Let’s face it, a solid “Retirement Financial Plan” is crucial for your golden years.
Too many high-income earners believe that simply saving money will suffice.
The common assumption is, “if I keep stashing away my earnings, I’ll have enough to retire comfortably”.
If only retirement planning were that straightforward…
If you’re serious about crafting a comprehensive retirement plan, you need to consider unique tax strategies and alternative investments methodically.
Otherwise, you’re taking the “hope and pray approach” to your financial future: making investment decisions haphazardly and hoping they pan out well in the long run.
Luckily for you, we’ve got an approach that nearly guarantees a robust Retirement Financial Plan that aligns with your lifestyle needs and financial goals. Keep in mind this article assumes you have already taken care of revolving debt. It is hard to make much headway on retirement savings or an emergency fund if you have high interest debt working against you.
Table of Contents:
- Understanding Your Retirement Expenses
- Managing Discretionary Spending in Your Retirement Financial Plan
- The Impact of Inflation on Your Retirement Financial Plan
- Creating a Sustainable Pension Plan
- FAQs in Relation to Retirement Financial Plan
- Conclusion
Understanding Your Retirement Expenses
Comprehending your outlays in the context of retirement preparation is not merely significant, it’s essential. Breaking down your lifetime expenses into non-discretionary and discretionary categories is essential for retirement planning. We like to use the categories of needs, wants, and wishes.
If you don’t like the sound of retirement expenses, think of this as your retirement goals instead. You should always start planning with the end in mind (what are your retirement goals) and work your way backwards.
Once we know what we are aiming at, we can start evaluating where we are today and what our expenses and discretionary spending look like.
Grouping Your Expenses into Non-Discretionary and Discretionary Categories
Think of your non-discretionary spending as the basics: living costs, debt payments, taxes, and healthcare. These are the must-haves (needs). Your discretionary spending, on the other hand, is your fun money for things like travel or entertainment. These are the nice-to-haves (wants and wishes).
Accounting for Increasing Healthcare Costs
Let’s face it: healthcare isn’t getting any cheaper with age. That’s why it’s important to account for potential budget-busters like rising healthcare costs in your retirement plan.
So there you have it. A quick rundown on how to understand and categorize your retirement expenses. The next step is to make a plan that covers all bases without leaving you eating ramen noodles every night.
Managing Discretionary Spending in Your Retirement Plan
When it comes to your retirement plan, discretionary spending can be the unpredictable wild card. However, there are ways to tame this beast and ensure that your retirement is financially secure.
The first step is to evaluate the flexibility of your discretionary spending. Unlike fixed expenses such as housing or taxes, discretionary spending is more variable. This means that there is room for adjustment and you have control over these costs. With proper budgeting, you can gain control over your discretionary spending.
Here are some budgeting tips to help you keep track of your discretionary spending:
- Use discretionary income to first build an emergency fund for unforeseen expenses.
- Create a budget and stick to it. This will help you identify areas where you may be overspending.
- Track your spending. Use a spreadsheet or an app to keep track of your expenses and identify areas where you can cut back.
- Be mindful of your spending habits. Before making a purchase, ask yourself if it is a want or a need.
Your next move is to identify potential areas for cost reduction. Rather than depriving yourself of the things you enjoy, aim to find a balance between living well today and securing tomorrow.
For example, you could consider cutting back on expenses such as dining out or subscription services. Every dollar saved now is one less worry later on. Some of you will bristle at this idea (I get it), no one likes to delay gratification….If it were easy everyone would do it!
Finding a suitable equilibrium between spending and saving is essential for maintaining a sound retirement financial plan. By evaluating your spending habits and identifying areas for cost reduction, you can ensure that your retirement is financially secure.
We must get to a point where we have discretionary dollars to be put away into retirement accounts (traditional ira, or sep ira, etc), otherwise the retirement planning process never gets off the ground. If you are struggling to have money left over after all the bills are paid you have two options, spend less or make more.
There’s no secret sauce here.
The Impact of Inflation on Your Retirement Financial Plan
Let’s talk about the elephant in the room – inflation. It’s that pesky little monster that nibbles away at your purchasing power over time.
Understanding How Inflation Affects Purchasing Power
In plain English, inflation makes everything more expensive. Imagine you’re holding a dollar bill today. Fast forward 20 years, and thanks to inflation, that same dollar will buy you less stuff.
It is essential to contemplate the value of $1 in the future when devising a retirement plan. Check out this handy Inflation Calculator.
Any “retirement strategy” that doesn’t incorporate a plan for battling inflation is not a real retirement strategy, its a hope and pray strategy.
Incorporating Inflation Rates Into Future Expense Calculations
You’ve got your expenses calculated? Great. Now let’s factor in inflation. With an average annual rate around 3% (this seems low based on my experience buying eggs, milk, gas, etc) for US consumers, those numbers can add up fast.
