This story originally appeared on NewRetirement.
Everyone knows that they need a retirement plan. But that means different things to different people, and not every plan counts as a truly useful retirement plan.
Sometimes a retirement plan is something that is prepared for you by a professional. It is likely a thoughtful plan, but how exactly is it going to be useful to you?
Following are several tips for building a useful retirement plan that’s not just a hefty stack of paper with some pretty (though likely confusing) graphs and charts.
1. A useful retirement plan is comprehensive
Many people think that a retirement plan is an account with savings to be used for retirement. And they are not wrong.
However, your savings and investments are only one aspect of a comprehensive and useful retirement plan.
For most people, Social Security benefits, home equity, retirement jobs or even good health are actually more financially valuable than their savings accounts. Therefore, it is critically important that your retirement plan looks at everything that will impact your financial well-being.
Inheritances, how much you spend, inflation — and so much more — are also hugely important considerations.
2. A useful retirement plan is something you really understand
There are so many hugely complicated parts to a comprehensive retirement plan. If someone else does the plan for you, if you use a simple retirement calculator, or if you just try to do mental arithmetic, you are not going to fully appreciate the details.
Whether you work with a financial planner or not, it is a great idea to have a place where you can manage and track all the details yourself.
When you create your own plan and really engage in the process of planning, you gain more insight into how big and little decisions will impact your future.
You can begin to see how your finances will play out with a very real perspective.
3. A useful retirement plan is completely personalized
Building a retirement plan requires some use of assumptions: things that are accepted as true or as certain to happen, but without proof.
When planning, you need to make guesses about inflation, how much money you are going to spend and so much more.
However, some online retirement planning tools (and even some financial advisers) use a greater number of more general assumptions than other resources.
To have a useful retirement plan, it needs to be as personalized as possible. For example, many retirement planning resources base their projections on the assumption that the retiree will spend 70% of their pre-retirement earnings in retirement. This may be true for some, but it is definitely not true for many others.
If you are working with a financial adviser, ask to see the assumptions used for your plan. If you are using the NewRetirement retirement planner, you know that you get to control an ever-expanding list of details. You can always click on the “assumptions” link to review the additional data used by the tool.
4. A useful retirement plan combines professional help with do-it-yourself tools
Good online retirement tools, professional retirement advisers and other financial professionals are not mutually exclusive.
In fact, they often actually complement each other. Research shows that many people don’t trust their financial adviser or even their banking institution. That distrust is usually rooted in not understanding why they are supposed to do whatever it is the adviser is suggesting.
If the client has a good understanding of their own financial situation (often gleaned from good online tools), then they are more likely to understand why an adviser might make certain recommendations.
On the other hand, using a retirement calculator may illustrate places where someone needs more help — from a professional.
5. Your retirement plan needs to be a living document
A useful retirement plan is not something you spend an hour or two on, one time. It should be easy to get started, but you need to spend significant time exploring and playing with all of your options.
In fact, this is one of the biggest complaints that people have about a formal written dossier about their retirement: They cannot easily make changes and try out different strategies.
Never mind the fact that things change.
Retirement planning is not something that you do once and forget about forevermore. Use retirement tools and resources that enable you to make updates at least quarterly and whenever anything about your finances changes.
6. A useful retirement plan helps you make necessary trade-offs
Life is messy. You have competing priorities, values, interests.
When you first gather all of your financial information, it is unlikely that you will have documented your perfect retirement plan. It is likely that you will need to make some adjustments and even assess trade-offs.
Here are some important questions to consider:
- Do you want to retire a little earlier and spend a little less?
- Do you want to downsize and afford more travel?
- Do you want to guarantee adequate income or go for high returns on your investments?
7. Your retirement plan needs to be able to serve different purposes and different stages
Your retirement planning goals are hugely different before you retire and when you are retiring or already retired.
Before you retire, your goal is about amassing and growing the maximum amount of savings in the most efficient way possible.
When you are retiring, your concern becomes how to continue growing while also spending those hard-earned resources in the most efficient way possible.
8. A useful retirement plan helps you make decisions and track progress
Building a retirement plan is only part of the equation for having a useful retirement plan.
A useful retirement plan is one that enables you to research and learn more about different topics, then go back and try different things with your newfound insights.
You also want a retirement plan that helps you to make decisions and actually take the actions that are necessary for a more secure future.
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