While some people may possess the financial experience to calculate the amount they should set aside for retirement and select and manage the investments in their retirement savings portfolio, many do not. Even individuals who have the necessary financial know-how for the task may find that they lack the time needed to do it properly.

In such cases, working with a financial advisor can provide you with both the expertise and experience you need to effectively design and implement your retirement plan. Additionally, there is the issue of ongoing monitoring of your progress towards your planning objectives. A certain amount of flexibility is required when making long-term financial plans, given that your financial situation, and financial conditions in general, can change between the time you make those plans and retirement. 

Your income might change, for example, or the market might perform better or worse than expected. If your financial situation changes significantly as a result of issues like this, your plan may need to be adjusted, and a financial advisor can help you accomplish this.

Once you’ve decided if you will use a financial advisor, it’s time to get into the nitty-gritty of the retirement planning process. The first question to ask when thinking about retirement is do you have a retirement plan.

It would come as no surprise to hear that a person walking around a house in the dark fell over a piece of furniture and tumbled to the ground. Similarly, individuals who try to make it to retirement without a plan may find themselves tripped up by unanticipated obstacles, causing them to fall short of their retirement savings goals. 

A major reason it’s so hard to reach your retirement objectives without significant planning is the trend towards participant-directed retirement plans. In past decades, when a company pension or Social Security were often responsible for the majority of people’s retirement income, putting together a comprehensive financial plan was less important. 

In today’s world, however, Social Security payments are nowhere near enough to provide sufficient retirement income for most people, and corporate pension plans are increasingly unavailable to the vast majority of employees. 

For many people, the largest portion of their retirement income will come from their retirement savings. This makes determining both how much you will set aside for retirement purposes and how you will invest those savings crucial to achieving your retirement objectives. Both of those efforts can benefit from a well-thought-out retirement plan.

Additionally, a retirement plan can help you answer important questions about your projected retirement lifestyle. It is one thing to have a general goal of retiring to an attractive retirement living community such as Sun City, AZ, and another thing to actually run the numbers and figure out what it would cost to do so. 

To successfully plan for retirement, four major questions must be asked:

1. What will my basic living expenses be in retirement?
2. How much would I like to spend above and beyond my basic living expenses?
3. After adding these two numbers together, how much in retirement savings will I need to generate enough income to meet my total projected expenses?
4. How much do I need to set aside while I am working to build up the required amount of retirement savings?

In addition to these questions, a retirement plan can help you answer the single most vital question to a successful retirement: 

How likely is it that I will have enough income in retirement to meet my total projected expenses and maintain my desired lifestyle? How long will you live in retirement?

This question reflects the fact that investment returns, especially in stock market linked investments such as mutual funds and ETFs (exchange-traded funds) as well as individual stocks, can vary widely. Thus, simply projecting investment returns based on average returns over a single period of time may not offer an accurate picture of potential outcomes. 

Instead, as covered in more detail in the next section, it is necessary to take into account a broad variety of past investment results in order to produce a comprehensive answer to this question.

Given the many complicated analyses, calculations and projections required to adequately plan for retirement in today’s new world, it should be clear that drawing up a retirement plan of some sort is essential to helping you properly prepare for retirement. Whatever form your plan takes, it should focus on answering the questions discussed in this section to optimize your chances of achieving your retirement goals.

Step #1: Investing for retirement

With most people relying on their own retirement savings to finance a significant portion of their retirement income, the performance of your retirement investments becomes a vital element of your retirement planning. Whether you select the investments yourself or work with a financial advisor to do so, it is crucial to monitor your investment allocation closely to ensure that it fits your time horizon, risk tolerance, and investment objectives. 

One of the most important functions you can perform when investing for retirement is to stress test your portfolio to ensure that you are likely to achieve your retirement investment objectives even in the case of unfavorable economic conditions. 

Such a test is known as a Monte Carlo analysis, and it enables your financial advisor to put your proposed portfolio allocation and planned contributions through thousands of simulations based on historical investment data. 

