2019 New Year's Resolution: Fix My Retirement Plan

Most people, particularly those in or near retirement, are concerned (and for good reason) about what the market performance in December did to their retirement plans. My friends, knowing what I do, ask me, “So, what do you think about the market?”

My answer to them is, “We’re OK, but the kids will inherit less from my retirement accounts if my wife and I are hit by the proverbial bus tomorrow.” In other words, my income is safe and relatively unaffected by market results even as my overall account has slimmed down.

If your New Year’s goal is to “Fix my retirement plan,” this article will give you five steps to accomplish your resolution. You’ll be able to “set it and forget it,” so you don’t have to make it again year after year.

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Step 1 – Find your retirement income potential

As a first step, take a few minutes to determine your Income Power (opens in new tab). It’s a simple calculation that shows you how much income your retirement savings can generate — starting at your retirement, increasing over time, and continuing for life.

At the same time, update or find your latest Social Security projection. Combine the two for an idea of your potential income. Of course, you’ll need the right kind of retirement plan to reach your full potential.

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Income Power Example (January 2019)

A 62-year-old woman with $2.15 million in retirement savings looking to retire in six years has the following Income Power:

• Starts at $142,000 per year
• Increases to $255,000 per year at age 85
• Totals nearly $4.8 million if she survives to 90
• Totals $2.15 million at a minimum, no matter long she lives

Her Social Security starting at age 68 is projected to be $30,000 per year, so she looks to start retirement with over $170,000 per year in income.

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Step 2 – Create your retirement budget

Once you determine how much income you expect, it makes sense to figure out how much you plan to spend. Add up your rent, food costs, transportation, insurance and gifts for the kids and grandkids. Here’s a sample retirement expense worksheet (opens in new tab).

Don’t forget to plan for unreimbursed medical and caregiver expenses, which can be large, and usually increase as you get older. If you can, create a budget for today and an estimate for 10 years from now.

With those budget numbers in hand, do you have an excess of income over budget? If there’s a wide deficit, take a good look at your Income Power. Saving more between now and retirement can boost your income. If there’s a surplus, maybe with the right retirement plan you can invest some of your retirement savings in something you’ve always wanted but didn’t know you could afford. You might fund your grandkids 529 plan at a higher level or invest some of your money in tech stocks you’ve shied away from. Or you might set it up an “as needed” fund for stuff that you didn’t plan for.

Step 3 – Prioritize the Three L’s

Your retirement plan will need to address your personal objectives, because they will drive your investment strategies and other tactics. When you prepare and prioritize the Three L’s (opens in new tab) — lifetime income, legacy and liquidity — you will significantly improve your chances for a successful retirement.

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The Three L’s defined

• Lifetime Income: Will your money run out if you spend at your budgeted amounts?
• Legacy: Will there be money left for children or grandchildren at your passing?
• Liquidity: Will money spent on unbudgeted events or lost in market downturns spoil answers to above?

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Thinking through the answers to these questions will help you evaluate your retirement plan. Even with this research and prioritization, you will have to make decisions based on some information that is unknowable: How long will I live? What will the market do over the next 20 years? What unexpected events will challenge even the best retirement plan?

How do you plan with so much uncertainty? The most important thing, we believe, is to educate yourself regarding the differences in how most retirement planning operates. Which brings us to Step 4 …

Step 4 – Research different planning approaches

The standard approach recommended by most advisers is to allocate your savings between stocks and bonds and to use a formula to determine how much you can withdraw each year. Here is a traditional retirement calculator (opens in new tab) you can play with.

The problem with such “asset allocation/withdrawal” plans is that they rarely are designed to last a lifetime, leaving the retiree with a lot of the risk. And they fail to distinguish between rollover IRA and after-tax personal savings or account for appropriate tax treatment.

Go2income.com has created an income allocation tool that provides more income with less market risk and treats rollover IRA and personal savings differently. Read about Income allocation and how it can increase your income and at the same time make it more dependable.

Step Five – Talk to an adviser

No matter how much you understand these planning methods, you’re likely going to need to speak to an adviser. Just as selecting the type of doctor to see depends on the treatment you expect, so do does selecting an adviser.

To pursue the standard asset allocation/withdrawal approach, talk to your current adviser or select the firm delivering the online advice. Make sure, however, you discuss your sources of income in the plan and how they are derived from your rollover IRA or personal savings. Bring your Income Power report and your Income Allocation plan with you to the meeting.

By working at your retirement plan slowly but surely over the coming months, you can use your 2020 New Year’s resolution to tackle something more difficult, like a promise to exercise three times a week.

We will help you accomplish your New Year’s resolution. Visit Income Power (opens in new tab) and Income Allocation (opens in new tab) to find answers to your questions.