“The problem arises if they need more than 4.50%,” says Mindel, adding that when that’s the case, people need to explore alternatives, including a reduction in expenses or a more aggressive investment strategy.
(If you think this may be an issue several years before you retire, one idea to consider is investing in annuities, which can guarantee income for the rest of your like. The key, Mindel said, is to buy one when you’re in your 50s.)
Step 4: Devise an Investment Plan
Once you have a balance sheet, it’s important to create a long-term financial plan that will match your cash flow needs with different types of investments with differing liquidity characteristics.
Looking at your current investment portfolio to see whether, "you should change the types of investments you hold to become more or less aggressive,” says The Hartford’s Diehl.
He adds that when creating your investment plan you also need to consider how to protect yourself against inflation --particularly relevant now considering the major increases in food and energy prices recently.
Step 5: Go for Growth
Schwab’s O'Neill says its important that your investment plan ensure a substantial amount of growth.
According to O'Neill, there is a 50% chance that your or your spouse will live to roughly 95 years old. “They have to have enough money to last them,” he says, adding that, “it’s not just about driving income but they also need some and some growth in that portfolio because they can be in retirement for another 30 to 35 years.”
Growth can come from a variety of products from cash (money markets and CDs) to mutual funds to annuities to high-dividend stocks. A diverse portfolio here increases your chances, says O'Neil.
Step 6: Consider Your Health
“Health care can be a major drain on the cash flow,” says Diehl, who adds it’s essential to consider how you plan to pay for your healthcare.
Diehl recommends asking the following questions: Do you have retiree health? If so, is it paid for by a company or do you have to fund it yourself?. If you don’t have retiree health, have you priced any private health insurance?
O'Neill says current data suggests that if you retire at 65 a married couple’s out-of-pocket expenses during retirement is $240,000.
He says you should start addressing this issue around 55 years old or whenever you start thinking about retirement -- especially if you retire before 65, the age at which you are eligible to receive government funds.
Step 7: Look at Long-Term Care
Genworth’s Mindel says anyone who lives longer than 75 also needs to address long term-care --such as a nursing home or other assisted facility. For married people, there's a 65-70% chance that will happen. Such care currently costs $12,000 to $15,000 a month for those living in cities or higher-cost areas.
While long-term care insurance isn’t for everyone – the decision is often dictated by factors such as cash flow and personal experiences with parents – if you do decide to get a policy, Mindel said do it in when you’re in your early 50s. At that age, he said, “You can get a decent underwriting and lock in your premiums. If you wait too look premiums get exorbitant.”
Step 8: Divide and Conquer
If you’re a married couple heading into retirement, consider how you plan to handle the responsibilities.
A recent MIT study found that married couples have more satisfaction when they divide the responsibilities, whereby one spouse pays bills and is more detail oriented while the other takes care of bigger picture issues, such as managing the investment portfolio.
While the study found that only 11% of couples practiced this “divide and conquer” approach, those that did were most likely to have a contingency plan to assure the financial security of the surviving spouse.
Step 9: Keep Documents Current
Make sure all of your important documents are relevant and up to date. This includes documents such as wills and trusts and details such as beneficiary designations on savings and investment accounts, including contingency planning.
“You never want to leave a contingent beneficiary to your estate,” says Mindel. For example, if a husband survives his wife, who was his beneficiary, then dies himself without another beneficiary, the estate will go to probate.
“It could get very ugly, creating a lot of income tax problems and legal costs,” for family and relatives, says Mindel.
Step 10: Decide Your Legacy
Of course, if you know cash flow will not be an issue in retirement, you should take time to consider how much of your wealth you want to preserve and what you plan to do with it.
For some, this may mean putting money into a trust for children or grandchildren while others may look to establish a plan to donate funds to charity.
Regardless of what you plan to do with your money having an overall plan in place before you retire could help alleviate difficult decisions in the future.