What’s the Difference Between Custom Allocation and a ‘Cookie Cutter’ Plan?
Many people take a simple approach to retirement and invest in a basic, age-based fund. They plan to withdrawal Social Security benefits as early as possible and follow advice they received from friends and family. They maintain a “set it and forget it” mentality and assume that everything will work out just fine.
But financial plans often need customization.
Why? Unlike popular belief, the most important component in any retirement plan isn’t necessarily the size of your nest egg or even when you plan to start your retirement (though these are very important factors). What’s actually most important is itemizing your top goals and then making individualized financial plans to help you plan these goals.
Everyone’s retirement plans are different, and therefore, the answer to “When can we retire?” isn’t always what people want to hear.
For example, if you plan to retire to a summer home you already have, your financial goals could be very different than those of someone who wants to travel a lot in their early retirement. In one scenario, you may be able to sell your primary residence; in the other, you will need to consider creating a travel fund. What if you’re an entrepreneur who has been dreaming of starting a business once you retire, hoping that your investments and cash flow will be enough to support the business?
Articulating and itemizing your top goals is key to planning. Working on these articulated plans with a financial advisor could help even more. Especially as these plans change throughout your life. A well-designed financial plan should encompass the following 6 categories, pegged to your goals:
- A cash flow plan (budget), designed to manage monthly expenses and income
- An investment plan
- A retirement plan
- An educational plan, if necessary (educational savings for children and grandchildren)
- A risk management plan (insurance for your property, such as a house and car, and life insurance for your family)
- An estate plan (a will and powers of attorney)
While the Internet allows us to find “cookie cutter” advice almost anywhere these days, financial planning is not a one-size-fits-all equation. You may have children to consider while someone else may not. Your goals are more than likely different from your coworkers and neighbors. Your family structure may look different. Discussing each of these elements with a financial advisor can bring important customization to your financial plan – and therefore fit better for you.
At Scarborough Capital Management, we’ve been helping busy families with their financial planning needs for more than 30 years. Unfortunately, using a basic approach when you have a complex financial life is a common, and sometimes expensive, mistake we see being made.
Break this cycle. Contact Scarborough Capital Management and get a conversation started. Set up a plan that answers the question, “When can we retire?” the way you want to.
Avoid the Risk of Your Plans Not Working: Forecast Your Expenses
Sadly, many people assume that a cookie-cutter financial plan will be “just fine,” but it doesn’t always work out that way.
One common rule of thumb, for example, is to assume your retirement expenses will equal 80 percent of your pre-retirement expenses. But what if they don’t? If your retirement expenses exceed what you had planned and budgeted for, you may have to scramble for ways to cover the overage. And many people have to face a grim set of options: Cut severely down on your expenses, or work when you didn’t plan to.
On the other hand, if you don’t need 80 percent of your pre-retirement expenses, it’s possible you could be overly denying yourself spending in certain categories before retirement.
A good way to avoid these situations is to chart your existing expenses over a period of months. Then calculate how those will change in your retirement – not a cookie-cutter retirement for Anyone In The USA. Develop a forecast for your retirement expenses versus income, category by category. A financial advisor can help with this.
If you have pre-existing health conditions or know that immediate family members developed health conditions in older age, for example, your health expenses may increase more than the general person’s in retirement. You may want to build in expenses for assisted living facilities and long-term care.
If you currently have a relatively expensive commute to work, on the other hand, those commute costs may vanish! But if you plan to build a business in retirement, you may want to allocate more for work-related expenses, not less.
Another way to prepare for your retirement is to test drive it a decade or so before retirement, to see what you actually need. Live for several months on your predicted retirement budget. Make sure to experiment for a long enough period that any gaps or needs for change become obvious to you. Is real estate more expensive than you thought? Have changes in the tax code resulted in a higher expenditure for taxes? Have healthcare costs climbed above what you expected?
Trying out your retirement when you’re still working gives you time to make changes. If real estate is soaring beyond your budget, for example, you can consider moving to a less expensive area, downsizing or both. You may have to save more to cover increasing healthcare costs. Discuss your plan with a financial advisor who will put your best interests first. For every potential identified problem, there is a solution.
Estimate Your Income
Another risk to using cookie-cutter advice is planning incorrectly for your retirement income.
Many people assume, for example, that Social Security benefits are one-size-fits-all. Retire at 65 or 66, the thinking goes, and you’ll receive the amount you’re due. But in fact, Social Security benefits can vary greatly, depending on when you choose to take them.
Anyone who is eligible for Social Security benefits can begin taking these benefits at the age of 62, but the amount you will receive at that age is reduced by as much as 30 percent from what it could be if you wait until you reach your full retirement age. This reduction is permanent: Your benefits could be as much as 30 percent lower every month of your life.
Conversely, Social Security benefits increase roughly 8 percent for every year you delay taking them between your full retirement age and the age of 70. The delay can be very helpful to increase the amount of your Social Security benefits.
Deciding when to take Social Security is just one of the important decisions in life that can alter your future. For advice on individualized plans, contact the financial advisors at Scarborough Capital Management.
When can we retire? The answer is up to you.