In my previous post, I described the first step in the retirement planning process–establishing a relationship with your advisor–and argued that this may be the most important step. But a relationship alone will not result in a cohesive plan or a successful road map to your destination, retirement.
Once you have found a financial professional that you trust, you will begin sharing your financial information with them. The data your advisor will collect will include concrete information such as your income and savings, future income sources, and expenditures. In addition to facts and numbers, your advisor will discuss longevity and goals, such as leaving your children or charities a legacy.
Equally as important, however, is your vision of retirement. Some envision a retirement filled with cruises and international travel. After all, you have worked hard for your whole life and now you finally have time to see the world! Others look forward to finally being able to spend all the time they want in their garden or babysitting their grandchildren. These two scenarios pose dramatically different income needs in retirement and are just as important for you to share with your advisor as your concrete financial data. Your advisor will learn all this information about you and your family through discussions and formal questionnaires.
Many expenditures decrease in retirement. Housing for example. Many retirees have paid off their mortgage prior to retirement. Maybe your gas bill will decrease because you are no longer commuting to and from work. But one can’t assume they will have less expenses. Maybe your gas bill will increase as you set out to see the country in your new RV. It is the obligation of your financial advisor to help you make your goals specific as possible and also tell you if they are likely achievable. All scenarios can be planned for if you start early enough.
With this information, your advisor will be able to calculate your financial position (your assets, less your liabilities) and will have a good idea of your cash flow and income (less expenses). They will then look at your current savings, future retirement income sources, and Social Security or Pension, for example. Considering the age you wish to retire at, your financial advisor will determine your savings timeline and calculate the amount needed to be saved annually to reach your goals.
Stay tuned for part 3; Analyzing and evaluating your data.