According to Planning for the 30+ Year Retirement,1 longer retirement has been one of the most dramatic consequences of greater longevity in the United States, and retirements lasting 30 or even 40 years may soon be routine. That means you require a carefully thought-out plan regarding your projected financial picture, not to mention being ready for unexpected roadblocks along the way, to help you retire with confidence.
“Planning for retirement begins years before the actual date arrives,” says Gabrielle Doss, a Wealth Planner with Wells Fargo Private Bank. Here, she shares five fundamental steps to help you retire with confidence.
1. Dive into the details
“In my view, the single most important thing that a person can do prior to retirement is to have a written, detailed wealth plan,” Doss says. “It is impossible to predict the specific events that may put pressure on the best laid retirement plans, be it a personal health crisis, changes in legislation, or even a global pandemic as in 2020. While the events themselves are difficult to anticipate, the effects they may have on our economy and the stock market can be addressed in a thorough retirement plan. The goal is to build a plan that is flexible and can withstand the inevitable challenges”
Ideally, that plan is something that you and your wealth planner and other well informed advisors create together and update periodically, she says. These updates can keep your plan aligned with your financial goals — which may change over time — and allow you to adjust for life or market changes.
”At Wells Fargo Private Bank, our wealth planners can run your plan through various financial stress tests to anticipate the potential effects of disappointing portfolio performance, higher than expected inflation, changes in tax rates, or the impact of unexpected major expenses so you can work with your investment professional to create contingency plans,” remarks Doss. (For more, see “How to Plan for Uncertainty.”)
2. Consider your cash flow
An essential part of your written plan is reviewing your current cash flows and projecting cash flow for your retirement years. As you plan, understanding “decumulation,” or how you spend down your money over the course of your retirement, can be just as important as understanding accumulation leading into and during retirement.
“An in-depth review of your current income sources and expenses as well as the income sources and expenses that you anticipate in retirement is the foundation,” says Doss. “Consider whether you plan on working during retirement, either part-time or on as contractor. This information will help us to determine if your goals are achievable or if you need to make adjustments to your savings or spending habits now to help achieve your goals in retirement.”
“Developing a cash-flow analysis brings a heightened sense of understanding to your retirement planning,” Doss says. “This can be a reality check or can reaffirm that you are on the right path.”
3. Create your second act
Your life plan in retirement is just as important as your savings plan.
“Reviewing your cash flow will trigger thoughts about how you want to spend your time in retirement and what income will be needed to support that lifestyle,” Doss says. “This brings the conversation down to earth from the sometimes intimidating 30,000-foot view of retirement planning.”
Would you like to spend your time traveling abroad, visiting family spread across the country, volunteering your time with a local charity, or playing golf every day? Doss says the planning process is also the time when people should consider where they want to live and whether they would like to help their children and grandchildren, for example, by helping pay for education costs or by making a down payment on a home. Doss notes, “Through the planning process, you will identify and prioritize what you consider fixed costs and what you classify as variable costs. As conditions change during retirement, a regular review of your plan will allow you to re-prioritize and adjust if needed.”
But Doss adds that many people discover their spending increases in the first few years of retirement. “As they adjust to their newfound freedom, retirees often schedule more lunches with friends, embark on the long-awaited home improvement project, and have the freedom and flexibility to travel,” so factor those plans into your retirement plan as well.
4. Adjust for ongoing changes
As you get closer to retirement, you and your wealth and investment advisors should consider how your assets are allocated.
Doss says to think about your assets as belonging to different buckets: “Investing your assets appropriately based on your goals and risk tolerance is a critical part of the plan to position your portfolio when challenging times arise.” Discuss with your advisors the order that you will tap into the buckets based on the types of assets in each bucket, the tax implications of liquidating each bucket, and potential growth of each asset. Many people will have a combination of pre-tax retirement plan assets (qualified) and after-tax savings (non-qualified). Plan carefully when deciding the order for withdrawing these funds to help reduce the market risk from tapping into those buckets. Keep in mind that the ordering of your liquidations may change when the markets are under pressure.
5. Establish an estate plan
An estate plan can help ensure that your assets are managed in a way that continues to align with your values and priorities even after your passing. It can also help to spare your loved ones from significant stress and the potential for family conflict.
At a minimum, an estate plan should include a will, powers of attorney, and health care directives, Doss says. Depending on your needs, your plan also may include one or more trusts. Completing these documents and actually executing them can give you confidence that you have a structure in place for taking care of your loved ones should something happen to you. (For more, see “Essentials of Wealth Transfer.”
“Reviewing your estate planning documents periodically is important to help ensure that they continue to represent your wishes,” says Doss. “Your review would also include a discussion of the current estate and inheritance tax environments and any recommendations to help mitigate future tax liability. Many people cringe at the thought of planning for the day when they are no longer around,” Doss says. “But I feel that it is the best legacy that you can leave for your family.”
1Planning for the 30+ Year Retirement: Funding Longer Life in the Age of Longevity, a 2020 paper developed by the Longevity Project in collaboration with the Stanford Center on Longevity and the Wealth & Investment Management division of Wells Fargo & Company. The principal resources for this paper include original public opinion research conducted by the Longevity Project between December 26 and December 29, 2019, of a nationally representative sample of 2,200 adults and interviews of leading experts in the retirement field.