The founder and CEO of NewRetirement, an online retirement planning service, describes concrete ways you can benefit from having a digital plan instead of a hard-copy plan.
Creating a retirement plan that is actually meaningful and useful can be challenging.
All too often, a retirement plan is a detailed paper document with lots of charts, prepared for you by a professional. It is no doubt well thought out, but how exactly is it going to be useful to you? It will be expensive, roughly $2,500 to $10,000 in many cases, and may be difficult to interpret or daunting to go through.
You need a useful retirement plan, not just a document with a high “thunk” value.
Here are eight tips for building a retirement plan that you will use and refer to—not just a hefty stack of paper with pretty graphs and charts.
Many people think of a retirement plan as their savings accounts. A savings account may be part of it, but it is definitely not the whole thing.
In fact, savings and investments are probably not the most important aspect of your plan. For most people, Social Security benefits, home equity, retirement jobs and even good health are far more financially valuable than their savings accounts. Planning for retirement is doing what you can to ensure that you do not outlive your assets.
Planning online allows you to find expert sources on a wider range of retirement planning topics.
Most people heading into retirement have spent their whole lives working, saving money, paying down their mortgage and putting some money away for retirement.
However, in retirement, you now need to spend instead of save. This is a huge shift in perspective and something that people can find problematic.
A recent study published in the Journal of Financial Planning, found that for retirees in the top quintile of financial wealth, their average financial assets increased over the analysis period of 10 years—they basically grew their net worth during retirement versus spending it down. And, retirees in the third and fourth quintiles also spent less than their income.
In addition to the factors listed above, a financial plan for retirement ought to cover the following key components:
There are so many complicated parts to a comprehensive retirement plan. If someone else does the plan for you or you use a simple retirement calculator or if you just try to do mental arithmetic, you are not going to fully appreciate the details. Most importantly you need to understand the plan so you can stick to it over time. Your plan needs to be able to change as you do.
Whether you work with a financial planner or not, it is a great idea to have a place where you can manage and track all the details yourself. When you create your own plan and really engage in the process of planning, you gain more insight into how large and small decisions will impact your future.
You can begin to see how your finances will play out with a very real perspective.
Building a retirement plan requires some use of assumptions—things that are accepted as true or as certain to happen but without proof.
When planning, you need to make guesses about inflation, how much money you are going to spend, your expected rates of return on investments, how long you will live and so much more.
Most online retirement planning tools (and even some financial advisers) use averages for most of the numbers in their retirement calculations. This is problematic. It is highly unlikely that you are actually average; many people underestimate how long they will live. Another issue is that many investors (and advisers) tend to overestimate expected rates of return.
For example:
Helpful online retirement tools, retirement advisers and other financial professionals are not mutually exclusive. In fact, they complement each other beautifully.
Research shows that many people don’t trust their financial adviser or even their banking institution. The source of that distrust is usually rooted in not understanding why they are supposed to do whatever it is the adviser is suggesting.
If the client has a good understanding of their own financial situation (often developed through use of computerized tools), then they are more likely to understand why an adviser might make certain recommendations.
On the other hand, using a retirement calculator may illustrate places where someone needs more help—from a professional.
The biggest complaint people have about a formally written retirement dossier is that they cannot easily make changes and try out different strategies, never mind the fact that things change.
Retirement planning is not something that you do once and forget about forever more.
Investors have competing priorities, values and interests.
When you first gather all of your financial information, it is unlikely that you will have documented your perfect retirement plan on your first try. It is likely that you will need to make some adjustments and even assess trade-offs.
Some questions to consider may be:
Building a retirement plan is only part of the equation for a successful future.
A useful retirement plan is one that enables you to research and learn more about different topics, then go back and try different things with your newfound insights.
You also want a retirement plan that helps you to make decisions and take the actions that are necessary for a more secure future.