What’s so hard about retirement income planning? After all, you just pick an investment and put a check in the done box, right?

Sadly, history tells us that those who take such an oversimplified approach to this important phase of their lives may be doomed to bounce fecklessly from one strategy to the next, never fully realizing any of the potential benefits. Worse yet, such a strategy may even jeopardize one’s long-term retirement goals.

More appropriate would be a more comprehensive strategy, taking these four steps into consideration:

  1. Take an inventory of your resources. This entails gathering saving and investment account statements, or information on other property (such as real estate) that you plan to liquidate to fund retirement. To be thorough, be sure to include future contributions you expect to make to 401(k) or other retirement plans, company matches and any other sources of future investments. 
  2. Set retirement goals. Sit down, ideally with a qualified adviser, and set some retirement goals.  The importance of this step cannot be overstated. Accurate goal setting puts you in the driver’s seat and will become a critical component of investment decision making. For example, a common question that I get as a CFP® professional goes something like this: “Is this CD a good investment?” The answer to that, of course, depends. If you have $5 million in savings and need no income from your investments and are very risk averse, the CD might be appropriate. However, if you have $1 million and need to draw $45,000 a year from it, a CD yielding less than 2 percent might prove a mathematical challenge since you will probably need to withdraw about 4.5 percent a year, yet you’ll be earning considerably less.
  3. Consider key factors that would impact your ability to meet your goals. An objective CFP® professional is a good choice to conduct this analysis. A basic plan should take several factors into consideration, including things like life expectancy, investment rate of return, inflation, etc. A good plan will also illustrate the impact resulting from variations in any of the above factors. For instance, if you assumed 2.5 percent as a projected future inflation rate, you had better also consider what will happen if inflation comes in closer to 4 or 5 percent. An excellent plan created by a first rate adviser will also take into account unexpected life events. For instance, you may ask yourself questions such as: “What will be the financial impact if my spouse spends time in a nursing home or dies unexpectedly early, and will this result in lost income or deplete the savings and investment accounts? How many cars will I likely buy in retirement?” Just because you expect to pay off the one you currently drive does not necessarily mean that it will be the last.
  4. Analyze the types of retirement income that you will be receiving. How much of your future income is guaranteed, and by whom? Earlier I gave an example of a risk averse investor, but what of the aggressive investor? Is an aggressive portfolio never appropriate for a retiree, as some claim? Again, the answer depends. I have counseled retired Federal workers, some of whom have quite high risk tolerances. If their income need is 100 percent guaranteed by the government in the form of a pension (with cost-of-living adjustments) and they wish to be aggressive with their investments, that might be okay since they don’t need that money to live on. On the other hand, retirees who are largely dependent on their investment portfolios may not have as much flexibility since the up-and-down nature of aggressive investing could leave them broke. 

Ensuring you will have enough income in retirement requires careful planning. Get out of that “set it and forget it” mentality and put a plan in place that takes your whole financial situation – current and projected – into consideration.