5 Steps to Reducing Stress in Retirement

A guy walks into a financial adviser's office and says, "I've saved $250,000 and I'd like to retire next week and generate $100,000 a year from my portfolio for the rest of my life. Oh, and I want to buy a $50,000 boat."

Without missing a beat, the adviser replies, "That will only work if you live no longer than two years."

The real punchline? It's not a joke. This is a true story. And it highlights a fundamental truth about retirement planning: Many advisers are very good at their jobs, but we're not magicians.

Top Retirement Concerns

When families first walk into my office to talk about planning for retirement, I usually hear these concerns:

• "We're concerned about running out of money even with our modest lifestyle."
• "We're concerned what we're currently doing to prepare for retirement won't work, but we're scared that doing something else will be worse."
• "We're concerned about the volatility of the stock market, inflation, low interest rates, unexpected health care costs."
• "Mostly, we're concerned about living without a paycheck."

Here are five time-tested steps that I've used hundreds of times to help people like you on their path to retire with confidence.

Step 1: Imagine Your "Norman Rockwell"

Picture your ideal life in retirement. Talk about it. Ask questions. "What do we want our lives to be about? What do we want to experience? Whose lives do we want to impact?"

Many couples haven't really thought about this but forming a clear picture in your mind is great for a relationship, and it's equally valuable for your investment adviser.

Your money is a tool to get you where you want to go. It's not the end goal. No one ever tells me, "The most important thing in life is to have a 7% return on my portfolio versus 5%." They care most about family, faith, churches and causes.

Retirement planning should always start by asking, "What do we want our life to be about?"

Step 2: "Stress Test" Your Current Approach

Physicians love to use stress tests to find out critical information about a patient's heart.

Putting your retirement plan through a rigorous stress test reveals critical information about your financial health. The test analyzes what you've done to prepare and what obstacles may prevent you from living your ideal life.

Secondly, it shines a spotlight on areas vulnerable to things we can't control—things that could impact your retirement plan such as a stock market crash or the need for unexpected long-term health care.

No one can control these risks but you can test how they would impact your own retirement plan and also make sure you don't miss opportunities.

Step 3: Design Your "Blueprint"

Your "Blueprint" focuses on the dangers, risks and missed opportunities identified by the stress test, and recommends a fix for them.

For example, in retirement, you have to take some amount from investments every year, but many don't plan how to generate income from investments.

So how do you turn your portfolio into a predictable income stream?

Most retirement plans contain a mix of stocks and bonds; people pull out a certain percentage each year and hope for the best. But a market crash or bad returns can force you to slash spending.

One way retirees and those nearing retirement can solve that problem is to design portfolios more heavily weighted toward dividend and interest payments. Such yield-generating portfolios can navigate big market downturns and still generate enough in interest and dividends to help provide the income you need. Another way to help secure a steady income stream is to use an annuity that pays out over the course of your lifetime.

Make sure you're comfortable with the suggested fixes in this "Blueprint Phase" before signing off on them.

Step 4: Brave The "Build Phase"

Now it's time for action—time to allocate a 401(k) or change the mix of a portfolio. This can be the toughest step for a lot of people because it means making changes, and change can be scary. They're worried they'll make a mistake, and fear can be paralyzing.

When it comes to the "Build Phase" in your retirement planning, ask yourself, "Am I going to do nothing, or am I going to do something?" This is where an investment adviser can help simplify and quantify your options so you can make clear and confident decisions.

Step 5: Adjust and Improve

Schedule reviews with your investment adviser and make sure you evaluate the whole strategy. Too many bankers and stock brokers only ask, "Do you want to rebalance your portfolio?" That's just one part of a retirement plan.

Go back to your "Norman Rockwell." Are you getting what you want? If not, go back to the "Stress Test" and "Blueprint." What could we do better? What changes will help you work toward achieving those goals?

This five-step process is designed to give you as much certainty as possible in an uncertain world.

Many advisers miss the first three steps. They focus on, "What's your risk tolerance," or "How do you want to diversify your portfolio based on your tolerance?" Planning for retirement is so much more.

Develop a broader perspective for your retirement planning. It's your life, your money and your responsibility to consider the whole picture. When you walk into an investment adviser's office, you'll be armed with a realistic and time-tested approach.

And thankfully, it's an approach that won't require you, or your adviser, to perform magic tricks.

Toni Hill is an author, radio host, philanthropist, Investment Adviser Representative and insurance professional. She helps retirees and pre-retirees create sound strategies for their future.

Dave Heller contributed to this article.