Every team is measured by the scoreboard, but after the game, good coaches look beyond the numbers in their constant quest for improvement.
They study video to discern strengths and weaknesses in their team and the upcoming opponent. They identify opportunities, assess risks and make adjustments before the next game.
Retirement planning deserves the same approach.
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Most people know how much they have saved for retirement. They may know their investment returns, their 401(k) balance or the value of their IRA. But those numbers alone don’t answer the most important question: Are you actually prepared for the retirement you want?
A strong retirement plan should be evaluated from several different angles. A retirement scorecard can help identify where a plan is strong, where it may have vulnerabilities and where adjustments could make a meaningful difference.
Here are five areas worth keeping score on.
1. Secure income: How much of your retirement income can you count on?
One of the first questions retirees should ask is not how much money they have, but how much reliable income they will have.
Social Security may provide an important foundation. Pensions can provide another source of dependable income. Some retirees may also use annuities or other strategies designed to create guaranteed income.
The next step is to compare that dependable income with the expenses that must be paid regardless of what the financial markets are doing.
Consider:
- Essential living expenses
- Healthcare costs
- Mortgage or housing expenses
- Other recurring obligations
The objective isn’t necessarily to have every dollar of expenses covered by guaranteed income. Rather, it’s important to understand how much of your essential lifestyle depends on your investment portfolio’s performance.
A retiree with $2 million invested and $100,000 of dependable annual income may have a very different retirement outlook than someone with the same $2 million portfolio but only $40,000 of dependable income. The account balances are identical; the retirement plans are not.
2. Retirement confidence: How well does your plan hold up when things change?
Retirement rarely unfolds exactly as expected. Markets rise and fall. Inflation changes. Tax laws evolve. Healthcare expenses can be unpredictable. And people may live longer than they anticipated.
That’s why a retirement plan should be tested against more than one possible future.
One way to do that is through Monte Carlo analysis, which can test a retirement plan across thousands of potential market and economic environments.
A retirement plan can be tested against periods of strong markets, declining markets, sideways markets, different inflation rates and changing tax environments.
The purpose isn’t to predict exactly what the future will look like. It’s to determine how resilient the plan is when the future doesn’t cooperate.
A plan that works only when investment returns are strong may look successful on paper but provide less confidence in the real world. A stronger plan is one that has enough flexibility to withstand adversity without requiring the retiree to completely change course.
3. Retirement taxes: How much of your money will you get to keep?
A retirement account balance isn’t necessarily the same thing as retirement wealth.
Taxes matter. A retiree may have money in traditional IRAs, 401(k)s, Roth accounts, taxable investment accounts and other sources. Each account can have different tax consequences when money is withdrawn.
That means retirement planning shouldn’t simply ask, “How much can I withdraw?” It should also ask, “Which account should the money come from, and when?”
For example, a retiree might consider whether to:
- Convert some traditional IRA assets to a Roth IRA
- Realize capital gains in a lower tax year
- Coordinate IRA withdrawals with Social Security
- Manage income to avoid unnecessarily higher tax brackets
- Consider the effect of additional income on Medicare premiums
- Determine which investments should be sold to fund retirement expenses
These decisions can look relatively small when viewed individually. Over a 20- or 30-year retirement, though, the cumulative tax impact can be significant. That’s why a retirement scorecard shouldn’t measure only investment performance; it should also measure how efficiently the plan converts wealth into after-tax retirement income.
4. Retirement risk: What could knock the plan off course?
Risk in retirement is about much more than whether the stock market goes down.
A comprehensive risk assessment should consider several factors, including:
- Expected investment return
- Retirement time horizon
- Target portfolio withdrawals
- Market volatility
- Inflation
- Longevity
- Healthcare costs
- Liquidity needs
- Personal comfort with investment risk
One retiree may be comfortable with a portfolio that another would find difficult to stick to during a market downturn. A theoretically optimal portfolio isn’t necessarily a successful portfolio if the investor can’t remain committed to it during a difficult market.
The goal isn’t to eliminate risk. That’s impossible. The goal is to understand the risks you’re taking and determine whether they’re appropriate for the retirement you’re trying to create.
5. Estate efficiency: What happens to the money you don’t spend?
Retirement planning doesn’t end when you determine that you have enough money to live comfortably. There is another question: What happens to the money that remains?
For many retirees, leaving assets to children, grandchildren or charitable organizations is an important part of the overall plan. That means estate planning should be considered alongside retirement planning rather than treated as a separate exercise.
The type of account, beneficiary designations, potential taxes, fees and the way assets are transferred can all influence how much reaches the intended beneficiaries.
The goal is about more than accumulating wealth; it’s also about determining how efficiently that wealth can accomplish what you want it to accomplish — during your lifetime and afterward.
Keep evaluating your scorecard throughout retirement
A scorecard isn’t valuable because it produces a number, but because it starts a conversation. A retirement plan might have excellent investment performance but a weak tax strategy.
It might have substantial assets but insufficient guaranteed income.
It might have a strong probability of success but too little liquidity for the retiree’s comfort. Or it might provide plenty of income today while creating unnecessary tax or estate planning problems later. That’s why the numbers need to be viewed together.
The purpose of a retirement scorecard is to identify what needs attention now. Great coaches evaluate throughout the season. They recognize what is working, identify what isn’t and make adjustments when circumstances change. Retirement is a long season and deserves the same discipline.
The goal isn’t to achieve a perfect score and put the plan on a shelf; it’s to understand where you stand today and identify what may need to change as your circumstances, markets and priorities evolve. A strong retirement plan is evaluated, adjusted and improved throughout the retirement journey.
Great coaches don’t wait until the final game of the season to make adjustments; they keep evaluating the scoreboard along the way. Retirement is a long season and deserves the same discipline.
Dan Dunkin contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.