Spring/Summer 2015 | BWD 25
Understanding expenses
One of the most important elements is understanding annual aftertax living expenses in retirement. And no matter how far away you
are from retiring, you should start thinking now.
Knowing your baseline cost of living is important: it will help you
build a plan that meets your retirement income goals.
For example, if you want to maintain your current standard of
living, then you’ll need to be prepared to handle 90-100 percent of
your current expenses post-retirement.
Retirement goal
% of current expenses you must be able to afford
Maintain current standard of living.
90-100%
Enter retirement with major debts paid
(mortgage, college for kids).
70-80%
Serious reduction in current standard of living.
50-60%
As you can see, there’s a lot riding on proper planning — it can
require real effort right now to enjoy the retirement you want.
Fill the buckets
We use a “bucket strategy” to build simple financial plans, visualizing
five buckets that collectively house your entire portfolio. They vary in
risk, growth potential and reasons for filling (or not filling) each one.
Income
Retirement income usually comes from pensions, bond portfolios,
Social Security, annuity payments and the like. The amount in
this bucket is need-driven, based on prevailing interest rates and
determined by pension and annuity payout calculations.
Retirement income is different than income earned during working
years, primarily because you will rely on sources that are not
dependent on your ability to produce it. However, these sources can
still provide stable income.
Growth
This bucket fundamentally exists to protect your purchasing power
throughout retirement. You want to at least keep pace with inflation,
but ideally out-pace the rising cost of living.
Items in this bucket include stocks, real estate and other investments
with growth potential. It’s important to note this bucket also has the
inherent risk of a large decline in value, which is why we have reserves
to miti