These scenarios reflect a wide variety of past economic conditions and the resulting investment performance. For instance, market crashes, recessions, bull and bear markets, etc. Typically, if the performance of your retirement investment portfolio exceeds the desired result between 75% and 90% of the time, your results are said to fall in the Comfort Zone. 

Results in the Comfort Zone give you the confidence of receiving a positive answer to the key retirement planning question mentioned earlier by demonstrating that you are highly likely to have enough income in retirement to meet your total projected expenses and maintain your desired lifestyle. 

If the results fall short of the Comfort Zone, it may be prudent to revise your plans. 

To accomplish this, you could up your monthly retirement contributions to increase your chances of reaching your goals, or you could change your portfolio allocation in an effort to improve projected returns. Another approach might be to plan to leave less of an inheritance for your heirs. 

The value of running these portfolio performance simulations is that it provides you with actionable data you can use to fine-tune your retirement planning. Performing such a stress test provides you with the peace of mind of knowing that you’re not aiming in the dark with regard to your retirement investment planning.

Step #2: How financial planning can help

If you look at each element of your financial life in isolation, it can be hard to get a good picture of your overall financial picture and how to best reach your financial objectives, including funding your retirement. The reason for this is that a fragmented financial planning process puts you at risk of constantly having to adjust or abandon your planned goals due to financial demands in other areas of your life. 

For instance, if you base your retirement planning on setting aside money each month, but then are forced to raid your retirement savings funds to pay for a down payment on a house, it may disrupt your ability to save as much as you would like for retirement. 

If, on the other hand, you were working from an actual financial plan that tracked the totality of your spending and investing, you would have seen this danger in advance, enabling you to set aside extra funds to make up for the savings spent buying a house. 

The same applies to other aspects of financial planning. For instance, to avoid the risk that an inability to work for a time might throw off your retirement planning, a financial plan will take into account the need for insurance of various types. Tax planning is also an important part of a financial plan. Structuring your finances to reduce the taxes you pay can help increase your chances of living the retirement lifestyle of your choice. 

Considering all relevant factors is extremely important when running a stress test on your retirement income scenario to ensure that the results are as accurate as possible. If you leave anything out, it can invalidate the results, giving you the impression that you are in the Comfort Zone when you are not or vice versa. Either result can be bad, causing you to either invest too little and fail to reach your retirement savings goal or to invest more than you need, cutting into your ability to meet your current spending goals.  

Step #3: 5 things to consider: Planning, Investing, Risk, Tax, and Legal

When considering your retirement options, the following five elements of the process deserve extra consideration:

1. Planning: You wouldn’t expect to take a long trip to an exotic destination without doing some planning: Where will you stay? Will your phone work there, Will you need to exchange dollars for another currency to make purchases? The same holds true for retirement, whether or not you write up an official retirement plan. Taking steps to set aside funds to build up a satisfactory level of retirement savings requires planning, as does selecting an investment strategy for those funds once they have been added to an account.  
2. Investing: In addition to the previous discussion about running a stress test on your investment portfolio, it’s also important to carefully consider which asset classes you want to invest in. Portfolio diversification, as described in Modern Portfolio Theory, works best when you diversify both in terms of asset class and geographical location. This means that prior to selecting portfolio holdings, either on your own or with the help of an advisor, you should consider which asset classes you are comfortable with, including stocks, bonds, ETFs, mutual funds, REITs, real estate, alternative investments, etc.  
3. Risk: While investing in the stock market typically offers greater upside than other investments such as bonds or CDs over the long run, it also comes with higher volatility and thus higher risk. Understanding the risk associated with various investment approaches and asset classes is key to planning for retirement. When a person is younger, investing a greater portion of their portfolio in equities (stocks) is usually recommended. Such strategies often call for reducing exposure to equities as you get closer to retirement to lower portfolio risk, given that as you near and enter retirement there is less time for recovery from a market downturn before you need to start taking income from your retirement savings. 
4. Taxes: Structuring your finances to reduce taxes as much as possible is crucial to maximizing your retirement savings. While 401k plans and traditional IRAs feature tax-deductible contributions and tax-deferred growth, Roth IRAs offer tax-free withdrawals and tax-deferred growth. People who will have a high tax rate even after retirement may want to consider investing a portion of their retirement savings in a Roth to reduce the tax they pay in retirement.
5. Legal: Whether you are drawing up an estate plan, considering the benefits and drawbacks of setting up a small business as a corporation or LLC, etc., there are a number of occasions when access to legal advice is essential for financial planning purposes. Working with a legal expert in such situations can help save you from making a mistake that could prove costly in the long run.

