How to fit your retirement finances to your life
(MoneyWatch) This is my second post on the methodical approach you can use for implementing one of the most important and retirement planning decisions you'll make -- sorting out which retirement income generator (RIG) or combination of RIGs might best fit your goals and circumstances. You'll want to review my previous post for background to better understand this post.
- Facing up to the risk of living too long
- 4 tips to deal with inflation and longevity in retirement
- 3 ways to turn your IRA and 401(k) into a lifetime retirement paycheck
My last post introduced the LIFE goals you can use for rating various RIGs according to your own personal circumstances. Once you decide the importance of each of the goals -- by giving each one a rating of "Not important at all," "Moderately important," or "Very important" rating -- you'll be ready to make the tradeoffs that are necessary to zero in on the RIG or combination of RIGs that work best for you.
In this article, I'll show how you can assess the importance of the first two goals, and then summarize the RIGs that might fit under different ratings for these goals. (In my next post, I'll cover the other two goals and the RIGs that might fit these other goals.)
LIFE Goal #1: Longevity Protection
One way to think about the importance of longevity protection is to imagine how you'd feel if you exhausted your retirement savings during your retirement. Will you have a backup plan or other resources you can rely on, or will you be in deep trouble?
Keeping that in mind, you'll give this goal a low rating if you have other sources of guaranteed lifetime retirement income that cover most, if not all, of your basic living expenses, such as Social Security and an employer-sponsored pension plan. You might also give it a low rating if you (and your spouse or partner, if applicable) are in poor health with a low life expectancy. On the other hand, you'll give it a higher score if your RIGs will need to cover a significant amount of your living expenses and if you have average or above-average life expectancy.
Here are the types of RIGs that correspond to the different ratings for this goal.
LIFE Goal #2: Inflation Protection
As with the first LIFE goal, try to imagine how you'd feel if your buying power were significantly eroded in the future due to inflation. Would you have other financial resources that you can tap? Or would you be able to reduce your living expenses substantially if the buying power of your retirement paycheck were eroded? Thinking about these issues will help you give this goal the most appropriate rating.
So you'll give the goal of inflation protection a low rating if you have other, significant sources of guaranteed retirement income that are indexed for inflation, such as Social Security and an inflation-adjusted pension. You'll also give it a low score if you've taken steps to manage your living expenses by doing such things as paying off your home mortgage, taking care of your health, buying adequate medical insurance, driving your cars into the ground rather than replacing them every few years, consciously reducing your utility or other monthly bills, and so on. You might also give it a low rating if you think your living expenses might decline in your later years due to reduced travel and recreational expenses. Don't rely too much on this last assumption, however, due to the possibility of increased expenses for medical and long-term care.
Conversely, you'll give this goal a higher score if your RIGs will need to cover a significant amount of your living expenses and if you haven't taken steps to contain increases in your living expenses.
Here are the types of RIGs that correspond to different ratings for this goal.
Stay tuned for my next post that covers the other two LIFE goals -- flexibility/potential for inheritance and exposure to market downturns -- and describes the RIGs that might fit with your rating on these goals.
This post and the tables are an edited excerpt from my recent book, Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
