Planning for retirement can seem like an overwhelming task. You may worry that you do not have enough assets to last a lifetime or that an unexpected expense could derail your retirement planning efforts. If you are unsure of your level of retirement security, you may benefit from scenario planning.  

Scenario planning is an approach that can help you evaluate how your retirement savings may hold up in different situations. It can help you determine: 

  • When to retire 
  • Your level of retirement readiness based on your goals 
  • Your potential tax exposure 
  • Whether you need to make any changes to your investment portfolio 
  • The potential tax burden on your heirs once they inherit your assets 
  • The types of risks you may face, such as longevity and inflation 

Our advisors help clients think through the following items to scenario plan for retirement.  

#1 – Understand what your retirement expenses will look like.  

The first step in retirement scenario planning is to gain an understanding of how much you will need to pay out in expenses each month. A general rule of thumb is to plan for needing 80% of your pre-retirement expenses once you retire. However, that number can be greatly impacted by your particular retirement lifestyle. For example, if you plan to purchase a second home or travel extensively, your retirement spending may be significantly higher than your pre-retirement spending. 

To estimate your retirement expenses, start by establishing a budget that accounts for both discretionary and non-discretionary expenses. Consider the expenses that will increase in retirement, such as spending on hobbies and travel. Also consider what expenses are likely to decrease in retirement, such as commuting to work.  

If you plan to move in retirement, consider how your new cost of living may be impacted. Are you moving to an area with more expensive property taxes, utilities and groceries? If so, be sure to factor the higher cost of living into your monthly budget.  

Once you have an idea of what your retirement spending may look like, you can compare that to your current savings to determine how long your assets may last in retirement.  

#2 – Consider both best- and worst-case scenarios.  

When planning for retirement, many people make the mistake of assuming current trends and market conditions will continue long into the future. But what if something unexpected happens? How could your retirement be positively or negatively impacted? 

A great way to gain a better understanding of whether your retirement savings can withstand various scenarios is by modeling different projections based on various circumstances. There are many different online retirement calculators that can give you a basic idea of your overall retirement readiness, but for more in-depth and personalized retirement projections, consider working with a wealth advisor to model various scenarios. 

#3 – Establish a retirement spending plan.  

The next step in scenario planning is to establish a retirement spending plan. Armed with both an estimated budget and an idea of how various scenarios may impact your retirement savings, consider how much you can withdraw each month to meet your goals while also helping ensure your retirement portfolio remains adequate to meet your needs throughout retirement.  

Modeling several different scenarios can be helpful here, as well. For example, what would the impact on your monthly income and retirement savings be if you purchased a second home, moved to a new state or country, downsized your home or were diagnosed with an unexpected medical condition?  

Once you have an idea of how various scenarios may impact your retirement, work with your wealth advisor to establish a target withdrawal rate. Some retirees begin by withdrawing a certain percentage during their first year in retirement, then they adjust that dollar amount for inflation each year in order to maintain their spending power. Your wealth advisor can help you establish a spending plan that makes sense based on your financial situation, your retirement goals and other factors that could potentially impact your retirement security.  

If you could use some help scenario planning for your retirement, we would love to have a conversation. To learn more about how United Capital Financial Advisors can help you plan for the future, please contact us.  

This commentary contained herein is intended for informational purposes only and should not be construed as tax, legal or investment advice. Past performance is not indicative of future results. Clients should obtain their own tax, legal or investment advice based on their circumstances. The material is based on sources deemed reliable but is not guaranteed.

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