Retirement planning involves more than just saving money in a 401(k) or putting away cash in IRAs here and there. An investor has to consider many other factors: living expenses and cash flow needs throughout one’s lifetime (as well as a spouse’s lifetime, if applicable), health care spending and how that can change over time, Social Security timing decisions, estate planning, and tax strategies. It can be a lot of work.
When it comes to planning for living expenses and cash flow needs (spending), one beneficial exercise can be to categorize your assets/goals into 'needs,' 'wants,' and 'legacy' items. The next step would be to think about how your retirement plan can be used to fund each category, starting with your needs first.
Your needs encompass those basic things you cannot live without – food, housing, perhaps some form of health care if there is a medical condition that needs attention. When planning for your needs, it could make sense to dedicate more stable, fixed sources of income such as Social Security payments, a pension, and/or fixed annuities to provide the cash flow you need.
If those more stable forms of income provide for your basic needs, then that means your investment portfolio can be more focused on helping you pay for the things you want in retirement. What you want – and when you want it – will play a key role in determining how you allocate your investment portfolio, and it makes sense to work with a financial advisor to run simulations to show you how different allocations may affect cash flows over time.
You may be thinking: how could I possibly know how much I should allocate for 'needs' versus 'wants' over time? The short answer is that you can’t know with certainty, but part of the retirement planning process involves simply thinking about these living expenses and trying to plan for them as best you can. The numbers may change over time (see graphic below) – and that’s ok. Your plan can always adjust with it. But sitting down with your financial advisor to sort through different possibilities is an important first step and can make a big difference when the time to retire comes.
The final priority would be legacy planning, i.e., if you have assets left over once your retirement needs and wants are fulfilled. It may make sense to allocate that portion of your investment portfolio more towards long-term growth, meaning perhaps that you own a larger percentage of equities.
Take the First Step: Establish Your Needs vs. Wants in Retirement
Talking through these retirement planning considerations is a good first step – your financial advisor should be equipped to ask you questions that will help establish what your cash flow needs in retirement will be or already are. The next step is figuring out how to pay for your needs versus wants, and how you should allocate your portfolio in order to achieve the growth needed to do so. The Wealth Managers at WrapManager are ready to work with you to establish a plan, and you can feel welcome to give us a call at 1-800-541-7774 to discuss your retirement today.