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TAKEAWAYS:

• Follow a structured process to build a retirement plan that covers income, healthcare, taxes, and lifestyle needs.
• Start early and adjust regularly to stay on track as life, markets, and priorities evolve.
• Work with retirement planning specialists to avoid common pitfalls and align your plan with your long-term goals.

The Goal of Retirement Planning

Assuming you’re near or in your retirement years, one of your greatest concerns might be making sure you have enough money to live on for the rest of your life. As retirement planning specialists, this is what we aim for when we do retirement planning for clients.

Ultimately, the goal of retirement planning is to develop an optimal strategy to convert retirement assets into sustainable income however long you live, without overspending or underspending so you can live a life of maximum contentment and happiness. Following a proper retirement planning process will give you the best chance to achieve this goal without fear or regret.      

It may surprise you there is no universal, generally accepted way of conducting retirement planning. The quality of the retirement planning process, deliverables, and experience can vary significantly from one financial advisor to another. Financial advisors who specialize in retirement planning services can be hard to find, especially if you’re looking for a flat-fee financial advisor who won’t charge you a percentage of your assets.

So here, we outline the eight steps to retirement planning that we, as retirement planning specialists, have been successfully using to help individuals retire without stress. You can use these as guidelines for your own retirement planning process.

Looking Back at Retirement Planning

Retirement planning is still a relatively new field within wealth management —especially in the area of generating retirement income. Therefore, a typical financial advisor is usually not a specialist in retirement planning. The wealth management industry traditionally focused only on accumulating assets without applying further thought to the differences that happen after retirement.

As a result, financial advisors often think of retirement planning in an overly simplistic way that usually consists of employing some form of the following ste

1. Ask you for your goals, usually expressed as a withdrawal rate on your investment portfolio.
2. Ask you to fill out a questionnaire to measure your risk tolerance, most likely relating to only one of the five risks retirees face -- investment risk.
3. Based on the results in steps 1 and 2 above, they recommend some asset allocation mix of stocks and bonds (say 40% stocks and 60% bonds, for instance).
4. They then run a Monte Carlo analysis programmed with some unknown set of assumptions, based on an impressive-sounding 1,000 simulations, and then print out some 50-page report full of data that would show you that you have an xx% chance of succeeding.(Here’s why you shouldn’t base your retirement plan on these pass or fail scenarios.)

Thankfully, retirement planning has come a long way in a short time. However, it is unfortunate that far too many financial advisors still follow some form of this woefully inadequate process and call it retirement planning. There are a number of potential reasons why many financial advisors have failed to progress. For more on those reasons, refer to Thrive Retirement Specialist's Guide to Choosing a Financial Advisor..

How to Plan for Retirement Using a More Realistic and Thoughtful Proces

A proper retirement planning process still involves some of the steps and tools above but is FAR MORE comprehensive and ongoing. Further, it focuses on the individual and their vision of what an ideal retirement looks like rather than just on the investment portfolio.

Following is a summary of the steps you should see in a proper retirement planning process:

1). Clarify Your Authentic Goal

The very act of retiring subjects you to four other unique risks aside from simply investment risk, which is traditionally the only risk considered. Those other four risks are 1). spending risk, 2). sequence-of-returns risk, 3). purchase power risk, and 4). longevity risk. See Thrive Retirement Specialists' Insight entitled "Evaluating the Big Five Retirement Risks" for more on this topic.

2). Assessment of Willingness and Ability to Accept Risk

The very act of retiring subjects a retiree to four other unique risks aside from simply investment risk, which is traditionally the only risk considered. Those other four risks are 1). spending risk, 2). sequence-of-returns risk, 3). purchase power risk, and 4). longevity risk. You should take the time to understand your feelings toward all of these risks to which you will be subjected. A proper retirement plan will seek to manage the risks to which you feel averse to a level you find palatable so that you can feel at ease, thereby increasing the probability of staying on course with the plan. Two dimensions of risk evaluation must be measured: risk tolerance and risk capacity. A retiree's risk tolerance is their willingness to accept the risk, whereas a retiree's risk capacity is their ability to accept the risk. Additionally, any emotional constraints should be explored and evaluated here as well.  See Thrive Retirement Specialists' Insight entitled "Evaluating the Big Five Retirement^TM Risks" for more on this topic.

3). Evaluation of All Retirement Assets

A retiree often has far more assets available to them than simply their investment portfolio when it comes to meeting retirement goals. Taking full stock of all of your income sources and assets can allow for a better-constructed retirement plan as certain assets and income tools are better suited for different goals.

An advisor should look beyond just the traditional financial assets to take stock of all available assets that could be considered and utilized, including those under the category of

1. Human Capital
2. Real Estate and Home Equity
3. Financial Assets
4. Insurance
5. Social Capital

See Thrive Retirement Specialists' Insight entitled "Using ALL Retirement Assets to Maximize Your Outcome" for more on this topic.

4). Develop Your Retirement Spending Plan

Your retirement spending plan is a detailed estimate of how you will spend money in retirement to support your goals and ideal retirement vision. It is this plan that will allow you to evaluate trade-offs, now and as you progress through retirement.

