Financial Planning Blog

In Part 1, we covered the first four of ten areas that add significant complexity to retirement planning, making it difficult to do yourself, and a bit dicey to rely on an on-line calculators. Here are the remaining six planning considerations that require flexibility and expertise in the planning process.

5. Retirement spending: On-line calculators often assume that during retirement you are going to spend a certain percentage of your pre-retirement (maybe 70% or 80%) after you retire. While these averages may be OK over a large population, your individual circumstances may be radically different. Some calculators allow you input your own estimate of spending, but usually it is assumed to stay constant in real terms over your entire lifetime. In any case, your spending expectations are a critical assumption and should be carefully considered. How do you deal with "needs" versus "wants"? Are you making reasonable allowances for future medical expenses, including Medicare and supplemental insurance, and potentially long term care insurance? How do you account for the "big trip" every five years, buying the motor home, or helping the grandchildren with college?

6. Social Security: Since Social Security accounts for a sizeable portion of most retirees anticipated income, handling it accurately is critical in projecting retirement income over time. However, Social Security is probably much more complicated than you imagined, and accurately estimating your benefit under different scenarios takes some know-how. And, for those of you concerned about the somewhat shaky state of our nation's finances, you may want to explore how potentially lower Social Security benefits would impact your retirement.

7. Longevity: If we knew exactly how long we were going to live, this whole retirement planning exercise would be much easier. Although dying early is not the preferable outcome for most people, it is much easier to fund a short retirement than a long one. It is the "risk" of a long life, with many years living in retirement that can really stress a financial plan. Unfortunately, many couples plan around an average lifespan, not taking into account the likelihood of at least one living well into the 90's or longer.

8. Long term care: Any retirement plan that does not address the risk of long term care expenses is some manner is incomplete. This may mean choosing to pay for long term care insurance (and including the premiums in your spending projections), explicitly self-insuring by allocating specific assets, or choosing to accept the risks and count on family or the government.

9. Home ownership: For many people their home is their largest single asset, and even if not, it is still a significant part of their net worth. Do you include the value of your home as an asset available to fund retirement expenses down the road? (Remember, you still need to live somewhere.) Do you want the home to be passed down to your heirs, or have it available to tap for long term care expenses? The home is obviously a big consideration that impacts other areas of your planning.

10. Pensions and annuitization: Are you fortunate enough to have an employer provided pension? If so, this needs to be included appropriately in the plan. Will you receive a monthly pension check, or will you get a one-time lump sum payout? Will your pension benefit be indexed to inflation like many government plans, or will it remain fixed and lose purchasing power every year like most corporate pensions? What type of survivorship options will be chosen and how do these impact future income? Even if you don't expect to receive a monthly employer pension check, you have the option to purchase an immediate income annuity--sort of a do-it-yourself pension. Would this strategy help you meet your retirement objectives? Of course, many of these decisions possibly don't need to be made today, but should be considered in the planning process.

Retirement financial projections have many moving parts, many assumptions and difficult computations. Whether you choose to employ a competent financial planner or utilize an on-line calculator, keep your eye on what are the real benefits from the planning exercise. It isn't a fancy financial plan that sits on your shelf, but the big value is in:

• Discussing and setting goals (however tentative) for the future.
• Identifying actions you can take today that help can get you on track to meeting these goals.
• Identifying behavioral changes that you need to make so that you can prosper in life.
• Identifying expectations that need to change in event you are unable or unwilling to make required adjustments.
• Understanding the financial risks you are facing in an uncertain future.
• Having peace of mind that you are adequately prepared for the next phase of life.
• Building the confidence that enables you to make important decisions, take advantage of opportunities and move forward in life.

Those last two points--peace of mind and confidence--are key with so many pre-retirees. Even people who have diligently saved and invested for years in anticipation of retirement want the reassurance and peace of mind that they are adequately prepared. They want confidence they "haven't missed something" and that "they have enough" before they pull-the-trigger and leave their job. When it is time to make these big decisions, the on-line calculators come up short, and it is worth the investment in time, effort, and money to engage a qualified professional.

Just make sure that qualified professional is a fee-only financial planner--one who is a fiduciary and who will put your interests first.