5 Critical Pieces of a Sustainable Retirement PlanOct 24, 2022
There are very few activities that give my wife and I more of a thrill than heading out to the open road with our big RV. We have always been pretty spontaneous travelers but find that there are a few basic things that really need to be planned, especially in a 42’ rig that is towing our pickup truck.
We’ve only owned it for a couple of years and I’m still a ‘nervous Nellie’ at times. Seriously, you can’t park just anywhere. There’s no way I’m pulling in to the neighborhood convenience store to fill up with diesel. And there are places around the country that I have to be aware of low bridges and narrow streets. With all of that to consider, I like to get some idea of the bigger details. And then things invariably change along the road.
We make specific plans when we build a home, plan a college experience for our kids, build a business, or plan a menu. It amazes me how, without even knowing it, aspiring retirees are so casual about their plans for retirement. Instead, they focus on the purchase decisions of financial products and get lost in the minutia; seldom do they really focus on the most efficient coordination of each of the foundational elements of a solid financial future.
With over 30 years of enjoying the privilege of assisting others with this exciting journey taught me to focus my energy on coordinating the principles, not the products. Following are the Five Critical Pieces of a Sustainable Retirement Plan. Many people retire just fine without specific game plans for each of these areas, but those who do make specific plans in these areas reach the destination with much less stress, and oftentimes sooner than those who just wing it.
The two greatest financial concerns about retirement are:
Will you’ll have enough income?
Will your income will last for both of your lifetimes?
So what is the specific plan for delivering that income over different periods of your life? Which assets will produce income first, which will take care of inflation after the first decade, and from which pot will you buy new cars or help out the grandkids? Identifying which assets you’re going to use at different stages allows you to identify where you allocate risk and where you lock in guarantees. Without a plan like this, most people make decisions out of the fear of not having enough and wind up taking on a lot of unnecessary risk in several of the other components.
Once the plan for current and future income has been established, you can go about the work of removing as many unknowns as possible. Using the income plan as the template in which to drop in an investment strategy can be very liberating. For most of my career, the coordination of these eluded me, forcing me to stick with the traditional stale strategies. By redefining the target – away from rate of return dependence – it allows us to think and proceed with much greater specific intent in our selection of investments.
Do you think taxes are going to increase or decrease over the next twenty years? I certainly don’t pretend to have a crystal ball, but I’d say the current state of affairs in the U.S. are going to dictate much higher taxation in the future. So why would someone retiring in a few years choose to ‘max out’ current 401k contributions today? You may find yourself withdrawing that for living expenses at the price of a much higher tax. From another perspective, what are you doing today to maximize the tax efficiency of the income you’ll need to live on after you retire?
The tax plan has much to do with the income plan as well. If you don’t make conscious decisions to reduce taxable sources of income, you’ll always be at the mercy of the tax man for your cash into retirement.
How will you protect your savings for your spouse and heirs from a myriad of risks? The goal is not simply the legal avoidance of giving your money to the government. There are many aspects that allow you to simplify the transition while providing benefits to your family.
Have you carefully considered the potential costs and come to conclusions about how YOU are going to deal with them? If you retire early, what will you do about health insurance prior to Medicare? What about a potential nursing home stay; how’s that going to get handled? If you are working with advisors who are regularly engaging you in conversations that lead to action steps in each of the following areas, then you’ve truly found a real advisor. Absent of that leadership, you’re probably making purchase decisions – not financial plans.
What plans do you have in place? What other aspects do you think need to be addressed? I’d love to hear your feedback in the comments!