No matter who you are or where you work, you don’t have money in a retirement plan; But you may have money … in a retirement account.
These terms - “retirement plan” and “retirement account” are often used interchangeably, but that’s not helpful. When one uses the term “retirement plan” for a 401K, a 403B, a 527 or even a WD40 (chuckle), it can mistakenly lead to the belief that you actually have a PLAN for retirement.
And, actually, what most of us really have is an ACCOUNT that holds funds we intend to spend once we’re retired. Even so, you may have no idea how you’ll do this. Therefore, you have a need for a real plan.
Think of a real retirement plan as a cash flow simulation of how you’re going to fund your lifestyle after you stop earning an income.
The first step is determining what that lifestyle is. Here you’ll want to take your time and be very honest with yourself about what you spend now and how much those lifestyle expenses are going to change when you retire.
One question I often ask pre-retirees to consider is: do you spend more money when you are working or when you are on vacation? For many, the answer is “on vacation.” So, don’t kid yourself about how much less you’re going to be spending in retirement.
You need to put together a good pre-retirement cash flow model and determine what your target is. If you need outside, professional help for this step, get it.
Once you know what your target is, begin assembling a list of your retirement income resources.
1. Social Security. For most folks, step one is their Social Security income. If you haven’t done so yet, go to www.ssa.gov to get a personalized estimate of what your Social Security benefits will be.
2. Pension. If you are fortunately to be one of the handful or so of private or public sector workers who will retire with a pension, make sure you get an updated estimate from your employer of what that pension benefit will be.
If your needs exceed what you can count on from the fixed, monthly income provided by Social Security and pensions, most of us will be left to decide what to do with our personal savings and how to generate a sufficient income from them, while avoiding numerous pitfalls.
Wall Street, banks and insurance companies all have no shortage of suggestions of what you should do with your personal retirement savings money.
The purpose of a retirement income plan is to put the jigsaw puzzle of your available resources, your needs and the financial industry’s products and services so as to maximize your income and minimize your risk.
We’ll discuss more about ‘accounts verses plans’ in a future blog.
