It’s no secret: navigating a successful path toward retirement is difficult. And for some, the inherent complexity is compounded by challenging bumps in the road.
Vanguard wants to help simplify the process for retirees by offering some direction. Recently published, Vanguard’s roadmap to financial security: A framework for decision-making in retirement is meant to guide workers from employment to retirement step by step.
Step 1: Determine goals
According to the framework, outlining goals is an essential starting place for retirement savers. “[G]oals include a combination of meeting basic living expenses, establishing a contingency reserve, accounting for discretionary expenses and leaving a legacy.” The way in which these goals are prioritized will be highly dependent on an individual’s priorities.
Step 2: Understand risks
Next, clients should be advised to consider the risks they may encounter and the way in which these risks could impact their financial security. The framework outlines five categories of potential risk:
- Market risk, such as investment returns, inflation, interest rates and return volatility.
- Health risk related to overall health, availability of health care coverage and level of desired care.
- Longevity risk wherein a retirement saver potentially outlives their assets, and mortality risk, in which a spouse is affected by a partner’s unexpectedly shortened life.
- Event risk including unplanned family expenses, home repairs and other significant financial burdens that may interrupt a retirement plan.
- Tax and policy risk related to changes in benefits, pensions and taxation of retiree benefits and estates.
Step 3: Assess resources
Then, retirement savers should evaluate their available financial resources and determine how they will use each to accomplish goals and mitigate risks. Potential resources could be guaranteed income from defined benefit pensions or private annuities; liquid assets like 401k plans, including the consideration of asset allocation and distribution; and any additional resources, such as private or government insurance, continued employment and home equity.
“A retiree’s goals and resources will inform an effective spending strategy, which is based on four primary levers: time horizon, asset allocation, spending flexibility and spending sustainability,” Vanguard noted.
Step 4: Develop a plan
The fourth and final step of the framework uses the previous three to shape each worker’s optimal retirement plan based on “prioritization of goals, evaluation of risks and an understanding of resources.”
“From constructing an investment portfolio to considering health care options, retirees face unique decisions on complex issues, which can be daunting. Our framework is both practical and prudent, giving retirees guidance and confidence in making thoughtful financial choices,” Colleen Jaconetti, retirement planning expert in Vanguard’s Investment Strategy Group, said in a statement.