Step 1 of 4: Begin with the End in Mind - Your Nest Egg Goal
KEY TAKEAWAYS:
This blog discusses the critical first step of the 4-step process to determine YOUR personal retirement income and withdrawal plan.
Some individuals want to spend all the money they’ve saved in retirement and time it so that their last check bounces; others want to accumulate as much of it as possible for the benefit of others, who will still be alive after them. The average person tends to be somewhere in between these two goal posts.
Determining whether your nest egg is intended solely for your own retirement support, or to assist with goals of supporting other people as well is key to determining the retirement withdrawal strategy that will work for you.
Welcome back to our Retirement Income Series! Are you looking to retire and figure out what the retirement nest egg you’ve been building for all those years can do for you? In this article we’ll dive into the first step in the 4-step planning process that’s key to a retiree determining their own retirement income and withdrawal plan.
The 4-step process looks like this:
Begin with the end in mind: what’s your ultimate nest egg goal?
Understand different withdrawal methods that tell you how much money you can take out.
Perform multi-year tax planning to minimize taxes in retirement.
Get to know YOUR retirement building blocks and when and how to use them for maximum effect.
So, this article centers around step one – “Begin with the end in mind: what’s your ultimate nest egg goal?”
This step might seem like it has an easy, basic answer: support an individual’s retirement needs and lifestyle. For retirement-minded individuals, that’s usually true. However, the real question is: are there any other goals wrapped into that? Some individuals will say no, and that everything they saved is intended for their own use. In fact, many go on to add that if they had a crystal ball and knew when their journey on earth was going to end, they’d spend down to their very last dime, maybe even bouncing their last check on their death bed. Other individuals feel quite differently, wanting to never spend down their nest egg. Sometimes this is for security-motivated reasons, knowing that if they never run out of money, they can always take care of themselves. Still others are preserving their nest egg for the benefit of other people, which might be family or friends, or even charitable organizations or causes they care about.
The spectrum of outcomes may look like this:
Studies suggest that outcomes at the end of life do have a range as shown in the bell curve above – with starting amount of retirement assets, length of life, and adverse life events playing a key role in outcomes.1 However, in large part an individual’s ongoing life choices on how they spent their money also played a role in whether they ended life with, or without, any nest egg left.
In my 20+ years of asking retiree clients about these wishes, the average person seems to fall somewhere in the middle. They note that their primary goal is to use their wealth for their own purposes, for enjoyment as well as to avoid being a burden on anyone else. However, if there’s anything left over, they want it to go to the people or organizations they care about. In many ways, this outcome is the easier one to plan for. There’s no specified end financial number, but rather a range of outcomes that would be acceptable. If this is your goal, then the key is to learn how much you can realistically spend along the way, and the type of monitoring you need to do so you can adjust if necessary. We’ll cover how to do these things in the next step of the 4-step process.
What if, instead, your goal lies at the far-right end of the spectrum, and you’d like to preserve as much of your nest egg as possible, potentially even sacrificing your own lifestyle to leave money behind? Individuals with a special needs child, an elderly family member, or others they care for who struggle to be self-sufficient often fall into this category. The nest egg of this individual will likely need to work harder because it needs to support two different goals and time horizons: the retiree, but also whoever needs the money next. In the next part of the 4-step process, step 2, we’ll discuss the withdrawal methods that best support these goals.
Finally, for those that saved their retirement assets for their own use and would prefer to reap the full benefit of it with intention throughout their lifetime and not leaving any money behind: this may be the hardest goal to achieve. Well, there’s a caveat: if you know when your death is going to occur, you could plan it easily. Unfortunately, most people are unable to predict when they are going to die . If they do know, it usually means that their time horizon is often quite short. AND when they do know, if they have larger sums of wealth, it might be hard to spend it all in meaningful ways before they pass on. How do you accomplish this goal? Do some very thorough planning. Address as many contingencies up front as possible, so that there’s a good likelihood that whatever is left is available to be used however you desire.
There are many contingencies that you may wish to consider. Some common ones include major health issues, the need for long term care as you age, needing to help a loved one financially which takes away from your own resources, the desire to create a fund for grandchildren’s college, and married individuals should plan for one spouse potentially passing away years before the other. There may be others; it’s a good idea to try and envision your own future life path and what realistically could go wrong, and how you’d want to be prepared for it financially.
In conclusion, with YOUR goal now firmly in mind, you will have the ability to more easily determine the withdrawal method that best fits your situation. That’s Step two in the process, which we’ll discuss it in our next blog post in this Retirement Income Series. Stay tuned!
Footnotes:
IMPORTANT DISCLOSURE INFORMATION
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