You should have a written retirement plan.
It doesn’t have to be hundreds of pages long, or even dozens of pages.
But surveys show those who started with written plans were more satisfied in retirement than others.
That’s probably because developing a plan requires you to carefully consider key issues and have reasonable expectations.
The importance of developing a plan is the process requires you to answer crucial questions.
I have stripped retirement planning to its essence and determined the questions that must be answered in your plan.
How long will retirement last?
In other words, what is your life expectancy?
It’s a key question that many people answer wrong.
Your plan will be very different if expectancy is 10 years than if it is 35 years.
Most people underestimate average life expectancy, which can cause financial distress in the later years of retirement. Check online sources to determine average life expectancy for your age group and consider obtaining a customized individual estimate.
If you’re married, a related question is, how long will you live together?
Income and expenses will change after one spouse passes away, and that contingency should be included in the plan.
When will you be ready to retire?
This is a non-financial question. The answer often determines how satisfied you will be in retirement. Age shouldn’t determine your retirement date. Retirement readiness should.
Retirement readiness is a state of mind. It means you are content to leave behind your workplace, including the colleagues, structure, sense of purpose, and activities. You’re ready to spend more time on other activities. One way to answer when you will be ready to retire is by answering the next question.
What will you do in retirement? This also is a sneaky way of determining how much you’ll spend.
Don’t rely on guidelines or rules of thumb. Develop a personalized spending estimate based on your interests and planned activities. Decide the lifestyle you want in retirement, including where you will live, and estimate its current cost.
Keep in mind that spending doesn’t stay the same, adjusted for inflation, year after year.
Most people spend less as they age because they’re less active and have done those once-in-a-lifetime activities.
For most people, spending steadily declines after age 75 or so, though it might increase later in life because of medical and long-term care expenses.
Don’t forget to include inflation in your spending estimates. Most of what you’ll spend money on in retirement will increase in price over time.
When will you be able to retire?
Being able to retire means your income and assets are sufficient to allow you to maintain the desired standard of living. Compare your spending estimate to your sources of retirement cash.
If needed, modify the expected activities to make spending match income and assets.
Financial security and the ability to retire often are enhanced by guaranteed lifetime income.
I recommend that most people have enough guaranteed lifetime income to pay their fixed, basic expenses.
That reduces much of the stress and uncertainty of retirement, and it also makes some people more comfortable investing for higher returns with the rest of their nest eggs.
Social Security is the only inflation-indexed guaranteed lifetime income for most people.
Don’t make a fast decision on when to receive Social Security benefits.
You have choices, and it’s important to optimize the Social Security decision, especially for married couples.
The right choice can add tens of thousands of dollars of lifetime income.
You also should consider buying additional guaranteed lifetime income through an immediate annuity or longevity annuity.
Unfortunately, the retirement date isn’t always in your control.
When you’re more than a couple of years from retirement, your plan should include a contingency that you might retire before you intend because of health or layoffs.
The wildcards in most retirement plans are medical expenses and long-term care.
Their timing and amount are unpredictable.
Many new retirees underestimate these costs and overestimate what Medicare and other government programs will pay for.
The best way to control retirement medical expense spending is to maximize insurance coverage.
Sign up for a Medicare Advantage plan, or join traditional Medicare and add a Medicare supplement plan and Part D prescription coverage.
Your fixed monthly expenses will be higher because of the insurance premiums, but your potential maximum out-of-pocket expenses will be lower.
If you don’t buy the insurance, you should save more and spend less on other things.
You’ll need a cushion in your nest egg for large medical expenses.
For long-term care, most people should use a combination of personal income and assets and insurance. You can choose traditional long-term care insurance, an annuity with a long-term care rider, or permanent life insurance with a long-term care rider.
How will you manage and spend the nest egg?
Of course, you need an investment strategy, and it will have to be adjusted as circumstances change.
The great gap in many retirement plans, though, is the spending strategy. Surveys indicate most people believe they can spend 7% or more of their retirement portfolio each year without the risk of running out of money. But the consensus among financial planners and economists says the maximum safe spending rate is about 4% or even lower.
You need to establish a spending policy. Most people don’t and often later regret it.
Overspending in the early years of retirement leads to financial distress or major adjustments later in retirement.
Develop a spending policy and revisit it each year as the markets and your spending change.
A retirement plan can contain much more than I’ve discussed here. But every retirement plan should answer these questions. They are the essential of a solid retirement plan.
