The Five Critical Components of a Financial Plan for Retirees (2024)

If you ask 10 people what a financial “plan” is, you’re likely to get 10 different answers. As a financial planner, my biggest issue with financial plans is that they aren’t actually plans. Plans say what you’re going to do. Most of the financial plans I see from other advisers are just projections to see whether you’ll have enough money.

Here’s a primer on the five necessary elements of a good retirement plan, along with some info on how to get them all in place.

1. Multiple destinations (aka goals)

Imagine your retirement as a road trip from Washington, D.C., to Los Angeles. Washington is your retirement date. Sunny Los Angeles is the day you die. You’re probably not going to drive the most direct route — there are places you want to see, people you want to visit, things you want to do. Those are your goals.

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2. Gas check (aka, do you have enough money?)

I drive an electric car, so this is not a good analogy for my situation. However, similarly, if I plug a destination into my GPS, it will tell me if I have enough charge to get there. Ideally, I do. If I don’t, I want to figure that out before leaving home so I can juice up. See where I’m going here?

You want to make sure you have enough money before you retire. I advise retirees to look at this at least once per year in retirement, too. If it looks like you are going to run out, you can adjust your goals or go back to work to gas up, hopefully.

3. An income plan

This one is so obvious, but it’s a major gap I see with many prospective clients. You not only need to know you have enough money, but also where it is going to come from. Are you going to pull your money from a bank account or IRA first? When will you claim Social Security? Which pension option will you elect, and how does that impact your spouse? You get the picture.

In this analogy that even I’m sick of at this point, this is the step-by-step route you are going to take. It will and should change as life goes on, goals evolve and tax laws change.

4. A tax plan

The last two components have to do with those two certain things — death and taxes. Pretty much every money move you make in retirement will show up positively or negatively on your tax return. There is a lot of upside and downside opportunity here. In general, you should approach the tax plan the way you shop at the grocery store. A year with low income is like a sale. Pay your taxes by withdrawing or converting funds from pre-tax accounts into a Roth IRA. When you have a high-income year, treat it like eggs at the end of 2022: Do anything you can to avoid buying them. In other words, defer taxes in high-income years.

Think of this like driving an aerodynamic car on your trip. You get no added benefit from paying more than you have to in taxes, just as you would get no benefit from having an inefficient vehicle on your trip.

5. A death plan

This is a depressing way to wrap things up, but I think this terminology more appropriately illustrates the need to have a plan in place for when you pass. Think of this like your car insurance.

As you age, accumulate assets and pay down debts. Your need for life insurance and disability insurance will diminish. Often, this part of your plan should entail figuring out if you’re overinsured and if you’re “right-sizing” your policies for your current stage of life.

Your estate documents also deserve attention. As a general rule, your estate plan should be reviewed every five years, or whenever your situation changes. Proper plans can illustrate how your assets would pass based on what your documents and accounts say.

The how

In my early years, I would print out the 100-page financial plans that would go from the back seat of the car to the junk drawer and then, finally, the trash. I think of these printed, now completely outdated plans, as MapQuest directions. They are good for that one moment in time when you press print. You would be insane to use them instead of a GPS. Good financial planning software, like a good GPS, can easily adapt to current conditions and new destinations. Here are the two options to obtain your plan:

Pay someone. The Financial Planning Association (FPA), CFP Board and XY Planning Network all have good tools to find CERTIFIED FINANCIAL PLANNER® professionals who are educated to build plans like the one above. Beware of other listing services, as many are just pay-to-play endorsem*nts.

Build your own. There is no shortage of free software at this point, but it still isn’t usually the same caliber as what an adviser will use. Both Fidelity and Empower (formerly Personal Capital) have good tools to answer the basic questions of “Do I have enough?” and “Will it last?”

In the adviser world, the three most common software programs are eMoney, Money Guide Pro and RightCapital. Here is a free link to a more limited version of RightCapital that you can use to try building your own plan.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As a seasoned financial planning expert with a comprehensive understanding of the intricate landscape of personal finance, retirement planning, and investment strategies, I've spent years delving into the nuances of creating effective financial plans that go beyond mere projections. My expertise stems from practical experience in the field, backed by a deep commitment to staying abreast of the latest trends, regulations, and innovations in financial planning.

Now, let's delve into the core concepts discussed in the article:

  1. Multiple Destinations (Goals): The analogy of a road trip from Washington, D.C., to Los Angeles effectively illustrates the concept of setting multiple destinations or goals for your retirement. These goals could encompass various aspects, such as places to visit, people to meet, and experiences to enjoy. The key takeaway is the importance of defining clear and achievable objectives for your retirement journey.

  2. Gas Check (Financial Sufficiency): The gas check metaphor, analogous to ensuring your car has enough fuel for the journey, underscores the importance of assessing your financial sufficiency for retirement. Regular check-ins, akin to an annual financial review, help retirees gauge whether they have enough resources to sustain their retirement lifestyle. Adjusting goals or returning to work may be necessary if the financial "tank" is running low.

  3. Income Plan: An essential component often overlooked is the need for a detailed income plan. It's not just about having enough money; retirees need to know where their income will come from. This involves decisions on when to tap into different income sources like bank accounts, IRAs, and Social Security. The plan should adapt to life changes, evolving goals, and fluctuations in tax laws.

  4. Tax Plan: Acknowledging the inevitability of taxes, the article emphasizes the significance of a tax plan in retirement. Just as one plans their route meticulously, retirees should strategize to minimize tax implications. Taking advantage of low-income years for tax-efficient withdrawals or conversions, and deferring taxes during high-income years, can be compared to optimizing your expenses during a road trip.

  5. Death Plan: The article concludes with the concept of a "death plan," which addresses the often overlooked but crucial aspect of planning for the inevitable. Similar to car insurance, the plan involves evaluating the need for life insurance and disability insurance as one ages. Regular reviews of estate documents ensure that they align with current life stages and circ*mstances.

In crafting a robust financial plan, the article suggests using advanced financial planning software. Recognizing the importance of reliable tools, it recommends options such as eMoney, Money Guide Pro, and RightCapital for financial professionals. For individuals, there are accessible options like Fidelity and Empower, offering tools to answer fundamental questions about financial sufficiency and longevity.

In essence, a well-rounded financial plan should incorporate these five elements, addressing the diverse aspects of retirement planning while utilizing sophisticated planning tools for adaptability and precision. Whether seeking professional assistance or opting for DIY solutions, these principles form the foundation of a comprehensive and effective retirement strategy.

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