Imagine for a second you and your life mate are headed out on a 30+ year journey, one that you had been planning to take for as long as you both can remember. You’ve dreamed about all the places you’re going to visit and the people and friends you’re going to meet along the way.
You know given your age, this will likely be the last, yet greatest adventure of your life with memories and experiences you’ll cherish forever. And vital to the success of this journey will be the confidence and knowing that the hard earned money you saved your entire working life will last the duration of your great adventure called retirement. You also know that once you set sail for the great unknown, there will be no chance for a do-over 10-15 years from now if you failed to properly plan.
Welcome to the world of retirement income planning.
Over the next decade, 10,000 baby boomers, those of us born between the years 1946-1964, will be retiring each day. By all indications, the majority of boomers will be flying blind into retirement. Not only is it scary and often overwhelming to actually conceptualize being ‘retired’, but the thought of sitting down and actually coming up with a smart and strategic plan on how all the pieces of the puzzle are going to fit together once you are officially retired is, for most people, a daunting task.
Whether you retire at 53, 63 or 73, whether you made it to the finish line with under a million or many, many millions, as the famous saying goes: If you fail to plan, you plan to fail. The vast majority of us boomers will need our money to last 30-35+ years, yet we have spent barely any time preparing for this major life transition.
Most boomers will spend more time planning for a long vacation than they will for retirement. And because of this, the majority of boomers will inevitably crash land into retirement, having no clue how much money they can spend each year or how much they can safely withdraw from their investments annually.
Inspired Retirement Planning
There’s an alternative approach to keeping your head in the sand or crash landing into retirement that I refer to as inspired retirement planning. Inspired retirement planning is part art, part science.
The art involves a more soulful, holistic approach to preparing for this long journey. It starts with going on a discovery mission and understanding what each of your hopes and dreams are for this new and exciting phase of your life. It’s treating the two of you as individuals, with unique needs, and finding the common ground that enables you to co-create a new life plan that truly inspires both of you.
The science involves the nuts and bolts of managing your money, and it’s this aspect of retirement income planning that’s usually the most challenging for people to deal with.
Below are five tips on the science part to help you make this transition to retirement a lasting success.
Retirement Income Planning Tips
1) When forecasting investment returns during retirement, play it ultra-safe. This is by far the number one mistake most people make when using retirement calculators found on the web. Instead of choosing a 7-9% expected annual return, choose a more conservative (and realistic) 5% annual return instead and plan accordingly.
2) Design a safe and durable retirement plan by withdrawing 4.5% of your nest egg annually. Just like you played it safe with your forecast of investment returns during retirement, plan the same with your retirement withdrawal strategy. Of course, once you reach retirement, you may indeed be able to alter this strategy, but for now, make the numbers work with a 4.5% annual withdrawal rate. Increase the total annual withdrawal amount by 3% annually to keep up with inflation.
3) Understand you will need to take some risk to maintain your purchasing power. Wouldn’t it be nice if treasury bonds were paying 8 or 10% like they were back in the day. If that were the case, retirement income planning would be pretty easy. But in this unstable, volatile economic environment, one of the biggest risks you’ll face is maintaining purchasing power over a 30+ year time span. This means you need to have a lifestyle sustaining income. Remember, every year, everything you need to buy will cost more, so when designing your investment strategy be mindful that over every 30 year period in American history, equities are the only asset class that have always increased income more than the cost of living.
4) Be nimble, flexible and never assume anything. Making your money last for your lifetime is about accepting how many X factors are out of your control. Yet the one thing fortunately you can control during your retirement years is spending. Never assume the markets will behave the way you hope – your best course of action is to stay nimble and be quick to adjust. Know that the retirement plan you designed is dynamic and can swiftly adapt to new realities. When all else fails and markets produce unpleasant returns, reduce spending quickly. It is one of the few variables we can control.
5) If it sounds too good to be true, it usually is. With the demand for retirement planning services currently far outstripping the supply of talented and ethical financial planners, many smoke and mirror games are being played with people’s lives. A financial salesperson masquerading as an advisor may try to assure you that you can withdraw a much higher amount from your savings each year than is prudent and a promise that your returns will be in the double digits over a 10-year period. They may advise that you not listen to your fee-only financial planner who they will insist is far too conservative.
Please, absolutely remember; when it comes to finding and trusting a financial advisor with one of the most important aspects of your life, seek out not only a fee only financial planner, but one that works on a fiduciary basis. That way you can be assured the advice you’re receiving is in your best interest, not the best interest of the salesperson.
You can access Zen and the Art of Retirement Income Planning - Part One here.
Image credit - http://www.flickr.com/photos/filicudi/