Step #4: Plan for all 3 phases of retirement: pre, transition, post

Planning for retirement must cover the three main phases of the process. 

Pre

In the pre-retirement phase, the primary goal is to prepare for your retirement by setting aside funds for that purpose and growing your retirement savings. In this phase, it’s crucial to try to forecast, as accurately as possible, how much you will need to have saved up to pay your retirement expenses. This, in turn, plays a part in driving your retirement savings and investment strategies. 

Stress testing your retirement savings projections using a Monte Carlo analysis can help you home in on the strategy most likely to successfully meet your retirement lifestyle expectations. You should also monitor your progress towards meeting your financial objectives and be ready to make adjustments as needed to stay on track to achieving them.

Transition

In the retirement transition phase, it’s time to make any final adjustments to your planning before and as you enter retirement. For instance, if your retirement savings have not grown as anticipated, you may want to increase your retirement contributions in the last few years before retirement. The IRS offers catch-up provisions for anyone over the age of 50 that allow you to contribute more than the standard amount if you are in that age group. 

The transition phase can also be when you make changes to your lifestyle or residence to get ready for the post-retirement phase of your life. If you plan to downsize your housing accommodations in retirement, you may want to consider doing so during the transition phase rather than waiting until you have retired if this would enable you to get a better price for selling your home, or allow you to cut costs and place more money in retirement savings.

Post

In the post-retirement phase, planning doesn’t cease altogether. It’s important to keep a close eye on your spending as you enter retirement to make sure that it matches your plan. If it doesn’t, you will have to make adjustments to ensure that your spending is in line with your retirement income.

Taking steps to balance your spending with the income produced by your savings is essential to avoid longevity risk – the risk that you will outlive your income. Another factor to keep in mind is inflation, or purchasing power, risk. To enable your retirement savings to keep up with inflation, it is important to structure your investment portfolio to provide for some growth potential as well as income if possible.

How do you find a financial advisor that is worthy of your trust? One place to start is by looking for investment professionals that have the experience and expertise necessary to provide you with the advice you need to reach your retirement objectives. 

Another area to consider is the advisor’s credentials. Do they have the correct licenses and training to be able to advise you properly? 

You should also look into an advisor’s compensation policy. Ask how they are compensated. An advisor you can trust will be transparent with you about how they calculate and charge fees.

Given the complexity of modern financial planning, when selecting a financial advisor it is important to look at the totality of the services they offer. If they can only offer you planning assistance in one or two areas, working with such an advisor may prevent you from getting the comprehensive advice you need to optimize your retirement planning efforts. 

For comprehensive planning assistance, look for a financial advisor who works as part of a team of professionals. Ideally, you should be able to obtain retirement, tax, estate planning, risk management, and legal advice all from one team of professionals.

The financial advisor you choose to work with and their team should be composed of professionals in investment, financial planning, taxes, and estate planning. All of these skills are necessary to help you plan your retirement and distribution strategies. 

One benefit of this type of one-stop-shop for all of your legal, tax, estate, financial, and retirement planning needs is that it helps avoid the contradictory advice that you may get when working with different financial professionals who aren’t normally in contact with each other. 

It also saves you the time and effort that would otherwise be necessary to meet with and provide your financial information to a variety of financial professionals who are not part of the same team. 

To see how close your retirement planning is to the Comfort Zone and what you can do to get it there if it isn’t, click here to schedule a free consultation with Prime Wealth Advisors.