It’s often been said that every accomplishment begins with a vision and a solid plan. Whether it’s an architectural marvel, a business success or personal achievement, the plan outlining where you are and where you want to be (and most importantly, the steps you must take to get there) always comes first. The same rings true when it comes to your retirement planning.
Over the course of my career as a Financial Advisor and CERTIFIED FINANCIAL PLANNER™, I’ve always referred to this plan as a blueprint. After all, you have many pieces coming together, calculations and connections to make, and a structure to build into the future. What I’ve found is that there are eight simple areas to investigate and act upon as we develop your blueprint. In this article, I’ll outline those retirement building blocks to help you make sense of the steps you can take to begin working a successful retirement.
Step 1: Know What You Have
Believe it or not, many people don’t. It seems simple, but think about how many buckets of assets you may have:
- Bank and brokerage accounts
- 401k accounts, some of which may reside with previous employers, or with a financial advisor you may have worked with in the past
- IRAs and other personal retirement accounts
- Homes, cars, boats, jewelry and other valuable assets
- Cash value of life insurance policies
- Business interests
In addition, you’ll also record your known income sources in retirement during this step. For example, include your anticipated social security income, pensions, or other income that you know will be in place upon retirement. On the other side of the ledger, as you consider your assets, you must also account for your liabilities, including any mortgages, credit card debt, student loans, business loans, or any other personal liabilities you may have.
Chances are you may have never taken an opportunity to collect this information and record it all in one place to give you a clear picture. Yet this is an important first step for many reasons:
- It removes the anxiety caused by not knowing. When it comes to your finances, ignorance is not bliss. It’s stressful, and causes unnecessary concerns and potential missteps.
- It eliminates the risk of overspending (due to a false confidence about your financial situation), or the risk of under-spending (due to a false concern that you don’t have enough).
- It allows you the knowledge you need to build a plan moving forward.
Step 2 – Know What You Need and Want
What does retirement look like for you? What kind of lifestyle would you like to maintain, and what are the non-negotiable, required expenses you’ll have to pay each month? To answer those questions, we start with the development of a retirement budget, broken into the two categories of “needs” and “wants.”
Your “needs” may generally include the following:
- Insurance (health, long-term care, real-estate, auto and liability)
- Real estate taxes
- Groceries and personal items
- Debt Service
- Needs of dependent children or parents
For many clients, I find that their “wants” fall into categories such as:
- Travel and entertainment
- Education for children or grandchildren
- Second homes
Once we’ve explored these items, we can prepare a budget and begin closely tracking what you’re spending now, categorize those expenditures, and help you monitor the wants and needs as you get closer to retirement to help you stay on track. It’s a secure and empowering way to approach the process, and gives clients confidence to know there is a plan in place. As a final note, we’ll ensure that we take into account things like inflation, increases in insurance premiums as you age, and fluctuating tax rates.
Step 3 – Build a Portfolio that Meets Your Needs
In general, as we work to build your portfolio, our primary goal is to cover all predictable expenses with predictable income sources wherever possible. The great news is that we have a wealth of options at our fingertips to help accomplish this. As we build, we’ll take the following into consideration:
- Identify the gap between your regular sources of income (i.e. pension and social security) and what you need to cover your expenses. This is what we’ll need to account for in your investments, insurance, and other components that will go into your plan.
- Your risk tolerance and timeline to retirement.
- What investments, and what asset allocation is appropriate for your needs. For example, when and where do bonds make sense, could an annuity play a role, what percentage of your portfolio should be in growth equities?
- What role taxes will play in retirement, as your income needs in retirement will generally be stated in “after-tax” dollars.
- How inflation will factor into your portfolio needs and distribution plan.
As you can see, this isn’t just about your investment accounts. That’s a piece of the puzzle, but many individuals and advisors don’t take the time to pull it all together. Going through this process and doing just that is a key part to helping you create a successful retirement.
Step 4 – Insure against Future Risks
While all insurance should be taken into consideration as we plan for retirement, the one that tends to be top of mind is health insurance, especially for those who retire before Medicare eligibility. There are many steps we’ll take while you’re still working to help address these issues, and others related to your health insurance needs:
- If you do retire early, determine how to fill that gap between end of employment and Medicare. What additional savings or plans are needed to accommodate for this?
- For many, a health savings account can provide a significant way to save funds that grow tax-free, and can be withdrawn in retirement tax-free if used for qualified medical expenses. We’ll explore how to best leverage an HSA for your needs.
- Once Medicare does become available, we’ll help determine what type of supplement is most appropriate.
- Anticipate your long-term care needs and potential exposure. Long term care can cost up to $300,000 to $600,000 over a four or five year period (in today’s dollars) for someone who requires care. There’s a good chance you’ll need it, and when you do, it will typically be twenty years after you retire, meaning the cost will continue to rise over that period of time. We’ll help identify the right type of plan with the appropriate benefits, death benefits for your heirs, or anything else that may be important for your situation.
During this step in the process, we’ll also explore things like disability insurance, annuities, and any life insurance needs you may have.
Step 5 – Establish and Update your Estate Plan
The general goal of the estate planning process is to ensure that, when you pass, the transfer of assets happens in the most efficient way possible and according to your wishes. This applies to everyone with assets. While there are many components to an estate plan depending upon the complexity of your financial situation, I’ve found that the creation of a one-page summary (in addition to the overall, detailed plan) outlining all key points helps clients to make sense of it. Your plan, and that summary, will include things such as:
- Your trusts
- Power of attorneys
- Distribution plan for your assets
- List of those who will make decisions for you if you are unable
This format not only makes it understandable and easy to follow, it also makes annual review much simpler. Remember, this isn’t a document to create and forget. Life happens, kids get older, and your wishes may change as time goes on. We’ll help you ensure that you remain in control of your assets, and strive to make the process as easy as possible for you.
Step 6 – Hire a CERTIFIED FINANCIAL PLANNER™ (CFP®) to Help
As this article has outlined so far, there are many steps, as well as moving parts and pieces, to take into consideration as you assess your situation, your needs, and build your financial plan. The good news is that you don’t have to do it alone. Working with a CFP® helps to ensure you have the right knowledge and experience on your side to go through this process. A CFP® can put things into perspective for you, work to make this an exciting time rather than a daunting task, and will help you look at your situation objectively. He or she will also know the appropriate questions to ask, and present options you may not have considered in the past. In our case, because we at Krilogy serve as fiduciaries, we can bring all of the pieces of your financial picture together in one place, and serve as home base for your plan, even coordinating with your CPA, attorneys, and anyone else who may play a role in your financial life.
Step 7 – Keep It Simple
As I mentioned in the estate planning section of this article, we like to keep things as simple to review and understand as possible. Not only do we present a one-page summary of your estate plan, we also present other parts of your financial world on one-page summaries, diagrams, and other formats that keep the communication of your plan straightforward and highlight the various aspects that may need attention. In these summaries, we’ll cover what matters most to keep you on track:
- Overall net worth
- Goals and progress towards those goals
- Income needs and how you’re measuring against your budget
- Insurance needs
Step 8 – Live Your Best Life
Once you’ve gone through this process, you’ll find that you gain a great deal of confidence to live your best life possible. You can have fun, help others through philanthropy or volunteerism, support family members to reach their own goals, and whatever else your dreams may include. Your blueprint, your financial plan, helps you accomplish this. As a client advocate and CFP®, it’s most fulfilling for me to see my clients reach this stage in which they’re living their dreams, enjoying life and finding the freedom to do what they want without being saddled with unnecessary financial worries. We’d look forward to an opportunity to help you find this freedom, and live your best life possible.