The intent of a retirement spending plan should not be to hold you accountable for spending exactly as your plan dictates at a detailed level; rather, it should be to consider everything to ensure you have enough retirement assets and a strategy to meet bottom-line spending needs.

See Thrive Retirement Specialists' Insight entitled "How to Create a Retirement Spending Plan" for more on this topic.

5). Connect Your Retirement Assets to Your Retirement Spending Plan

Once you have a list of all of your retirement assets and know how much money you need to retire, your financial advisor should consider how each retirement asset from your list could become income. The objective then becomes flushing out the details for how each retirement asset income type can combine with available tools and tactics in a way that funds your retirement spending plan without exceeding your willingness and ability to accept risk.  

6). Craft a Sustainable Spending Strategy

The development of a sustainable retirement spending plan is achieved when the trade-offs and determinations made in step five have been tested to show that all spending can be funded by plan assets within a "suitable" probability of success.

The probability of success is measured using Monte Carlo simulation analysis, a tool that most financial advisors and retirement planning specialists have access to. What is deemed "suitable" when reading the outcome of this analysis is based on unique personal circumstances. As part of this test, an initial withdrawal rate must be determined, and a stock-bond asset allocation mix must be selected for the investment-based assets portfolio.

See Thrive Retirement Specialists' Insight entitled "Dynamic Withdrawal Rules -- Higher Withdrawals With Less Risk" for more on this topic.

7). Develop an Investment Portfolio for Investment-Based Assets

What about the money that you’ve saved up that is not in retirement plan accounts like IRAs, Roth IRAs, or 401(k)s? For Investment-based assets to be an effective source of retirement income, the investments must be structured and managed properly. Much value can be gained or lost at this step.

Having a concrete understanding of your financial advisor's investment philosophy and portfolio construction is critical. The difference in investment fees between an advisor practicing an active investment philosophy versus one employing a passive investment approach simply trying to match the market's returns using low-cost index funds can be 1.00% to 2.00% or more. This is a material cost differential, especially given the volume of overwhelming evidence that shows active investment strategies are rarely worth the extra expense. And this is before taking into consideration the high potential cost of not having a maximally diversified portfolio. See Thrive Retirement Specialists' Insight entitled "Total Cost of Investing -- The Easiest of Retirement Optimization Strategies" for more on this topic. Plus, don’t forget that most financial advisors are paid on a percentage of the assets they manage, compared to a flat-fee advisor that is likely to be more objective as they have no conflict of interest.

8). Establish Intervals to Update and Review Your Plan 

While it is a lot of work to get to this final stage of completing an initial retirement plan, it is just the start of your retirement journey. Life will begin to happen, and variables will change. Some can be controlled, such as lifestyle goals and investment expenses, and some cannot, such as health changes, actual market returns, tax code changes, and the realization of unplanned contingencies.

It is important that you and your financial advisor, or retirement planning specialist (click here to learn more about the difference between the two) meet formally on an annual or semi-annual basis to update your retirement plan so small corrective steps can be made in real-time. Sometimes that may mean you can work with more, and sometimes that may mean having to work with less necessitating further trade-off decisions. Still, at least problems will not be allowed to compound and lead to the need to make potentially disruptive lifestyle changes later in retirement.

Do Not Sacrifice Quality of Life While Living

As you can see, a proper retirement planning process is far more comprehensive and ongoing than what is traditionally being done in the name of retirement planning. The traditional route taken by most financial advisors has, in essence, led retirees to believe they have to fund essential expenses, discretionary expenses, contingent expenses, and legacy gift expenses all from the same single source, the investment portfolio. The investment portfolio is also often the only tool that is looked at to manage a retiree's risk, which is why investment risk is predominantly the only risk they consider and attempt to manage through the asset allocation decision. This has led retirees, especially those with higher risk aversions, to place too much emphasis on being overly conservative on their sustainable spending strategy decision. This has had the unfortunate unintended consequence of many retirees sacrificing quality of life while healthy and living only to pass, leaving a much larger than planned legacy.  

Advisors following a proper retirement planning process should be agnostic and consider every tool and tactic available to a retiree. This should include layering in other income sources or risk management tools to provide alternative retirement funding methods that help to de-risk the retirement from an over-reliance on the investment portfolio. The greater the reliance on a market-based investment portfolio, the greater the retiree's exposure to sequence-of-returns and longevity risk. Only focusing on the investment portfolio will not lead to optimal outcomes.  

Advisors following a proper retirement planning process should be agnostic and consider every tool and tactic available to a retiree. This should include layering in other income sources or risk management tools to provide alternative retirement funding methods that help to de-risk the retirement from an over-reliance on the investment portfolio. The greater the reliance on a market-based investment portfolio, the greater the retiree's exposure to sequence-of-returns and longevity risk. Only focusing on the investment portfolio will not lead to optimal outcomes.

Want guidance to ensure you get your retirement planning right and save yourself the stress of worrying about running out of money? Contact one of our retirement planning specialists today.