There’s no better time to plan things than when you’re officially approaching retirement. But what does approaching retirement mean? And what does it really mean to plan things out?
First, if you’re less than ten years away from retirement and haven’t developed your retirement income plan, now is the time. For many, the idea of making a retirement income plan is as unappealing as a root canal treatment. If done right, it really shouldn’t feel so bad.
The retirement income planning process certainly shouldn’t result in a thick, nearly useless report filled with a bunch of colorful charts and endless pages of numbers. We all know where this type of report ends up.
Instead, a quality retirement income plan should help you do two simple things. The goal is to define a reasonable destination and show you a clear set of paths to get there. More importantly, it must be kept up to date to help you reorient yourself with confidence, as your life inevitably changes.
A retirement income plan starts with three key building blocks; an inventory of your finances, a portrait of how you want to live in retirement and your estimated time of arrival.
The first building block is to take an inventory of your current and future financial resources that will support your retirement years. It starts with tallying your current investments and layering your future savings. But, your future resources could include financial events, such as selling your business or deciding to downsize your home. Of course, your financial inventory should also include your expected social security benefits, any retirement benefits, and even a transition to part-time work for a while.
The second building block is to summarize your projected living costs in retirement. Just forget the bad word, budget. Instead, a nicer term is a cost-of-living summary. It is only an assessment of all your expenses today and after you retire. Ultimately, all expenses are a choice and a cost of living summary is only a reflection of your values and priorities. He doesn’t need to be too specific, but he must be honest.
The third building block is to set your desired arrival time to the point where your work becomes optional. It’s the real working definition of retirement, after all. By the way, this should not be considered an on-off switch. For some people, this can be a transition.
With your financial inventory, cost of living summary and arrival time established, a robust retirement income model can then be created. If done right, it should give you a clear picture of your financial future that deepens your understanding. It’s important to note that any model worth its salt should allow the flexibility to test and retest the choices you make today and tomorrow. Think of it as a living map. It’s much better than a root canal.
Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-based consulting firm, and the founder of Money Series, a nonprofit program committed to providing free access to education financial, for everything. Reach him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com.