Six Key Factors to Consider as You Plan Your Retirement Investments

This article was originally published in full on Tacoma’s The News Tribune on January 2, 2024. Gary Brooks has been a contributing author for the paper since 2008 and is also a Partner and Senior Wealth Advisor at Mission Wealth in Gig Harbor, WA.

The United States population will reach its age 65 peak in 2024. More Americans than ever – 12,000 per day – will turn the traditional retirement age as the Baby Boom wave rolls on.

That doesn’t mean they will all retire upon the milestone, but retirement will be a prominent thought for most. Preparedness might be elusive and not solely from a financial perspective. Many people who have financial security aren’t ready to retire because they are uncomfortable with the change in their identity. What will they do with their time? How will they engage in worthwhile endeavors that give them purpose?

It might be hard for many people to believe, but some people “fail” at retirement, not because they don’t have enough income, but because they are bored with unstructured days. While the financial side of retirement is critical, a measure of a “successful” retiree often can be found in the calendar. It is the people who report that their calendar is so full now, they can’t believe they ever had time to work, who seem to be happiest.

Inverted Retirement Planning: Start With Your Purpose

Therefore, retirement planning for those soon-to-be 65-year-olds, or anyone who is plotting their freedom from a paycheck, might best be inverted.

Start with understanding the life transition before determining what is required for the financial transition. That is supported by the reality that the cost of how you want to live is a key factor in determining when you are financially ready.

Once you have a sense of how you expect to occupy your time, it’s important to ensure the financial plan works. To know if you can afford your vision of retirement, you need thorough testing to determine how robust your finances are through various market and economic conditions.

Six Important Inputs to Assess Retirement Financial Readiness

1. LIFE EXPECTANCY: You can’t know how much you’ll need until you know how long you will need it. This is one of several important factors you can’t control but the odds that you will outlive the oldest same-gender relatives in your family tree are generally strong.
2. HOW MUCH WILL YOU SPEND? You won’t spend the same amount on repeat each year, so many basic retirement planning calculators quickly become inadequate. While settling on one number is difficult, you should focus on the difference between essential needs and discretionary extras. If you’re like many retirees, you can expect a phased approach to spending as the go-go years give way to the slow-go years and then the less expensive no-go years.
3. INFLATION: It would be reckless to plan on anything less than 2.5 percent average annual inflation of your expenses. The longer your expected retirement, the more important the inflation factor is in your plan.
4. GUARANTEED INCOME: Before evaluating what your investment accounts need to produce, understand how much of your budget is covered by guaranteed income from Social Security, pension, or other sources. The higher the percentage of your budget that is covered by known income, the more you can tilt your investment accounts to long-term growth rather than over-weighting current dividend and interest payments.
5. INVESTMENT RATE OF RETURN: Knowing that investment returns will vary from year to year, sometimes dramatically, what is the long-term average annual return you expect for your chosen investment approach? Alternatively, what is the investment return required for your plan to work and how can you re-orient your portfolio to that expected return, possibly taking less risk?
6. TAXES: If you have a mix of different investment account types, you likely own some assets that will be fully taxed as ordinary income, some that will be taxed at lower capital gains tax rates, and some that might not be taxed at all. If your accounts are heavy on pre-tax, ordinary income, dollars, you might need a meaningfully different spending budget than someone whose assets will face lighter taxation. Some people are also surprised to learn that their Social Security income is taxed and that Medicare premiums are determined by their taxable income.

Those are the six core inputs that every retirement plan must include. There could be many more inputs based on personal situations and preferences. In addition to the key factors that you can make credible assumptions about, you should also think about “what-if?” options. Consider what-if circumstances might harm your plans (lower investment return, higher inflation, longer life) and what-if ideas that are more aspirational, such as your ability to spend more or give more.

Life transitions, income, and investment markets will eternally evolve, but you’ll be able to make more informed decisions through change if you have a stronger sense of how your life plan fits with your financial plan.