4 things we learned after building & reviewing 1000s of financial plans
When it comes to creating a plan for retirement people are always looking for the magic formula. A+B+C equals your perfect retirement plan. While no plan is completely perfect, there are some critical components that help a plan succeed and areas that can lead to failure. Here is what we learned after creating and implementing thousands of plans.
There are several key components that create a sound financial plan or leave it vulnerable.
Real expenses create real plans.
For many people preparing for retirement it has been years since they had a budget in place. The money comes in and the money goes out while the savings seems to grow in some cases. For others, they invest as much as they can and just live off the rest. Not many families are tracking what they spend for groceries, restaurants, entertainment, or gas. Those days seem long gone, but when preparing for retirement taking stock of the monthly cash flow becomes critical. Why? In order to create a plan there needs to be an accurate baseline for expenses. This baseline can then be adjusted for inflation and coupled with desired additional spending like vacations, large purchases, or other fun parts of the puzzle. With the groundwork laid you can then start building.
Income is KING.
While many people focus on having a certain amount in their investment accounts, the more important factor can often be the amount of income that can be generated in retirement from investments, pension, social security and other sources. Think about it this way…if a person has all or majority of their expenses covered by the income streams they are receiving consistently how concerned are they with market fluctuations? They are far less likely to sell out of fear because their daily life goes unchanged. Establishing effective and efficient income sources helps replace the paycheck that retirees are used to having all those working years. With a proper income plan in place, families can weather the ups and downs of the market.
Diversify more than your investments.
While having a diversified portfolio of investments is important, another big part of planning is the diversification of the income. This means that plans should have multiple areas to produce income based on market conditions and timing. Many plans have social security and one distribution plan which is dependent on the continued growth of the market. This can handcuff people into selling investments at a loss because of the need to fund their monthly expenses. Strong financial plans create multiple opportunities for income creation, whether that be dividend distribution to maintain principal, annuity income, or other means.
Save some for your not-so-favorite uncle.
Many people become attached to the account values that they see on their statements but fail to realize that the number is not as large as they think. With most retirement dollars being saved in pre-tax accounts there is a silent partner waiting to be paid. Uncle Sam, also known as the IRS, needs to be considered in your financial plan. Changing tax laws and brackets along with the different taxation rules for types of account play into where and how to take money out of retirement accounts. Many financial plans may have strategies about how to grow the account value, but fail to have tax-efficient distribution strategies or a roadmap for utilizing Roth conversions to reduce taxation. Taxes can be the largest expense a retiree faces and must be accounted for.
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