you plan with so much uncertainty? The most important thing, we believe, is to educate yourself regarding the differences in how most retirement planning operates.
Step Four – Research different planning approaches
The standard approach recommended by most advisors is to allocate your savings between stocks and bonds and to use a formula for withdrawing amounts each year. Here is a traditional retirement calculator you can play with.
The problem with such “asset allocation/withdrawal” plans is that they rarely are designed to last a lifetime, leaving the retiree with a lot of the risk. And they fail to distinguish between rollover IRA and after-tax personal savings or account for appropriate tax treatment.
Go2income.com has created an income allocation tool that provides more income with less market risk and treats rollover IRA and personal savings differently. Read about Income allocation and how it can increase your income and at the same time make it more dependable.
Step Five – Talk to an advisor
No matter how much you understand these planning methods, you’re likely going to need to speak to an advisor. Just as selecting the type of doctor to see depends on the treatment you expect, so do does
To pursue the standard asset allocation/withdrawal approach, talk to your current advisor or select the firm delivering the online advice. Make sure, however, you discuss your sources of income in the plan and how they are derived from your rollover IRA or personal savings.
If you prefer a new income allocation approach, talk to one of Go2Income’s specialists. We can help you with your Income Power calculation and Income Allocation plans. Once you’re set on your plan, we can also help you find an advisor to provide money management services.
By working at your retirement plan slowly but surely over the coming months, your 2020 New Year’s resolution can tackle something more difficult, like a promise to exercise three times a week.