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Investing for Retirement Needs, Wants and Wishes

When it comes to creating a retirement plan, it’s easy to get overwhelmed. Considering what goals you would like to tackle first can be complicated at any time of life. Like many aspects of life, when creating a retirement plan it is essential to start with the basics and work our way up. What can become more concerning is not planning at all. The closer you get to the end your regular paychecks, the more frightening things can become.

Budget for Basic Retirement Living Expenses

First, it is imperative that you start with creating an income goal or budget that will handle the basic living expenses. These expenses can include things such as your mortgage, utilities, food, insurance, and other expenses that are necessary to take care of. Ideally these expenses should be covered by sustainable income streams during retirement, such as pensions, Social Security, and annuity payments. Let’s call this set of expenses your “needs.” It is important these expenses come from sustainable sources so your basic living expenses won't be impacted by market fluctuations.

Save for Retirement Wants

The next set of income goals that you set forth may include things like travel, golf or expenses associated with your hobbies. This set of goals can be considered your “wants.” It is important that you begin planning for these goals sooner rather than later so your plan can be adjusted to be ready for these expenses. You probably didn’t plan on just sitting on the couch and watching TV during retirement. Remember, in retirement every day is a Saturday. The income goals set forth in our wants should come from investments that produce consistent income, such as fixed income investments and dividend-paying stocks. These investments should produce an income stream consistent with the income needed to meet your wants during retirement. (For related reading, see: How to Create a Modern Fixed-Income Portfolio.)

Decide How Much You Want to Leave for Others

Your last set of income goals set forth during retirement might include things like gifting to your children or grandchildren, philanthropy, or leaving a larger estate. This set of goals are considered your “wishes.” Everyone is different, and some may place more value in leaving more money to their heirs. Goals set forth as your wishes should come from more growth-oriented investments. These investments can include stocks, bonds, real estate and many others. Since the goals set forth as wishes are typically longer term, you have the ability to be more assertive with the investments earmarked for these goals.

The single most important piece of planning for retirement is setting realistic goals. Separating your goals into different categories such as needs, wants and wishes allows you to invest differently for each goal. Traditional advice suggests you should invest around 60% of your savings in stocks and 40% into bonds. This strategy may not hold up as it once did, since stocks and bonds are more correlated than they once were. When planning using a needs, wants and wishes approach, you can invest appropriately for each segment of your overall income goal since each has a unique time horizon. This means your investments allocated for your needs will be less risky than investments allocated for your wants and wishes.

(For related reading, see: How to Create an Effective Retirement Income Strategy.)