A Retirement Readiness Checklist

Working out if you're on track to retire can be more manageable if you break it into smaller steps

Christine Benz 26 October, 2020 | 9:57AM
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Whether it's a daily to-do list or the supermarket shop, using checklists can help us avoid mistakes, be more efficient, and reduce stress. Checklists can also make seemingly enormous, daunting jobs seem doable by breaking them into smaller, more manageable steps. So why not use one to plan for retirement? 

Gauging your financial affairs in advance of retirement is a job that lends itself well to a checklist. Of course, financial management before and in retirement is so complex that you should also consider professional help, or at least a second opinion on your plan, before you embark on it. But even if you ultimately end up employing a financial adviser to be your guide as you prepare to retire, using a checklist can help you comprehend the key variables that will make your retirement plan succeed or fail. 

If you're starting to think about retirement and what your retirement plan should look like, here's a checklist to help you think through the key variables.

1. Work Out Your Retirement Date

If you're planning for retirement, it makes sense to know when it will begin. Of course, the financial pay-off of working longer has been well documented: delaying portfolio withdrawals, additional retirement plan contributions and tax-deferred compounding, and larger in-retirement benefits can all contribute to your plan's sustainability.

But it's worthwhile to consider your expected retirement date from a number of additional angles, not just the financial dimension. You'll also want to consider quality-of life issues, health, and whether you can actually continue to do your job later in life.

It's also important to bring a healthy dose of humility to retirement date planning. Research from Morningstar Investment Management's David Blanchett, has demonstrated that people often do a poor job of estimating when they expect to retire. Those who thought they would hang it up early often end up working longer than they estimated, whereas some who had anticipated delaying retirement didn't do so.

Health issues or layoffs often force people out of the work earlier than they might consider ideal, while others continue to work longer than anticipated because they need or enjoy their jobs or value the social dimension. In other words, as valuable as it is to set a goal date for retirement, you may end up deviating from it for one reason or another.

2. Assess Your Income Needs

The next step is to take stock of your planned in-retirement spending. One common rule of thumb is the 80% rule - that is, in retirement, you'll need to replace about 80% of your working income. Taxes may go down and you don't have to save like you did when you were working, which represents the bulk of that 20% reduction.

But affluent retirees tend to spend much less than 80% of their working incomes, whereas retirees with lower working incomes tend to consume a higher percentage of their working incomes in retirement. That's only logical, in that affluent households likely have more savings, whereas lower-income households consume a bigger share of what they make.

Many retirees also plan lifestyle changes in retirement that will affect their spending. Some may be planning to downsize, while others may expect spending to increase because of heavy travel or rennovation plans.

Because forecasting your anticipated income needs is such an important component of crafting your retirement plan, make sure you right-size your income needs by looking at your expected outlays line item by line item. Also remember that your spending won't necessarily be static from year to year; you may have higher-spending years, especially in the early and later parts of retirement, and lower-spending ones, too. 

3. Maximise Your Pension and Benefits

How much of your income needs will be supplied by sources other than your portfolio - for example the State Pension or an inheritance? The next step in the process is to quantify how much income you'll receive from those sources and to consider how your decisions can enlarge or shrink those benefits.

Delaying State Pension payouts, for example, could boost your eventual benefit and is often a good option for people who anticipate longer-than-average life expectancies. 

4. Consider an Annuity

If a pension will supply you with less income than you need for basic expenses (housing, food, utilities, and insurance, for example) an annuity may be appropriate. An annuity is an insurance policy which means you use your pension pot to buy a guaranteed income for life. They're not always the best option, but if you have a longer-than-average life expectancy or health issues, they could be worth consideing.

Before sinking a portion of your assets into an annuity, it's important to thoroughly understand what you're getting: whether you need such a product in the first place and what type of annuity might be right for your needs. This is an area where speaking to a professional will likely be incredibly helpful. 

5. Work Out Your Spending Rate

Once you've determined your in-retirement income needs and how much will be covered by certain sources such as a pension (and possibly an annuity), your investment portfolio is going to have to supply the amount that's left over.

The annual amount you plan to withdraw from your portfolio, divided by your portfolio's current value, is your withdrawal rate (or even better, your spending rate). For example, if you have a £100,000 pension pot and plan to withdraw £5,000 - that's a 5% spending rate. 

What's a reasonable withdrawal rate? The 4% guideline is a commonly used one, which revolves around withdrawing 4% of a portfolio's value in Year 1 of retirement, then inflation-adjusting that amount thereafter.

While that system might have worked historically, some retirement experts are concerned that currently low bond yields and rock-bottom interest rates could make the 4% strategy too rich going forward. In any case, it's wise to be a bit flexible with respect to withdrawal rates, especially reining in spending in weak market environments.

6. Construct an Investment Portfolio

Once you've determined your spending plan, the next step is to build a portfolio to support it. Long gone are the days that retirees can subsist on the income from their cash and bonds; today's retirees also need the long-term growth potential from stocks.

To help structure your portfolio, you can use your cash flow needs to determine how much to hold in cash, bonds, and stocks. So, for exapmle, you might hold two years' worth of spending in cash, eight years' wroth in bonds and dividend-paying equities, and the remainder in a group of globally diversified stocks. That provides a roughly 10-year buffer in case stocks decline and stay down for a long time. The key is using your own cash flow needs to inform your asset-allocation positioning. 

7. Don't Forget Tax

It would be so simple if we could each bring just a single portfolio into retirement, but the reality is much messier. Most retirees will have their money spread across savings accounts, Isas and pension pots; withdrawing money from each has different tax implications. Doing your tax maths with help you work out the best way to withdraw from these pots without handing more over to the tax man than is necessary. 

8. Make an Estate Plan

Documenting your wishes in case you should die or become incapacitated is valuable at every life stage, but it takes on increasing importance when we age.

What do you want to happen to your financial assets? Who do you want to be able to make important financial and healthcare decisions on your behalf? What instructions do you want to give your spouse or other loved ones about your portfolio? Retirees and pre-retirees should ask all of these questions when they're of sound mind and body, and update their estate plan periodically to reflect their current situation. This is another area where getting professional help can be beneficial. 


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.

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