In last week’s article, we outlined the six-step process everyone should go through to complete their retirement blueprint. I have reproduced the entire article at the end for your reference.
In this article let’s talk about step one, Establish Retirement Goals.
Establishing goals is a good best practice for any endeavor. Knowing where the finish line is allows you to stop running. If we equate building a successful retirement to constructing a new house, establishing goals would be like envisioning the completed home on the blueprint itself. What do we want the house to look like? How many rooms does it have? What’s the layout?
Retirement goals are unique to everyone but they do share some common characteristics.
The most basic retirement goal for most is to be able to continue their pre-retirement lifestyle and have work income be optional. Beyond this, though, every retiree has a unique blueprint there trying to build.
For some it involves helping kids and grandkids. For others it’s about travel and leisure. Still for others it’s about giving and charity. Or it’s a mix of all of this.
Whatever the goals are, we won’t know whether these been accomplished unless we first quantify the outcomes.
We quantify a goal in several dimensions.
The first dimension is “how much?” How much per month you want for your lifestyle? How much per year do you want to be able to spend on travel? How much in total do you want to provide for each of your grandkids to help with education?
The second dimension is “by when?” This is the time element. Defining goals in the time element could be accumulating a certain amount of money by a particular time, being able to experience a goal for a certain period of time, or being able to accomplish or have enough money for something indefinitely.
The last dimension is “why?”. This is a dimension that most people never explore.
Did you know that money is the way that you work out your value system? Each goal that you define and set is an embodiment of something that’s truly important to you. As you accomplish each goal you will have an experience of values fulfillment.
Figuring out the how much and by when are pretty straightforward. But how do you figure out the answer to the why question? Consider using the “5 Why’s Technique” which would look something like this:
“I would like to have $5,000 per month to spend throughout the rest of retirement”
(notice that the goal has answered the “how much” and “by when” dimensions)
“Why would you like to have $5,000 per month to spend for the rest of retirement?”
“If I had $5,000 per month to spend, I know that all my need to be taken care of and I wouldn’t be required to work. I could spend my time doing things that matter more.”
“Why is it important to feel financially taken care of so that you can spend your time doing things that matter more?”
“Because I don’t want to have to worry about money. I want my time to be spent on things that matter more than money.”
“Why is not worrying about money so that you can spend your time on things that matter more than money important to you?”
“Because I only get one life. I have a finite amount of time and I don’t want to waste it on things that don’t really matter.”
“Why is not wasting your time on things that don’t really matter important to you?”
“Because I want my life to really matter and make a difference”
“Why is it important that your life matter and make a difference?”
“Because that’s why was put here on this earth and that’s where I get the most fulfillment.”
This simple short exercise gets to the core of what’s important to you and why accomplishing your goals matters.
Sure, you can live a life that matters and makes a difference with less than $5,000 a month in predictable retirement income, but if you’re constantly worried about money in retirement, it’s going to be difficult for you to truly fulfill your values as you’ve defined them.
Make sure to complete all three dimensions for each retirement goal that you define.
(Previous Article on 6 Steps of Retirement Planning)
Are you like me?
I like following directions. When my kids were small, the first thing I did after opening a toy on Christmas morning was to read through the directions and make sure that I followed them step-by-step to minimize my frustration and make sure that everything was put together correctly.
If I’m following a recipe, I’m going to read through each step carefully and make sure that all my measurements are exact so that the final product is just as it is intended.
I’m just the kind of person who likes step-by-step instructions to make sure that I do things right and that the work and product comes out the way it was designed.
Planning for a successful retirement has a recipe as well.
To get the right outcome, make sure you follow all the steps thoroughly. In this article will overview the six steps and then in future articles go into detail.
STEP 1 – Define Your Retirement Goals
We start by defining what were trying to accomplish in retirement. These are the tangible financial goals such as replacing our work income, having travel funds, helping kids or grandkids, replacing our cars, and so on. An effective goal includes the “what”, the “how much”, and the “by when” so that we can fully know if the goals have been accomplished.
STEP 2 – Summarize Your Retirement Resources
You will be accomplishing your retirement goals with your available retirement resources, and so making sure you fully understand and quantify them will be supremely important. You have retirement income resources such as Social Security, pension, rental income, or annuity income. You also have investment asset resources such as IRAs, 401(k)s, and your housing wealth.
STEP 3 – Strategically Deploy Your Retirement Resources
Here’s where true strategy begins and where professional expertise can come in handy. You need to effectively elect how to receive your predictable income sources such as Social Security and pension. You also need to determine how to allocate each investment dollar to the primary goals of income, growth, liquidity, and protection.
STEP 4 – Effectively Manage Cash Flow
During your working years you could simply make more money to cover up sloppy cash flow. In your retirement years your margin of error is much thinner and having an effective strategy to manage your incoming “retirement paychecks” will be critical to ensure that you don’t take more out of your accounts than is needed so that it can last.
STEP 5 – Manage or Eliminate Retirement Risk
You will want to make sure the right kinds and amounts of insurance and risk management strategies are in place to effectively deal with the most sinister of retirement risks which could derail your plan. This includes the premature death of a spouse, unexpected long-term care costs, and a major market meltdown during retirement while you’re taking money out for income.
STEP 6 – Optimize Tax Liability in Retirement
If you’re like most retirees, you’ve accumulated a majority of your retirement assets in tax qualified plans that will be fully taxable we take them out. With proper proactive planning you can minimize the total tax liability by taking advantage of lower income tax brackets and minimizing Required Minimum Distribution after the age of 70 and ½.
If you have any questions please feel free to contact me.