The 10-Step Roadmap to Retirement

A lot of people think that an advisor’s main job is to help them manage their investments by picking the right stocks and bonds with the highest rate of return.

While that’s important, it’s only a fraction of the value advisors have to offer clients.

I believe that you should focus on things you can control. You never know the direction the markets will go, or who will be elected for the next term in office. However, you can control several other things, like:

  • How much you’ll be spending during retirement
  • When you decide to take your Social Security and pension
  • The amount you set aside for emergency funds

Kiplinger recently published an interesting article that lays out 10 key things (outside of investment management) that can help you get ready for retirement.

I will be diving into them in this blog, while providing simple examples to help you understand better.

Read on to discover 10 things you should keep in mind while building your retirement plan!

1. Know How Much You Spend Right Now

You don’t need to prepare a detailed budget or go through your bank statements to Identify how much you’re spending right now.

There is one place where you can directly look for the information you need – your pay stubs! Most people usually spend whatever shows up in their checking account.

If you had a few thousand dollars in your account last year, and you have a similar account balance this year, guess what you spent? Most likely, it’s the total amount you received through your paychecks.

Another great thing about pay stubs is that they tell you the amount deducted for health insurance, as well as federal and state taxes. This will help you build a picture of what your health and income tax expenses might be in retirement.

So the next time you want to know your spending, you know where to look for it first!

2. Back Out Expenses That Will Decline or Disappear Later

Not every expense that you have right now will carry on to your retirement. Plan accordingly!

Your mortgage is one of the biggest expenses that you’ll probably be paying off early or facing only during the first few years of your retirement.

For example, if your current take-home pay is $4,000 per month, and $1,000 of it is going towards your mortgage, then you don’t need to plan for $4,000 monthly spending for the rest of your retirement. Once your mortgage is paid off, you’ll only need to plan for the remaining $3,000.

3. Determine the Cost of Your Retirement Lifestyle

If you think that your spending will go down in retirement, that’s not necessarily true.

Most people start spending much more on travel and entertainment than they did before. Earlier, you might occasionally go to movies, restaurants, and on vacations. But in retirement, every day is a vacation day!

That’s perfectly fine. In fact, this trend of the go-go years, the slow-go years, and the no-go years is extremely common among retirees, as you are likely going to have a lot more energy during your early retirement years.

If you have planned for such costs well, you can enjoy the big celebrations and the one-time trips without the guilt of spending more than normal. You know these expenses aren’t going to persist throughout your retirement.

After all, the only thing worse than running out of money in retirement is realizing you didn’t spend enough to enjoy your golden years!

4. Get a Handle on Healthcare Expenses

If you are worried about your healthcare costs, understand that it does not have to be a big issue.

Believe it or not, but studies have shown that people aren’t spending as much on healthcare during retirement as they had planned for.

Why? Because as soon as you hit age 65, you become eligible for Medicare. You no longer need to worry about your health insurance coverage as Medicare takes care of most health costs.

Now you may ask, “What about long-term care costs?” It can be a big cost for some people, while others may not need it at all. This makes it a question of probability, where you’ll either need it or you won’t. You can’t just plan based on the “average costs.”

So how do you plan for it? There are multiple ways. You can set aside extra money to cover these costs, use tools like a reverse mortgage, or the best way to solve for a big costs with an unknown likelihood of it occurring –– get insurance.

5. Do Not Forget About Taxes

Tax planning is a critical component of your retirement plan. Not only do you need to know what your estimated taxes are going to be, but also how they might change over the years.

When you’re working, you don’t need to worry much about taxes. They are simply deducted from your salary. In retirement, it’s a lot different.

Some people might think that the best way to plan for taxes in retirement is to consult a professional and get an estimated tax rate.

But remember, you have a lot more control over your taxes during retirement than you might expect. Instead of relying on a fixed estimate, you can take control and optimize your tax picture through proactive planning!

6. Adjust for Inflation

Like healthcare, inflation does not have to be a big deal to worry about.

What we have seen is that people often spend less as they age, naturally adjusting for inflation.

But you still ought to plan for it. All good retirement plans account for the potential impact of inflation so that you can maintain your desired standard of living throughout your retirement.

One of the best inflation hedge tools out there is your Social Security. It goes up with inflation and lasts for the rest of your life! Plus, there are different things you can do to boost your Social Security.

Learn more about Social Security as a hedge against inflation by reading our Blog: Why Social Security Could Be the Answer to Your Inflation Concerns.

7. Prepare an Emergency Fund

The article by Kiplinger mentions that you should set aside $200 – $300 every month as part of your emergency fund.

I believe that this amount is too small to make an impact. When you’re in need of a few thousand dollars, you can always turn to your 401(k) or your IRAs.

A bigger concern arises in situations such as a major stock market crash, which can last for many years. In the meantime, you don’t want to sell your investments at a market low to cover your expenses.

In this scenario, having an emergency fund that has got you covered for 3-6 years is much more beneficial than having a fund that only lasts for a few months.

When we talk about having some money saved outside of the market, it doesn’t necessarily have to be equal to your total expenses for the next few years.

For example, if you need around $80,000 per year in expenses, and you are receiving $50,000 from Social Security and pension, you only need to have an emergency fund that can cover the remaining $30,000. Multiply that amount by the number of years you want to have the fund for – depending on how conservative or aggressive you are in terms of savings.

8. Expect Changes in Expenses as You Age

Retirees usually spend more upfront, less in the middle, and then more again due to healthcare costs.

However, a lot of people might continue spending less if they do not require long-term care. But for others who need it, they might experience a sharp increase in their healthcare costs.

As we discussed before, the best way to plan for it is through insurance. You’ll either need long-term care or you won’t, both of which have significantly different effects on your expenses.

9. Create a Backup Plan

Ask yourself, “What’s the absolute lowest my income could ever be, to help me comfortably get through uncertain times?”

That amount is your floor income.

Then, you need to find a way to secure a fixed monthly income that is equal to or greater than your floor income.

One of the most common ways to do this is through an annuity. An immediate annuity is a tool where you pay some money to an insurance company, and in return, they provide a fixed monthly payment for the rest of your life!

But before you buy such an annuity, understand that your Social Security and your pension are the best annuities you can get. By delaying them a few years, you can also increase your floor income!

Another key thing to keep in mind is that you also need to think about the “survivor gap.” When one of the partners in a couple passes away, the surviving spouse should have a sufficient floor income too.

10. Review Your Expenses

The article suggests that you review your expenses for the previous year to ensure you are sticking to your retirement plan.

While I agree with this idea 100%, I believe you should go one step further and also review the expected expenses for the upcoming year.

If you know that a big anniversary celebration is coming up, or you might need to get your roof fixed, you can plan for those expenses well in advance.

Taking a look at both your previous and expected expenses is a great way to keep your spending in check!

For more such useful information, subscribe to Kiplinger.

If you have any questions regarding any of the above 10 steps, or even retirement planning in general, feel free to reach out to us!


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