Recommended Financial Planning Process for Retirees and Near-Term Retirees

Several of our readers have asked us to briefly summarize the financial planning process that we have been discussing in the past few months in our posts.  So, this post contains our recommended seven-step process designed to help you make better decisions about:

• retirement feasibility, if you are considering retirement, and
• ongoing spending and investment decisions, if you have already retired:

Seven-Step Planning Process
 
Step 1: Estimate your future recurring expenses

Step 2: Estimate your future non-recurring expenses

Step 3: Categorize each expense in steps 1 and 2 as "essential" or "discretionary"

Step 4: Using one of our Actuarial Budget Calculator workbooks for retirees, determine the actuarial reserves needed to fund your future essential expenses (floor portfolio) and your future discretionary expenses (upside portfolio)

Step 5: Compare the total current (or present) value of your assets with total actuarial reserves needed as calculated in Step 4.  If the total current value of your assets is greater than the total actuarial reserves needed,

• increase your current and future spending budgets,
• increase your rainy-day fund or
• increase some combination of the two. 

If the total current value of your assets is less than total actuarial reserves needed,

• increase your assets (for example through part-time employment),
• decrease your current and future spending budgets,
• apply reasonable smoothing to your current spending budget or
• some combination of these alternatives.

Step 6: Develop an investment strategy consistent with floor and upside portfolio calculations in Step 4.
 
Step 7: Repeat above steps at least once a year
 
We will provide an example of the calculations involved in this process in our next post for a hypothetical couple, Tom and Gina.  This couple will be considering whether they have enough accumulated savings to retire.  In addition to showing the calculations and screen shots of our workbooks, we will show you why we believe this recommended process is more robust than other approaches commonly used.