Defining your retirement objectives: What are you saving for?

Imagine if your healthcare provider said that doctors were too expensive so they are now just going to contribute a box of medications toward your plan and you can figure out for yourself the best way to use them to maintain your own health.

That’s similar to how companies did away with the pension system for baby boomers, so it is understandable that so many boomers feel overwhelmed maintaining the health of their retirement wealth! But it is important to keep in mind that we were all born equally uninformed, successful retirees have simply made a choice not to retire that way … and you can too!

In retirement we can only live on the fruits of our labor, not the fruits we planned on someday learning how to grow, so start learning now in order to give yourself a long enough growing season to produce a bountiful retirement harvest! Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

One suggestion for making this process more manageable is to assemble a retirement support group — family members, successful retirees, mentors and perhaps even a Federally Focused Retirement Planner. But the biggest contributing factor to pre-retirement procrastination is a retirement goal that lacks definition. It’s hard to know where to aim when you don’t know what you’re shooting for!

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So the biggest suggestion is to start by learning how we actually define our retirement goals.

How often have you gone to your barber or stylist without even a clue of how you want your noggin to look when you walk back out? Probably never! Don’t go to retirement seminars that way either! First ask yourself, why are you saving this money?

Don’t just stop at answers like, “for the future, for growth, to have more.” Sure, those all may be true, but they’re about as helpful as telling your barber you want a haircut that makes you look like you have less hair! It’s way too vague!

Take your definition even further by asking why do I need growth so that I have more in the future?

What is my nest egg actually supposed to do when I retire?

This fundamentally simple question represents a major turning point in your investing career—when we leave the Accumulation Phase, where we contribute and grow our nest egg, to enter the Distribution Phase, where we look to distribute and preserve our nest egg.

You will likely have segments of your nest egg that are assigned specific goals (pay off mortgage, legacy, bucket list, emergency funds, growth account) but the primary goal is almost always to preserve your current lifestyle by sustainably filling the gap between what your retirement lifestyle costs and what your retirement incomes are projected to provide!

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So we need to start asking ourselves:

  • What does my current lifestyle cost?
  • What retirement income will be required to maintain that lifestyle?
  • What changes to my lifestyle am I anticipating in retirement?
  • When would my ideal retirement begin?

Try utilizing this complimentary “Federal Retirement Budget Calculator” to evaluate your current lifestyle cost and then consider how that may change in retirement.

What expenses go away and which will be added?
Do you plan to travel?
Are you looking to downsize or move?

Once we have a good idea of the expenses from your current lifestyle budget and retirement lifestyle budget, we can begin to evaluate your retirement income streams:

  • How much of my lifestyle budget is provided by Social Security and my pension?
  • What other retirement income streams do I have?
  • Do I plan to work part time in my golden years?
  • How much of my lifestyle is left to fund through my own savings efforts?
  • What assets have I accumulated to fund my lifestyle through retirement?

Whether you calculate your pension by hand (CSRS, FERS), use OPM’s Ballpark Estimator or request a comprehensive Retirement Income Forecast from WalkerCPG, accurately projecting and evaluating your retirement income is critical to building a sustainable retirement plan.

Once we know how much of our lifestyle budget still needs to be funded each year from our retirement nest egg, we can work backwards to determine which financial instruments, or combination thereof, will fill that income gap to protect and preserve your standard of living throughout the entirety of your retirement.

Remember, more so than “good” or “bad” products, there are “good fits” and “bad fits” for how a product is intended to be used. Financial instruments are tools that generally have a specific ideal application, meaning the same instrument may be a “good fit” for one person’s objectives and a “bad fit” for someone with a different set of goals.

Fitting financial instruments is like shoe shopping: you have to know where you plan to wear the shoe before you can decide if you should get, say, a loafer or a sneaker. Two different people could have drastically different outcomes with the same exact loafer because it would be a “bad fit” for someone going on a hike but would be a “good fit” for someone heading to the office.

By working backwards to let our objectives help determine which options are appropriate for us to consider, we won’t be the person that walks out of the shoe store with a stylish brand name stiletto just to later break their ankle wearing it on the stair climber at the gym! It may have been a great shoe but it was clearly a “bad fit” for that athletic of an intended use.

Retirement planning is hard but it does not need to be overwhelming. Break the planning process down into the simpler steps listed below and let the hierarchy of goals you identify along the way guide which investments you consider implementing in your retirement plan.

To recap the steps:

  1. Define the hierarchy of your retirement goals.
  2. Calculate your ideal retirement lifestyle budget.
  3. Determine your ideal retirement start date.
  4. Find trusted family, mentors and coaches to assist you.
  5. Accurately project all of your retirement income streams.
  6. Determine the shortfall to be filled by your nest egg.
  7. Identify any secondary goals for your retirement nest egg.
  8. Allocate nest egg according to hierarchy of retirement goals.

Tom Walker is a chartered federal employee benefits consultant and founder of Walker Capital Preservation Group, Inc. He believes strongly in empowering today’s federal employees through benefits education at retirement workshops and through featured publications. He has compiled many informative resources at his website, and on the WalkerCPG Facebook page.