What's the Plan, Stan? Financial Planning Continues in Retirement

For most of us, a financial plan sounds a lot like a budget--a highly entertaining piece of fiction that we'll get to when the kids are grown and the cars are paid off. But a plan--along with expert advice--is the key to a long and financially solvent retirement. Longevity, sickness, inflation, and downturns in the market can chip away at your investments. If you don't have a plan in place to handle the highs and the lows, you could turn your golden years to bronze.

The biggest fear most retirees have is that they'll outlive their money. Unfortunately, there's no surefire way to figure out how long you'll live or how much money you'll need. But the experts agree on one thing--don't go it alone.

If you're a do-it-yourselfer, you're probably feeling the pinch more than most, right now, says Meridee Maynard, a vice principal at Northwestern Mutual in Milwaukee. "These are the people who are probably the most hurt and most confused about what's going on in the market and don't know how to recover," she says.

Manage your retirement portfolio

Ignore the one-size-fits-all approach to retirement planning. "The bottom line is there isn't a magic formula," says Maynard. "What may work as a perfect asset allocation for your neighbor may not meet your own goals and objectives or your lifestyle," Spending habits, goals, dreams, and income vary considerably, so only an individualized, tailored plan will work, she says.

Likewise, how you spend your retirement income will depend on your goals and objectives. Most people try to live off the income that's thrown off their portfolio, but that's not always the best option, says Fran Kinniry, a principal at The Vanguard Group. "If you spend all the income, the portfolio will not grow. And then that 4% or 5%, five years from now, will buy you much less with inflation."

The amount you should take from your portfolio will depend on your asset allocation, says Kinniry. "An investor who's more into equities, which have a higher annualized return over longer periods, will be able to spend more than those with bonds," he says. "Four percent could be a conservative spending level for someone who's 80% to 100% in stocks, but an aggressive level for someone who had 80% in bonds."

Even if you have a plan in place and a rosy future ahead of you, retirement is not the time to dismiss your financial planner. A plan isn't a static document; it needs to be revised annually, or whenever there's a drastic drop in the market or a significant change in your goals. "Some people have very conservative goals during retirement and, even with the downturn, they still might be able to meet their goals. Others have lofty goals without the assets to support them, and they need to re-look at their entire plan, not just how they're invested," says Tim Steffen, first vice president and financial planning director at Robert W. Baird & Co. Inc. in Milwaukee. "As people approach retirement, they have less and less time to recover from a market downturn, so they should begin to move more and more assets to more 'stable' investments, such as bonds and cash."

As a rule of thumb, advisors believe you should tap your nontax-deferred investments first. "Allow things like 401(k)s, IRAs (individual retirement accounts), and Roth IRAs to continue to build up until you need them," says Steffen.

Keep your assets intact

You can't protect your assets against the fickleness of the market, but a long-term care insurance policy can help protect them against unnecessary health care costs. "There are a lot of misconceptions about what government programs provide. They're not going to be your safety net," says Maynard. Typically, government programs like Medicare don't pay for home health care or assisted living care, and they only kick in when you and your spouse are destitute. In the meantime, you could be paying upwards of $50,000 a year for long-term care. That's why an increasing number of people are incorporating long-term care insurance into their retirement plans. "It's one of those risk-management basics," says Maynard. The younger you are when you buy the policy, the cheaper the premiums will be.

Investments are only one part of the retirement equation. How much you save and spend is going to have more impact on your financial welfare than the equity or bond market. Forget about all that money you'll save on dry cleaning, nylons, and lunches with your colleagues; you'll be spending it on travel, hobbies, lunches with friends, or possibly a second home. Besides, the cut-back, scale-down, make-do retirement is going out of style. "That's becoming passe," says Maynard. "What we're finding is that everyone's definition of retirement is unique."

To make matters worse, Americans are living longer. Baby boomers and Generation Xers can expect to live twice as long in retirement as past generations, says Maynard. "One of the biggest issues that this generation hasn't come to grips with is that we're going to be living longer. The challenge is to make sure this pot of money lasts a lifetime."

A second chance

Twenty years ago, retirement also meant the end of your working life. Period. But more and more people are now using their financial independence to bankroll a small business, turn a hobby into a vocation, or consult for the very companies they just left. Working part time in retirement is an excellent way to protect your savings, because every dollar earned is a dollar of your investments that can continue to earn interest. "The longer you have for that money to work for you, the more likely you are to be able to support yourself long term," says Steffen.

If possible, look for a job that allows part-time employees to contribute to the company 401(k) or pension plan. There are some limitations on contributions and the amount you can earn before your Social Security is affected, so check with your pension manager and local Social Security office before taking employment.

Here's to a long life

Published September 2, 2002