The retirement planning process can yield dramatically different results, depending on who you are and what stage of life you are in. Our firm, Patina Wealth, has done retirement planning for clients who are several decades away from retirement and for clients who are already retired. Most are trying to answer the same question: “Am I on the right track for my savings to outlast me?” That may sound like a strange concept, but in the end, that’s what we all need. We need our money to allow us to live a desired lifestyle after our peak income earning years are behind us.
Let’s explore the various inputs that are used when determining the probability of long-term financial success. Some of the variables you (the client) will have control over, and others you will not. It is important to remember that once a retirement plan is in place, these variables will inevitably change, and, when they do, it is important to adapt and update your plan.
First, the planning process often requires a little homework on the part of the client. Important inputs into the retirement planning process are the amount you are currently saving in a workplace retirement plan, or brokerage account, the current balances in these plans, your projected or current social security income (anyone can establish a social security account and see their projected social security income), your future or current pension income and, if applicable, current mortgage expenses, among others.
The one variable that clients have the greatest control over is spending. When thinking about how spending will impact your retirement plan, try to get a good idea of what that spending number will be once your earned income stops. Factor in lifestyle changes and inflation. This number is easier to estimate as you near retirement. Break out your spending by “needs” and “wants.” Needs are typically what you can’t live without, such as utility bills, mortgage payments, insurance premiums, personal property tax, healthcare costs, groceries, etc. Examples of “wants” could be a certain amount for an annual vacation, a second home or an annual amount for charitable donations.
A big variable in the planning process is when a client wants to stop working. This decision has a major impact, as that is when earned income most likely stops. At this point, the planning software will begin to calculate when the client is likely to start making withdrawals from their investment accounts. Up to that point, it is assumed that all spending is covered by earned income.
Life expectancy is, of course, a variable that we do not have control over. But, when putting together a financial plan, consider your family history. Did your parents and grandparents live long, healthy lives? Or, do you live a healthy and active lifestyle? It’s a good idea to assume you will live longer than is generally estimated in order to minimize any chance of financial challenges.
Another variable that we don’t have control over is what the future returns of the market will be. Whether a client is still in their savings years or is retired, they still need their investment portfolio “working for them.” For example, if a client retires at the age of 65 and then lives until he or she is 95, they will need their portfolio to help cover living expenses for 30 years (!) after their earned income has stopped. Portfolios should be invested in a way that is in line with your risk profile while also achieving goals and maintaining purchasing power. Update your retirement plan when, and if, you have major life changes. One major adjustment would be a job change, as this move typically affects not only income but also savings going into retirement accounts. A physical move can be a substantial change, too, as house or rent payments are typically one of the largest expense items.
In summary, remember that no part of a retirement plan is set in stone. Things will change on the path to retirement, or once you are retired. Inevitably, the market will fluctuate, or your spending habits may change. Perhaps you want to take your family on a big vacation or buy that Porsche you’ve always wanted. Having a plan in place makes it easier to update and see how these changes will impact your chances of long-term success.
