How and why to make a written retirement plan

written retirement plan

The headline from a recent study caught my eye: “Majority of retirement plans done ‘in people’s heads’ or not at all.”  I think the latter is more likely.  Doing a retirement plan in your head is kind of like reciting Pi out to a hundred decimal places or trying to list off all of the Samuel L. Jackson movies from memory—I don’t doubt that there are people who can do it, but most of us would give up if we tried.

Why?  Because retirement plans are complicated and have a plethora of moving parts.  It’s not just deciding that someday, maybe, depending on how things go, you might just move to the beach.  It’s deciding what (specifically) you want to do, what that’s going to cost, and where that money will come from.  It’s creating a retirement budget and a distribution strategy.  It’s considering things like Social Security, inflation, longevity, sequence risk and dozens of other variables.  That’s more than most of us can calculate and keep straight without bringing pencil and paper (and a computer) into the mix.  Having a few vague plans in your head won’t cut it.  You should have a written retirement plan.  Let’s look at how to make one.

Where am I?

A good retirement plan answers three questions.  Where am I?  Where do I want to be?  How am I going to get there?  Answering the first question is fairly easy.  Just sit down and gather some basic information about how much you have saved for retirement so far.  Add up things like your IRA, 401(k), pension, annuities, cash value life insurance, real estate, brokerage accounts and any other assets or income streams (e.g. Social Security) that you plan to use to fund your retirement.

Where do I want to be?

Next, you need to figure out what you want to do in retirement and what those things are going to cost (a.k.a. Where do I want to be?).  Your plans will drive your income needs, so you need to have a good idea of when you want to retire, where you want to live and what you want to do. All else being equal, you’ll need more money if you want to retire at 60 in Italy to join the semi-pro bocce ball league than if you want to retire at 70 in Omaha and volunteer at the humane society.

So think like a journalist and ask the who, what, where, when and why of your retirement.  If you’re married, go through this exercise with your spouse.  Be as specific as possible.  For example, don’t just say, “I want to live in California.”  Say “I want to rent a 2 bedroom condo in San Diego.”  Don’t just say, “I want to get outdoors more.”  Say “I want to visit all 59 National Parks.”  The more specific you are, the easier it will be to estimate costs.

Which leads me to my next point.  Once you have a good idea of what you want to do, you need to figure out what those plans will cost.  Ignore inflation for the time being.  In other words, if you want to retire at 65 and you’re 55, don’t try to guess what your plans will cost in ten years.  Just do some research to figure out what they’d cost today and you can adjust that for inflation later.

To help outline your expenses, you can download my free Retirement Budget Worksheet.  Go through line by line and come up with your best estimate for what you think you’ll spend each year in retirement.

Quick note: Some of you may be wondering about things like the 80% rule of thumb.  That’s the assumption that many people can get by in retirement on about 80% of their pre-retirement income.  In my opinion, having a specific line item budget is preferable to a general rule of thumb because it will give you a more realistic estimate of your costs.

How am I going to get there?

This is where things get tricky.  There are so many variables involved with the typical retirement plan that you need to bring some expertise and computer power to bear.  If you have the expertise, but just need some help with the calculations, there are a number of online calculators available.  A word of warning, however.  Many free calculators are very basic and make a number of unrealistic assumptions.  To avoid a plan that is “garbage in, garbage out,” be sure to choose a calculator designed to do serious planning.

If you don’t have the time or expertise to do the planning on your own, it’s probably a good idea to hire an adviser who specializes in this type of planning and who has access to sophisticated planning software that factors in taxes, inflation, sequence risk and a host of other variables.  A good adviser will also make sure your plan is comprehensive and covers key areas like savings goals, distribution planning, cash flow management, risk management, pension payouts, asset allocation, insurance, Social Security, Medicare, long-term care, debt and more.  Finally, if there’s a shortfall between where you are and where you want to be, an adviser can help devise a plan to bridge the gap.  There’s obviously a cost associated with hiring an adviser, but you will also likely end up with a plan that is more accurate, realistic and tailor-made for you.

The payoff

As you can see, there is a lot of work involved in creating a written plan, but it comes with a number of benefits.  Done properly, your plan gives context to your financial life.  Gone are the days of just saving randomly and hoping it will be enough.  With a plan, you can know for sure whether you’re on track to meet your goals.  You get clarity and peace of mind.  You get financial security.  You get on the same page with your spouse.  You get a clear vision for the future.  I’ve done hundreds of these plans for clients over the years and I’ve never had someone tell me that they regret doing it.  The payoff is definitely worth the effort.

~ Joe

Photo Credit: Nick Kelly.

3 Responses to “How and why to make a written retirement plan”

  1. Maria July 21, 2016 at 11:36 am #

    Hey Joe,
    Thank you for another great post. Prior to officially retiring a couple of months ago, we filled out your Retirement Budget Worksheet. It was very comprehensive and an eye-opening exercise. Fortunately, in our case, we arrived at the end with less in expenses than income! Hopefully it’s not because I forgot to enter some critical expense…:)

    Anyway, we had filled out other retirement budget formats in the past and yours was way better. Hubby and I have gone over that thing on several different occasions just to make sure its on track. This being our first year in retirement, we are being very cognizant of our expenses and trying to be frugal where we can. Your Budget Worksheet has helped tremendously. Thank you!

    • Joe Hearn July 21, 2016 at 2:50 pm #

      Hi Maria. Thanks for the kind words! Sounds like your retirement is off to a great start. Keep up the good work and touch base if I can ever help.

      – Joe

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