Most investors think about how they want to spend retirement. It may range from the simple life away from the rat race to constant travel and gifts lavished on grandkids.
Financial advisors warn that actually living the dream takes some solid financial thinking and restraint. And many urge clients to sit down and write a retirement policy statement, a kind of Declaration of Independence to guide spending and investing in and near retirement.
“The basic idea of a retirement policy statement is to have a road map for financial decisions before, during and after retirement,” says Clint McCalla, founder of Wealth Planning Co. of Texas in Austin. “In my view, it should be no more than a few pages long.”
[See: 11 of the Best Fixed-Income Funds to Buy.]
The document, McCalla says, “creates decision-making accountability for all involved parties.”
The idea is to establish a set of guidelines so you’ll know if you’re on course or veering off the road. You suddenly hanker for a 40-foot motor home? Well, it shouldn’t be an impulse buy — get it only if it fits your spending rules. And decide whether you’ll handle things on your own or get professional help for spotting opportunities and pitfalls
Kathleen Fish, an advisor with Fish and Associates in Memphis, says she and her clients write a plan together, and she asks clients to let her know about any big unplanned expenses.
“I had a client that wanted to buy a new Lexus that would cost about $100,000,” Fish says. But the client’s money was tied up in individual retirement accounts and a big withdrawal would have put him into a higher tax bracket and increased his premium for Medicare Part B, she says. “I convinced him to pay over four years at a low interest rate to avoid both of those mistakes.”
Here, then, are key points advisors say a retirement policy statement should cover.
Craft a lifestyle description. A general picture of how you plan to live can bring you back to earth when you get a wild notion to buy a private island. So say, “We plan to live simply most of the year and use 20 percent of our regular income to visit family and hike national parks until we’re 80 or our knees give out.” Or, “We’ll keep honey bees and grow tomatoes and sell produce at the farmer’s market, then blow everything else in Vegas.” Obviously, the general picture needs to fit your desires, finances and common sense.
This item might also include a backup plan, like moving to the country if living on the Riviera doesn’t work out. What are the low-cost ways to be happy? Maybe taking up fly fishing would be a good substitute for the full-Hemingway of buying a sport fishing boat and going after 1,000-pound marlin.
Jennifer Myers, president of SageVest, a financial advisor in the District of Columbia area, urges a clear accounting of taxes, projected Social Security income and a distinction between needs and wants.
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
Write an investment plan. Cover all the basics like how much of your net worth should go into each type of holding — stocks, bonds and cash. This will reflect the amount of risk you’re willing to take, indicate how much income you might expect, and raise a red flag if an advisor urges you to bet on oil futures. Remember that being too conservative poses risks too. Earning too modest a return can leave you short late in life.
“If someone has unrealistic expectations on either returns or income they will need to generate, we may not take them on as a client, (and) we have fired a few clients over the years who would not listen,” Fish says. “We did not want to be a part of their demise.”
Anticipate big events. Account for events that will change your financial life, like Junior and Sis finally moving out, retirement dates or downsizing to a cheaper home in a less expensive location. Don’t count too heavily on uncertain things like receiving an inheritance by a given date.
Nicole Peterkin, a planner with Peterkin Financial in Braintree, Massachusetts, says, “A retirement policy statement should include a list of the assumptions that the numbers are based on — the mortgage being paid off, second home being sold, etc.” to make clear what funds will be available and when. “This will make it easier to make decisions and adjust the numbers if the client’s decisions around those assumptions change.”
List ordinary costs. Everything from gas to groceries to health insurance premiums should be tallied for a clear view of what it costs to live now. Then assume the total will all go up every year by 3 percent, roughly the long-term inflation rate. Try it at 2 and 4 percent as well to see how you’d do if conditions change.
Ordinary expenses should be paid out of reliable income like Social Security, a pension, bond interest and annuity payments.
“Understand your real spending,” urges Rob Williams, Denver-based director of income planning at the Schwab Center for Financial Research. “While many guess how much they spend, (that) can be a huge source of grief in retirement. It’s important to be accurate, so dig up bank statements and look at what the real outflow is.”
He also recommends a plan for paying off debt before retiring.
List non-recurring costs. Items like the motor home, the Mediterranean cruise you’ve always dreamed of and a lake house should be realistically scheduled and funds earmarked. Figure what will happen to your ordinary income if you take a big lump sum from your nest egg.
[See: 8 Things That Matter More Than Money for a Happy Retirement.]
Share. Think about who else should know your plan — a spouse or lifetime partner, certainly, but also a financial advisor, accountant and lawyer dealing with estate matters, your will and power of attorney. Perhaps one or more other family members should be in the loop as well, in case you need help later on.
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Why Investors Need a Retirement Policy Statement originally appeared on usnews.com
