It is hard to face the realities of our own financial circumstances. I experienced this during the great market declines of 2008 and early 2009. I did not want to look at the values of our retirement portfolio. Finally I forced myself to study the damage regularly. As they say in business, if you don’t measure it, you can’t manage it. It’s all part of giving your retirement plan a reality check, even if the reality is unpleasant at the time.
1. What are your retirement expectations? What do you expect to be doing when you retire? Working part time? Where will you be living? If you haven’t at least explored these questions, you aren’t be real about what the future may hold.
2. What are your monthly living costs today? I continue to be amazed at the number of people who have no realistic idea of how much they spend each month and/or how much they spend on needs vs. wants. If you can’t gather this data now, I don’t now how you can predict whether your retirement plan will be a failure or success.
3. Which of your monthly expenses will increase and decrease when you retire? The reality is that some expenses will decrease or disappear (educational costs, retirement savings) while others will likely jump (health care). You have to know these things to plan for them.
4. Where (and starting when) will your retirement income come from? Social Security? Pension? Annuity? Investments? When will you start receiving Social Security or pension benefits? Is your target date even realistic based on other factors?
5. How much inflation-adjusted retirement income can you realistically expect from your current plan over your lifetime? You can’t do what our politicians do and arbitrarily adjust revenue projections to meet budgeted expenditures. You can’t assume that the 4% withdrawal rate rule still applies. Finally, you cannot ignore the effects of inflation.
6. Is there an income-expense gap and, if so, how will you make it up? This is the ultimate reality check – discovering that your existing plan is likely to fail. But without that knowledge, you can’t take corrective action. That’s why I am regularly running our plan through various prediction tools, such as Financial Engines.
What do you do to reality check your retirement plan?