If you're going to take the leap and make a plan to secure your finances today, and when you pass, you should probably not skip over a plan for retirement. Planning for retirement provides you with security and independence in your later years. And it is the bridge between your current finances and your legacy plan.
But, without a plan for retirement, your plans risk running aground. Retirement is the potential iceberg between securing your current finances and ensuring that you meet your legacy goals.
To create a robust estate plan, we review your financial assets and liabilities. For efficiency in terms of cost and time, it would make sense to take this opportunity to also plan for a secure retirement. The funded ratio provides clients with a pass/fail determination of retirement feasibility. That is merely the first step.
Whereas an estate plan provides you with the opportunity to determine how your assets will distribute, retirement planning begins the process of ensuring that you will have the necessary assets to maintain your financial security in retirement and to distribute to achieve your legacy goals.
The process of how to plan for retirement begins with discovery. We must get to grips with the terrain. That is, what resources do you have, versus your goals. We then estimate the cost of your goals against your expected available resources. After making some initial calculations, we assess whether you are funded or over/underfunded. If you are underfunded, we discuss a variety of strategies to achieving your goals. Regardless of your current funding status, we discuss how to ameliorate common foreseeable risks retirees face. We then determine how to achieve the income you will require in retirement. After testing alternatives, we decide on a plan. We then take steps to implement that plan. Finally, as you move towards retirement, we monitor the plan and adapt to changes.
The first step in creating a plan for retirement requires an evaluation of the present. We must chart a path from today to retirement. To do so, we need to understand your current situation fully.
This information overlaps with the information that we need to create a life and legacy plan. But, instead of focusing merely on your intentions, retirement planning also requires an assessment of your ability to fund those intentions.
Along with understanding the context of your family relationships, we analyze your current financial situation and risk tolerance.
Retirement means different things to different clients. Some clients will never retire. Some will ease into retirement slowly. Others want - or circumstances will necessitate - a clean break with work. By discussing what retirement means for you, we can identify your goals and expectations for your ideal retirement. We will then look forward to your retirement goals.
By estimating the costs of retirement, you can plan forward for how to meet those costs. The process of estimating the cost of a successful retirement depends on your goals. If you envision an active retirement full of travel and hobbies, you will need to add that to your expected retirement costs. Alternatively, if you want to stay at home, you may want to invest in building a life in a scenic neighborhood. In addition, you may have the intention to contribute to the educational goals of your grandchildren. Or, you may want to serve as a resource for your children by providing them with a gift to purchase a home.
In any event, by understanding your retirement goals, we can begin to fund them with available assets.
The estimate of available resources includes current assets and sources of ongoing income. We would add this to your financial capital, which is just your current financial assets (equity in your home, retirement, brokerage and savings accounts, etc.) Income would include your expected income between now and retirement, collapsing into a single value that we call your human capital (the present value of your expected income).
We estimate the feasibility of your ability to fund your goals with your expected asses and income sources from now until retirement. If you are over-funded, you can consider gifting or legacy goals. Alternatively, we will discuss reducing risk and keeping you on a path towards success if funded (i.e., marginally funded). If you do not have the assets to cover your expected retirement goals, we look for ways to overcome your underfunding.
In the case of a shortfall, we would look for ways to spend less and save more. By working a few months more, you can improve your retirement portfolio if you had saved 1% more for 30 years. So you can shore up an underfunded retirement plan by saving longer, delaying the decumulation stage, and reducing the length of retirement all at once. You could also consider deferring Social Security benefits, ways to improve your investment performance, and smarter tax allocation and location decisions. Further, you could consider ways to incorporate your home equity into your plan - either by downsizing or a reverse mortgage.
The decumulation side of the retirement portfolio equation carries unique risks from the accumulation side. By not adding further to the principal (aside from capital gains), the portfolio experiences greater risk in inflation, market, and sequence of returns risk.
Longevity risk is the risk that you outlive your retirement portfolio and can no longer fund your income floor. There are also risks associated with aging. These include rising health care costs, the potential need for long-term care, dementia, frailty, and the potential for financial elder abuse.
Depending on your level of funding, your goals, and your personality, we next choose an income approach.
With the systematic withdrawal approach, we look to achieve your goals through a well-composed and managed portfolio. Depending on market fluctuations and your changing income needs, you would adjust your asset allocation accordingly.
We would look to allocate your short-term, medium-term, and long-term needs into different accounts with a bucket approach. For instance, you might have 3-5 years of cash reserves in an account allocated for an essential income floor. Given that zone of safety, you might feel more comfortable taking more risks in your medium and longer-term accounts. If there is a down year or several down years in a row, you wouldn't replenish your short-term account. This would help you avoid selling low. You would wait to replenish your short-term account when the market turned around. In this way, you would sell high.
With the flooring approach, we would prioritize meeting your minimum income floor first. Adding onto Social Security, we would lock in a guaranteed income floor. We would do this with either a bond ladder or an annuity. With the remaining funds, we could use either of the prior approaches depending on your personality.
At this stage, we are ready to test alternative strategies. With monte carlo simulations, we can measure probabilities of success. Depending on your comfort with the results, we can test different scenarios. We can also measure the existence of a potential shortfall and the magnitude of the shortfall.
In deciding which plan to select, you need to understand the tradeoffs required to achieve success. If you do not understand them or are uncomfortable with them, then the plan isn't right for you. In that case, further discussion may reveal creative alternatives.
Once you decide on a plan, you need to agree to implementation steps and a timeline. And when things change, you should come back to adjust the plan to the new circumstances.
This may sound like a lot. I recommend that you start with the approachable FREE My Blocks resource through my website to get you started in thinking about some of these issues.
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Austin, TX 78738
