{"id":666,"date":"2019-10-08T22:25:07","date_gmt":"2019-10-09T05:25:07","guid":{"rendered":"http:\/\/retirementhangout.com\/?p=666"},"modified":"2019-10-08T22:25:07","modified_gmt":"2019-10-09T05:25:07","slug":"create-your-retirement-plan-the-eightfold-path","status":"publish","type":"post","link":"https:\/\/retirementhangout.com\/index.php\/2019\/10\/08\/create-your-retirement-plan-the-eightfold-path\/","title":{"rendered":"Create Your Retirement Plan: the Eightfold Path"},"content":{"rendered":"\n
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Dharma Wheel
source: larchedegloire.com<\/em><\/figcaption><\/figure><\/div>\n\n\n\n

Do you have a financial plan for your retirement?  Do you need one?  What exactly is a retirement plan, anyway?  If your answers to these questions are a bit vague and uncertain, read on!  This post will lay out why you need a plan for the years after you stop working (yes, you should have a plan), and how to go about creating one.   The good news is it\u2019s not that hard to do.  In fact, if you\u2019ve been reading my posts until now (and, of course, following up on my recommendations!), you\u2019re 80% of the way there already.  This post pulls the pieces together into a single whole; eight steps leading to enlightenment — at least about your financial future.    <\/p>\n\n\n\n

Why Do You Need a Plan?<\/strong><\/h5>\n\n\n\n

Perhaps you\u2019re in your working years, and have dutifully been putting away 10% of your income \u2013 maybe even 15% — every year in a 401(k).  Well, most years anyway \u2013 when you didn\u2019t need the money for a house down payment, or a new car.  Also, you struggle some with whether to put money into retirement savings or a college fund for your kids; it seems a stretch to do both.  You worry about whether your parents, who are getting older, are going to need some help down the line.  Meanwhile, you and your spouse, who are both healthy and adventurous, have talked about retiring early \u2013 maybe at 55 \u2013 buying a sailboat and traveling the world.  You\u2019ve also talked \u2013 maybe dreamed would be more accurate \u2013 about getting a little cabin on the coast.<\/p>\n\n\n\n

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Credit: Hulton Archive\/Getty<\/em> <\/figcaption><\/figure><\/div>\n\n\n\n

Does this constitute a retirement plan?  The answer is probably pretty obvious.  Dreams and aspirations by themselves do not make for a plan.  In fact, you (in this example) don\u2019t really know whether you\u2019re on track to retire at 65, let alone 55.  Nor is it clear whether you\u2019ll be able to send your kids to the college of their choice, let alone buy a sailboat or a cabin.  Your retirement, when you think about it realistically, may be more a source of worry than excitement. <\/p>\n\n\n\n

This is why you need a plan.  You need to know whether those future dreams are realistic, and whether you are on track to achieve them.  The only way to do this is to sharpen your pencil and crunch some numbers.  This doesn\u2019t need to be a particularly onerous task; there are many software tools that can make it fairly painless.  If you\u2019re so inclined, you can do what you need to do on your own computer or even with paper and pencil.   Once you map things out, you may find you need to make some adjustments \u2013 save more, retire later, get a smaller sailboat \u2013 to make the numbers work.  But the rewards are great; knowing whether or not you\u2019re on track to realize your dreams is a good feeling \u2013 much better than worrying, wondering and hoping.  If you\u2019re about to retire, or even already in retirement, it\u2019s still important — and not too late — to have a solid plan.  Ready?  Let\u2019s get started.<\/p>\n\n\n\n

Step 1: Begin by Setting Goals<\/strong><\/h5>\n\n\n\n
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Retire to Italy?
Source: Jetsetter<\/em><\/figcaption><\/figure><\/div>\n\n\n\n

Hold off for a moment on firing up the spreadsheet.  The first, very important, step in planning is to define your goals.  If you\u2019re a couple, you should sit down and do this together to make sure you\u2019re on the same page.  Couples often have different ideas on when to retire and what they\u2019d like to spend their time doing.  Discussion and compromise may be required! <\/p>\n\n\n\n

Defining your goals should not just be a financial exercise.  What do you actually envision doing when you stop work?  Do you want to stay where you are or move to some idyllic (or cheaper) location?  Do you have interests or hobbies that will keep you busy or do you think you might want to work part-time to avoid going stir-crazy? <\/p>\n\n\n\n

A comfortable retirement is going to be the biggest goal for most people, but you should also identify other goals, especially if they\u2019re likely to have a significant impact on your finances.  They may include aspirations like those listed above \u2013 retiring early, traveling the world, getting that dream cabin, sending your kids to college.  You may also have responsibilities, such as caring for an aging or disabled family member, which you should include in your plans. <\/p>\n\n\n\n

You will very likely need to prioritize: supporting your kids through college and not being a burden in your old age might be more important than retiring early.  Write your goals down so that you can see them all in one place and prioritize them more easily.  OK?  Now let\u2019s translate your life goals into specific assumptions and numbers \u2013 a plan. <\/p>\n\n\n\n

Step 2: Estimate Your Spending in Retirement <\/strong>(see this post<\/a><\/em>)<\/h5>\n\n\n\n

You\u2019ll need to estimate how much money you\u2019re going to spend each year in retirement.  Retirement planners sometimes recommend assuming that your retirement spending will be 70 to 85% of your pre-retirement income.  This sort of rule-of-thumb estimate is OK if you\u2019re many years from retirement, but if you\u2019re getting close you should take the time to come up with something more accurate.  <\/p>\n\n\n\n

I recommend estimating retirement spending (and your other multi-year projections below) in today\u2019s dollars<\/em> \u2013 that is, netting out inflation.  This makes it easier to project expenses over time (you can simply project your current spending level without adding some sort of guess on inflation), and makes it easier to interpret all your out-year estimates (you don\u2019t have to adjust for changes in purchasing power \u2013 a dollar in 2050 buys the same amount as a dollar today). <\/p>\n\n\n\n

If you\u2019re already retired, estimating spending is easy \u2013 it\u2019s your current spending level (plus or minus any expenditures you\u2019re pretty confident will change). <\/p>\n\n\n\n

If you\u2019re not yet retired, you\u2019ll need to come up with an estimate based on your current expenses.  Look at your current annual budget \u2013 what you\u2019re actually spending money on, not some aspirational ideal.  (This is most easily done if you use an online budget tracking program — often offered for free by banks and brokerages.)  Then adjust for items you know or expect will be different once you\u2019re retired, including: <\/p>\n\n\n\n