Financial Planning

As featured in Manning & Napier’s Guide to Financial Planning, Prosper. To get your complimentary copy, and to read the full article, visit go.manning-napier.com/Prosper.

When it comes to planning for retirement, few people fully understand if they are financially prepared to move into the next phase of their lives. How much do you need to save? How much can you afford to spend each year? How long will you live? How will your investments perform? These are just a few of the questions that make planning for retirement so difficult.

Each person’s unique situation makes it tricky (and perhaps unwise) to use a one-size-fits-all approach to retirement cash flow planning. At Manning & Napier, we believe it’s crucial to understand the goals and expectations of each client to help them understand whether they are adequately prepared and on the right track to achieve their retirement goals.

An estimate of initial spending target can be approximated in two primary ways: estimating income needing to be replaced in retirement or by creating a budget.

Income Replacement

One way to estimate an initial spending need in retirement is to look at what you have historically earned and then adjust this figure lower, since a few things will change once you retire. First, depending on your situation, income taxes may decrease. Second, you will no longer be saving for retirement. Third, you will no longer be paying FICA taxes. Thus, taking your earned income later in life and reducing by these amounts will give you a solid initial spending estimate.

However, other factors will impact your spending rate in retirement. Your spending could be lowered by reducing for amounts that are related to employment expenses, like transportation and work attire. Retirement also typically comes at a time when your children are no longer living at home. In contrast, increased travel costs and greater expenditures on other leisure activities can result in increased spending in retirement. Likewise, Medicare/health insurance and other health care costs can impact expenses in retirement.

While many of these figures are likely to vary, it’s best to begin by estimating how much you’ll spend in the first few years of retirement.

Budget Analysis

Rather than basing a spending need on prior income, another common approach involves the creation of a budget, and adding up each incremental expected expense. While this seems like a logical approach, many times budget items can be overlooked. This type of approach is best suited for those with accurate spending records and the willingness/desire to dig in to the details.

So this begs the question: How do you know how much your spending will change in retirement and how do you plan for such a vast unknown? For many people, the best way to answer this question is to ask themselves how they truly want to spend their retirement. How much they want to travel, what else they want to spend money on, and how willing are they to change their plans later in retirement should their portfolios achieve returns that are either far better or worse than what they projected?

Manning & Napier understands the importance of comprehensive retirement planning and can help clients model their future cash flows to help them understand if they are on track to achieve their goals. Our modeling capabilities are highly customizable to our clients’ unique circumstances, and can consider a broad range of assumptions. The more we understand about our clients’ goals and needs in retirement, the better we can manage their investments to be in line with their goals.

Planning for retirement spending and cash flow needs is difficult for a number of reasons. Nobody knows what the future holds and there are many factors out of a retiree’s control. Nevertheless, it’s imperative to have a plan that provides a roadmap so you are able to better enjoy retirement and have the tools in place to navigate a changing world.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.