​A retirement plan rests on setting goals in five areas: income security, housing, reserves, discretionary spending, and bequests. This article illustrates the process.
Financial necessities will no doubt influence your retirement plans. But so will your personal goals. Decisions about how to invest your savings, how much to spend, and whether to buy insurance or an annuity will depend, ultimately, on what matters to you. When planning your retirement, it's helpful to make your goals explicit by discussing them with your spouse or partner, or a trusted friend, or a financial adviser.
Even more important, and admittedly rather hard, is to rank your goals from most to least important.
Of course, life changes, and your goals may change, too. A plan to secure your basic income may rank high as you begin retirement. Later on, stable income may be a fait accompli, and something else, perhaps reserving some funds for medical expenses or financing your move to a retirement community, may rise to the top. Thus, as you prioritize your goals now, remind yourself to revisit them in the future.
At able2pay.com, we recommend organizing and prioritizing your retirement goals in five areas. They are defined below, in no particular order, along with questions you might ask yourself and illustrative answers.
Questions to Ask Yourself. What percentage of your basic expenses do you want to be covered by stable or guaranteed sources such as Social Security, a pension, or an income annuity? If your savings are sufficient, would you accept some fluctuation in your income, perhaps a variable ceiling above a fixed floor?
Possible Answers. A cautious person with limited resources might answer, "I want all my normal living expenses to be fully covered from guaranteed sources." Someone with more tolerance for variation or with ample savings might answer, "I want my fixed expenses, such as rent or mortgage, utilities, and insurance premiums, to be covered with stable income; the rest of my income can fluctuate with the performance of my investments, from which I would like to get some surplus income, most years."
Questions to Ask Yourself. Do you plan to move from your current home, and if so, when? Are you a renter or an owner now, and will that change in the future? If you have equity in your home, what do you foresee happening to your equity? Will it grow untouched, be reduced as you spend it down, be converted to a new place to live, or be preserved to cover expenses that might arise in the future?
Possible Answers. You might simply answer, "I own my home outright and plan to live there indefinitely." Or, "Within a few years, I'd like to sell my home, move to a retirement community, and if possible retain some of my home equity as savings." Other possible answers include continuing to rent your current home or apartment, even as the price may rise, or downsizing your home and redirecting any surplus to other goals.
Questions to Ask Yourself. What unusual expenses might arise in the future that exceed your normal, recurring expenses? Do you foresee home repairs or uninsured medical expenses? If your budget depends partly on income earned by a spouse or partner, what would happen to your income if the spouse or partner died?
Possible Answers. For uninsured medical expenses, you might answer, "I want to keep a medical reserve fund that covers the shortage that Medicare won't cover, plus a couple years of deductibles." Or perhaps: "I want to have medical reserves to cover twice the annual out-of-pocket maximum on my Medicare Advantage plan." If loss of a spouse's or partner's income matters to you, an answer might be, "I want to reserve enough of our joint savings to cover the gap if I have to rely on just one Social Security check."
Questions to Ask Yourself. Is it important to you to spend as much of your savings as you reasonably can? Do you intend to spend more on discretionary items early in retirement than later on, perhaps by traveling more, starting a new hobby, or updating your home? If your investments do better than expected for a few years, would you prefer to save the excess or to spend it?
Questions to Ask Yourself. What percentage of your assets today would you like to preserve for the estate you leave when you are gone? Is there a specific asset, such as your home or a particular account, that you want to set aside as an inheritance? During your retirement, do you want your budget to include a certain amount or percentage to be donated to charity each year? Do you intend to create a trust for your children or other heirs, or to give them a certain gift amount each year?
Possible Answers. If bequests are a low priority, you might answer, "I want my retirement plan to have a target of preserving only enough resources to cover the possibility that I might live longer than expected." Should bequests be a high priority, your answer would perhaps be, "I want to leave 20% to 40% of my current assets as an estate for my heirs," or perhaps, "I want my budget to include an annual allocation of 10% to charities and the maximum annual tax-free gift to each of my two children."