Four Steps to a Healthy and Prosperous Retirement

Planning for a retirement that can last 20 years or more can be a daunting task. It's easy to get lost in the details and not see the forest for the trees. Your first step is understanding the big picture, so you focus on what really matters to you.

Here's your goal: You want a reliable, lifetime retirement income that covers your living expenses for a good life, no matter how long you live and no matter what happens in the economy. While that's easier said than done, of course, it's what you should be striving for.

These four steps will help you achieve this goal:

Develop sources of reliable, lifetime retirement income.
Manage your living expenses.
Protect against things going wrong.
Plan for a good life.

Now let's talk details.

Step 1: Develop sources of reliable, lifetime retirement income.
For most people, there are five possible sources of retirement income:

Social Security benefits
Pensions
Income generated by retirement savings, such as 401ks and IRAs
Income generated by home equity
Work

Each of these sources most likely won't be enough by itself to generate adequate retirement income; in this case, you'll need to piece together your total retirement income from a few sources. There's also a good chance that some of the sources above won't be available to you; for example, most Americans don't have income from a traditional pension plan. So learn about the resources that you do have -- it's a great place to start your planning.

Step 2: Manage your living expenses.
The following sources make up 75 percent of the average retiree's budget in America, in order starting with the highest amount:

Housing
Transportation
Food
Medical
Entertainment

Your goal is to spend the least amount of money on the categories above to buy what truly meets your needs and makes you happy. Again, that's easier said than done, but that's your goal.

Steps 1 and 2 combined represent the magic formula for retirement security: I > E, or your income should be greater than your expenses.

Step 3: Protect against things going wrong.
You can make well-thought out plans to manage the magic formula described above, and then life can throw you a curveball and upset those plans. To help protect against the unknown, you'll want to put strategies in place to survive life events that can derail your retirement plans. For most people, these are the most common events they should protect against:

High medical bills
High expenses for long-term care
Poor health
Investment losses
Death of a spouse

Having strategies in place to protect yourself and your family against these common events lets you focus on what's really important, which leads us to step four.

Step 4: Plan for a good life.
I contend that what people really want in their retirement years is to be happy -- and that may or may not translate to the traditional retirement of "not working." What makes you happy? I'm not talking about the temporary pleasures that come from watching a good movie or eating a tasty meal. I'm talking about the things that give you deep satisfaction in life.

For most people, satisfaction with life involves meaningful relationships with family and friends, helping others, learning new things, devoting yourself to a cause you really believe in, and/or applying your skills and experience in a way that's consistent with your values.

It's also important to distinguish between happiness and the lack of unhappiness. You can become unhappy if you don't have enough money to meet your personal living needs, or if you become unhealthy. So it's important to make sure you have enough money to meet your needs and to do everything possible to improve your health (which itself will help you save money).

But once you have enough money and if your health is good, most people want more out of life. Thinking about the things that will give you lasting satisfaction in your later years will provide guidance about just how much money you really need, how to spend your time, and where you should live.

One reader left a comment on one of my recent blog posts that summed it up well:

"I may not have enough retirement income to take a cruise around the world, but I'd rather take a drive around the state with my grandkids anyway."

There are many details you need to learn with each of these steps, and the links in this post are a good place to start. Successfully plan for all four of these steps, and there's a great chance you'll live long and prosper!

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Steve Vernon

View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.

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