During the planning process, you may be asked how you envision your retirement. Then, the planner can plug in some numbers and show you how woefully short you will come to your goal unless you invest X number of dollars with him. I use the word “him” as about 75% of financial planners and advisors are male. I have heard of people walking away from a planning event depressed that they will never be able to live the life in the dream.
Retirement is not the same for all people. In fact, each person or couple will likely have a different vision, and life events often play into that. Some may want to change direction and work on their life’s passion; some may volunteer and give their time. Some want to help with grandkids or travel. Even with these different desires, life may throw a curveball. You may be forced to work longer at your current job or the children boomerang back home with kids in tow. Maybe health fails, or you end up in retirement on your own, without your spouse of so many years. Or you live for more years than you have worked to start with. The bottom line is: life is unpredictable.
So how do you plan for these later years in life? I recently read an article that helps describe “modern retirement theory” by Jason K. Branning, CFP and M. Ray Grubbs, Ph.D. They propose management of retirement funds by using different categories, or “buckets”, of funds to help maintain a sustainable lifestyle in retirement. Here is my take on their categories:
- Base Fund: This is money that should be used for basic living expenses. It should be “secure, stable and sustainable” and should “adjust for inflation over time.” Generally, this bucket consists of Social Security plus other income producing assets.
- Contingency Fund: This is emergency money. If the economy tanks during your retirement, or an illness comes, you will have funds set aside so you don’t lose your base standard of living.
- Discretionary Fund: This is fun money. These funds can be used for anything, such as travel or new large purchases.
- Legacy Fund: This is money set aside specifically for inheritance.