By Michael Torney, CFP, J.D., LL.M.
All of us reach an age at which our thoughts drift away from work and toward retirement. And for many of us, this transition is a great thing. You’ve worked hard and now it’s time to kick back and reap the rewards.
If you’re sure that you’re financially well off enough to retire in comfort, then great! Enjoy it. But for many of us, a financially stable retirement isn’t always on the table. There’s still cost of living to consider; without financial assets to back you up, you might feel worried about how you’ll support yourself in the coming years.
This holds doubly true if you haven’t done any financial planning or have never worked with a qualified financial advisor. It’s hard to know how to handle your assets in a productive way. Financial planners provide much-needed insight into investing and long-term planning.
To help, we put together this guide of questions to ask, factors to consider and pitfalls to avoid during your retirement planning process.
Financial Planning Pitfalls to Avoid
There’s no shortage of retirement planning advice on the internet. You’ve probably seen websites offer free financial planning tools, calculators or “quizzes” meant to assess your finances and tell you what kind of financial shape you’re in.
These tools are fine for a general overview, but keep in mind that they’re one-size-fits-all by nature. In most cases, they’ll have you answer a few basic demographic and income questions and then spit out a generalized retirement age. Clearly, these aren’t the most helpful tools.
Another pitfall to avoid is the so-called “rules of thumb” for retirement planning:
- “Multiply your portfolio by 4% to learn what you can spend in retirement.”
- “Buy your age in bonds.”
And so on. It’d be nice if retirement planning were so simple, but rules of thumb don’t account for what other variables may affect your finances.
It’s important to point out these pitfalls because once you retire, you can’t go back and save more money, even if you end up needing it. That’s why so many people work with professional retirement planners to set them on the right path.
Questions to Ask at the Beginning
One of the most important steps you can undertake on your own is to learn about which financial variables matter in your analysis. At the most basic, you’ll be asking the following questions:
- What assets do you currently own that can be used to fund retirement? How much do you plan to spend each month in today’s dollars?
- What kind of lifestyle do you want in retirement; for how long can your finances sustain you?
To put things bluntly, retirement planning depends on how long you expect to live. While none of us know for sure, we can make a few assumptions based on the above questions.
According to life expectancy tables from the Social Security Administration, there’s a 30% chance of living to age 92 for the average male and 94 for the average female. In the absence of individual health information or family history, these ages are good starting points for planning. For the sake of round numbers, this means we’re expecting around 30 years of life after retirement.
Factors Affecting Your Retirement Plan
The next variable to consider is a spending number. If you aren’t familiar with how much you currently spend, don’t worry. That’s normal. But in most cases, we recommend that you plan for a similar level of spending in retirement as you do now, which means it’s time to start tracking your finances. Use your current spending level as a benchmark to move forward. This is a conservative assumption, but it allows for plenty of flexibility over time – an important part of building a 30-year plan.
Next, we’ll look at your current assets. Typically, we count only the assets that meet certain criteria:
- Assets that are investable
- Assets that can/will be sold for investment
- Assets that produce income
With this calculation in hand, you have all your personal variables figured out. The only thing left is to account for future taxation/inflation rates. This is somewhat murkier, but generally, we recommend going with conservative estimates. It’s always better to prepare for the worst and hope for the best.
Analyze Your Finances to Determine Your Retirement Wealth
With the above calculations done, it’s time to assess your finances with a “Monte Carlo” analysis. This approach, in essence, runs as many as 1,000+ scenarios to see how different versions of events may play out. It’s a system that helps account for the unpredictability of life and the viability of your spending and saving targets.
This provides us a benchmark that may meet your goal, but it may fall either lower or higher than your goal – at which point, we’ll have a conversation about what to do with the surplus or shortfall.
It’s important to have these conversations well before you begin planning for retirement. This gives you more time to plan and to adjust your savings, spending habits or long-term goals. For example, many people simply plan to transfer their wealth and assets to their children after death; but given today’s economic climate, your kids in their 30s may be able to make better use of that money sooner, rather than waiting until their 60s.
Overall, this scenario analysis gives you insight into your numbers and how your on-paper finances translate to real-world action. We suggest re-running this analysis at least once per year to make sure you’re staying on track, even during your retirement.
The Best Time to Begin Retirement Planning Is right Now
There are many things to consider during retirement planning, but like other aspects of your finances, remember the golden rule: The best time to start planning is yesterday. The second-best time is right now.
Take charge of your finances by performing a self-audit with the above questions. This should give you a baseline of your financial wellness. But to really set a structured retirement plan, you’ll need the help of a qualified financial planner. Even if you don’t feel ready to commit to a planning service just yet, speaking with an advisor for an assessment is the best way to start learning more about the steps you should take to secure your financial future.
© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only, based on generic assumptions. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.