We’ve come a long way since we started this tutorial. First you had to locate and itemize your assets, then you learned how to discover your investment-profile objectives and see how well they matched your portfolio. Lastly we showed you how to consolidate your assets where possible to streamline your planning. The final step is to look into the future and see what changes you need to make.
If you analyzed your portfolio and discovered that it didn’t fit your objectives, or that some accounts or investments need to be replaced or upgraded, you need to do research to identify suitable replacements. But first you need to figure out how much money you should have on hand by the time you reach retirement. You can get a basic idea of this by making the following computations:
How Much Will You Need?
Start by estimating how your current budget might change during retirement. Would you still go to the ballpark every other weekend? Would you still eat out as much? How much more would you pay for medical and dental care? (To help estimate healthcare costs, see Medicare 101: Do You Need All 4 Parts?) Will you spend less on clothes and commuting, but more on travel? Will your energy bills rise because you'll be running the air conditioner or keeping the heat up during the day when you used to be at work? Try to get at least a rough estimate of what you think your monthly budget will look like after you stop working.
Then determine the bottom line of your assets by using a time-value-of-money calculator (find a selection of them here) to project how much your funds will be worth in X number of years when you retire, assuming a given rate of inflation. You may want to figure in a lower growth rate because your portfolio will likely be more conservative as you approach retirement. Add in what you expect to receive from Social Security (go to My Social Security for an estimate; the agency also has its own calculators if you want to look at different scenarios).
Now that you have estimated what you'll spend and how much you are likely to have given your current assets, it's crunch time. Will you have enough? Do you need to rethink your strategy? The last step in the process is making a financial plan and revisiting your assets in light of it.
Making a Financial Plan
Even if you've done all the work yourself up to now, this may be the time to bring in a financial planner. If you just need guidance, a fee-based adviser might be a good idea. If you also want help in effecting some transactions, a full-service broker or planner may work better for you.
With your assets and goals organized, this is a perfect time to create a comprehensive financial plan for yourself, especially if you feel there’s a good chance that your earnings and circumstances will stay relatively stable and predictable between now and retirement. (See What Kind of Financial Plan Makes Sense For You?) Planners have sophisticated programs that can run all kinds of hypothetical scenarios showing what will happen if things go the way you think they will – and what could happen if they don’t. You may be wise to pay for a few different possibilities, such as one that shows what would happen under dire economic conditions and one that shows how things would play out if you were to become disabled. If you’re a do-it-yourselfer, try www.futureadvisor.com.
Running these numbers, either on your own or with professional help, will enable you to see what you need to do between now and retirement to adequately provide for yourself and your family.
Revisiting Your Assets
Finally, look at the assets you identified in the previous section as needing to be rebalanced or replaced. Is it time to unload those savings bonds? Should you consider cashing in that old whole-life policy – or do what's needed to bring it up to date?
Look at your investment profile and goals against your financial plan: Do you need to consider being more risk tolerant and including more growth-oriented investments to reach the funds you estimate you'll need to retire? Or, on the other hand, is your time to retirement getting shorter so that you should consider switching some portion of your portfolio to safer investment vehicles?
Now that you have your assets in order – and have simplified and consolidated them where possible – resolve that you will revisit your portfolio at least every year. And be sure that plan custodians, banks and brokers have your updated contact information so no assets will be lost in the coming years.
The Bottom Line
Congratulations, you’re finally finished. If you followed the steps in this tutorial, you should now have a pretty clear idea of where you are financially, how your assets are working for you and what you will have when you stop working. You will have located missing assets and consolidated your holdings so that they are easier to manage going forward. And you have a plan. Pat yourself on the back – you've taken a significant step toward improving your quality of life at retirement.
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