If we don’t account for this sneaky thief called inflation while crafting our retirement savings plan, we might end up with a lot less than we thought.
I know what you’re thinking: “But my expenses won’t increase THAT much.” Well… think again. Some costs (like healthcare) tend to grow faster than general inflation post-retirement.
With people living longer and social security slowly pushing back full retirement age, inflation is going to do more damage than you suspect. In fact, if inflation averages 4%, your expenses will double every 18 years.
If you retire at age 65, your 50k in annual expenses will be 100k by the time you are only 83.
If you retire at age 62, your expenses will have doubled by the time you are 80!
For a couple both age 65 there is a 50% chance both will still be alive 16 years later.
Are you healthy? Congratulations! One-third of today’s 65-year-old women in excellent health and about one in four men are expected to be alive at 95.
For those lucky individuals who decide to retire early at age 62, your retirement expenses may double TWICE!
Even the social security administration has done studies talking about the risks of longevity to social security income in general. Longevity and inflation are a one-two punch.
Inflation isn’t something to take lightly. Please with with a certified financial planner TM to get this right!
Creating a Sustainable Pension Plan
Are you a high-income earner looking for unique tax strategies and alternative investments to create a sustainable pension plan? If so, you’re in the right place. Let’s delve into the details of constructing a financial plan for retirement that can assist you in achieving your objectives.
Funding Strategies for Pension Plans
The first step in creating a sustainable pension plan is to identify your funding sources. Savings accounts, investment accounts, employee benefits, or employer obligations can all be potential gold mines for your retirement expenditures.
Diversifying your funding sources is essential to mitigate risk and maximize potential returns. Spread out the risk and increase potential returns by investing across different asset classes like cash value life insurance.
But Matt, you said pension plan! Yes, yes I did.
We like to create a kind of private pension plan through the use of guaranteed income annuities for a portion (not all) of your fixed expenses.
The best source of funds for these privately funded pseudo pension plans will be your qualified retirement accounts. Think 401k, IRA, Sep, simple, 403b, tsp, etc.
For business owners, an old solo 401k makes another great vehicle for a privately funded annuity pension.
These annuities (often we can find products with zero fees that are also indexed for inflation) allow us to cover basic living expenses while investing money that is left over in higher risk vehicles.
Why higher risk? Because you need risk (and we aren’t talking about putting all your money into crypto) to generate a return.
We HAVE to take risk if we are going to outpace inflation. Especially because smart people are living longer, and living longer subjects you to more inflation. Since you are reading this you qualify as a smart person 😉
Guarantees are expensive and risk is free and there is no return without risk.
FAQs in Relation to Retirement Financial Plan
What is a retirement financial plan?
A retirement financial plan is a strategy that outlines your income, expenses, and investments to ensure you have enough funds during your retirement years.
What is the 70% rule for retirement?
The 70% rule suggests that retirees will need about 70% of their pre-retirement income to maintain their current lifestyle in retirement.
What is the 4% rule in retirement planning?
The 4% Rule, also known as Safe Withdrawal Rate (SWR), advises withdrawing no more than 4% from your savings annually during retirement to avoid running out of money. [source]
It is helpful to let your current money manager know that the 4% withdrawal rule has a 10% failure rate.i
Investing money comes with risk, and the 4% w/d rule isn’t risk free.
How much money do you need to retire with $100,000 a year income?
To retire with an annual income of $100,000 using the 4% Rule, you would need a nest egg of approximately $2.5 million.
But that doesn’t account for taxes.
If all your money is in a 401k, you actually need to withdraw around 137k per year (at todays tax rates using 5% state income tax) which means you really need to save 3.425M to somewhat safely (10% fail rate) use the 4% withdrawal rule.
When planning for retirement, it’s important to consider specific financial products or services that can help you achieve your goals.
Personal investment experiences can also provide valuable insights into retirement planning strategies.
While political views on retirement policies can vary, it’s important to stay informed about any potential changes that could impact your retirement plans.
Conclusion
Retirement Financial Planning: How to Ensure Financial Stability During Your Golden Years
Planning for retirement is crucial to ensure financial stability during your golden years, and understanding expenses is key to effective management.
Categorizing expenses into non-discretionary and discretionary can help you manage your finances effectively, and it’s important to consider relocation costs and increasing healthcare expenses when planning for retirement.
Managing discretionary spending by evaluating flexibility and identifying potential areas of cost reduction can lead to a more sustainable pension plan, and incorporating inflation rates into future expense calculations is important in creating a long-term financial plan that balances necessity with luxury.
Don’t forget to check out credible sources to back up your claims and make sure your retirement plan is on track!