Retirement Planning for the Middle Class: A 7-Step Plan

Last Updated Oct 25, 2010 1:50 PM EDT

If you're overwhelmed with information about retirement and are feeling stressed about making accurate decisions, it helps to have a step-by-step plan to follow. One that I really like comes from a report prepared for the Society of Actuaries. It's a simple seven-step plan that offers some easy guidelines for the financial aspects of retirement.

Here's a brief summary of the seven steps.

1. Quantify your assets and net worth. This includes separating your financial assets, such as 401ks, IRAs, and other retirement savings, from your non-financial assets, such as your home equity or a business that you own.
2. Quantify your risk coverage. What insurance do you have to pay for common retirement emergencies, such as medical or long-term care needs? Are you adequately covered for unexpected emergencies?
3. Estimate your available retirement income and compare that to your expenditure needs. Learn what you can expect to get from Social Security and any pensions or annuities at your expected retirement date. Do the math to see how much retirement income your retirement savings can generate; this will entail learning about the different ways to convert retirement savings into income. Compare your total estimated amount of retirement income to your expected living expenses to see if you've got these expenses covered. Distinguish between basic and discretionary spending, and establish an emergency fund.
4. Compare the amounts you need for retirement against your total assets. In Step 3, if you discovered that your expected retirement income will cover your expected living expenses, then proceed directly to Step 5. If you came up short in Step 3, then you'll need to adjust your savings, your spending, or your expected retirement date, and do the calculations again. Your ultimate goal is to make sure you have enough retirement savings to close the gap between your living expenses and your expected income from Social Security, pensions, and annuities.
5. Categorize your assets. Determine if you have enough liquid assets to meet your short-term spending needs, so you don't have to sell long-term assets at possibly unfavorable prices on short notice.
6. Relate your investments to your investing capabilities and portfolio size. Some investments are only suitable for sophisticated investors or large amounts of assets. In most cases, it's better for middle class investors to stay with simple investments, such as no-load mutual funds or low-cost annuities. In addition, be aware of your tolerance for volatility in your investments.
EVALUATE 7. Keep your plan current. Update your plan to reflect changes in your circumstances, such as changes in family status, the health of you or your spouse, your living expenses, and your portfolio.

    So there you have it -- a simple seven-step plan for planning your retirement. Some steps may take some time, such as estimating your available retirement income and comparing it to your expenditure needs. Just remember: You don't need to complete all the steps at once -- just make steady progress. And be sure to involve your spouse or partner, if applicable.

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      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 Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.