Life Events Guide

Retirement Planning

Planning for retirement is best treated as an ongoing process rather than a one-time life event. Ideally, you should start early in your working career: the sooner you start saving for retirement, the more time your investments have to grow by compounding. However, it is never too late to start planning. Whether you are 25 or 60, some basic retirement planning should serve you well. While a Certified Financial Planner can probably analyze your situation more efficiently than you can on your own, the following notes and resources can help get you started on this important matter. These notes certainly scratch the surface of what is involved in a comprehensive retirement plan.

Plan Checklist

Financial planning has to do with quantifying in terms of specific times and specific dollar amounts where you are, where you want to go, and how you propose getting to where you want to go. For retirement planning, here are the basic steps:

Step A — Present circumstances: Evaluate and document your present circumstances
Step B — Goals and assumptions: Set income goals during retirement and assumptions about inflation and investment returns
Step C — Devise action plan: Determine what actions are required to go from your existing circumstances in documented step A to the desired goals specified in step B.
Step D — Implement action plan: Act, save, invest!
Step E — Monitor and revise: Periodically review progress and return to step B

Step A – Present Circumstances may be the hardest for most people. To get a complete picture of your present circumstances, you have to gather your personal financial information and organize as follows:

1. Personal Budget
2. Personal Net Worth Statement

Click to download the forms shown above to help organize your information. Or, you may want to try Quicken Financial Planner or Microsoft Money. These products are available from Quicken and Microsoft respectively, and offer a fairly complete system to organize your information.

3. Estimate retirement income from Social Security and Pension plan(s)

You will want to collect information on your anticipated retirement income from Social Security, the Pension Plan, and any other pension plans which may apply. Social Security is now sending out annual estimates of your future benefits. You can also click here to get a “quickie” estimate of your Social Security benefit. To get an idea of your benefits under this Pension Plan, contact the Plan Office with a request for an estimate of the benefit you have already earned.

Step B – Goals and Assumptions presents another difficulty. To set goals realistically, you need to set two specific goals and make three assumptions about the future.

GOALS:

1. State the specific month and year when you want to retire,
2. State in current after tax dollars what your expenses are likely to be (don’t forget travel, hobbies, kids, grandkids, medical expenses, and long-term care costs).

A rule of thumb used to be that you need 60%-80% of your current income to maintain the same lifestyle in retirement. Many planners are now suggesting a higher percentage, due to a variety of factors: retirees are more active (spend more money) than in previous generations, medical inflation rates continue to outpace general inflation rates, and long term care needs are not anticipated to be met by family or the government.

And look in your crystal ball to foresee:

ASSUMPTIONS:

3. how long you (and your spouse) will live in retirement,
4. how much your investments will earn,
5. what inflation will be.

Be careful, unrealistic assumptions will usually yield wacky results. Most planners use conservative assumptions based on long-term historical rates. For example, they might use 4% as an assumption for the annual inflation rate, 10% as the investment return for stocks, and 6% investment returns for bonds. These assumptions work O.K. for long-range planning, but they are worthless for time horizons of under 5 years. The longer the period which is being estimated, the more accurate these assumptions can be expected to turn out. If your estimates produce unrealistic results, go back and review your assumptions.

Step C – Make a Plan requires a lot of number crunching. In this step you take all the numbers showing where you are, calculate all the savings/investment buildup until retirement, and calculate all the spending during retirement for the length of your expected lifespan.

It is possible to work out rough estimates with pencil and paper. If you are so inclined, you might create an Excel spreadsheet. Most people find it is easier to use one of the software packages mentioned above. Or they use an online retirement planner such as is available form Schwab, Vanguard, Fidelity, and many other financial websites. But beware, the planning software on these sites will often produce widely different results. This is because they ask you to input your information and assumptions in differing ways; each planning software also has its own assumptions which are not always apparent to the user. You may also want to get the help of a financial planning professional, such as a Certified Financial Planner (CFP). Fitting together the probable outcomes based on all this input is an area to which you will want to dedicate some considerable attention.

Your calculations should result in a number — how much to save each month, and an asset allocation — what investments to put your savings into. That is your action plan.

Step D – Save and Invest is easy!

Start (or continue) saving.
Reallocate your existing investments and make new investments based on the asset allocation you have determined.

Step E – Monitor and Revise

At least annually, review your progress towards your goals.
Reevaluate your current circumstances as applicable.
See how well the chosen assumptions fit real life results.
Consider rebalancing your investments to maintain your asset allocation.
Make changes to your assumptions and plans as necessary.

BONUS STEP — ONGOING EDUCATION

As the world changes, so does the standard thinking regarding retirement planning. From Money and all the other financial magazines, the Wall Street Journal, hundreds of financial websites, and self-help financial books, there are vast resources available to you. As the economy changes, your Pension Plan changes, Social Security and Medicare rules change, stay informed. This will allow you to take your best shot at arranging for a comfortable retirement.

You can check out this publication, a Financial Warmup, offered by the Department of Labor and the CFP Board as a starting point for your research.

Also Consider…

Contact the Plan Office if you have any questions.