Help employees spend in retirement? There's a map for that

April 6, 2021

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When it comes to saving for retirement, a retirement plan participant need only make the decision to enroll in a retirement plan. A well-designed plan will help participants reach their retirement savings goals.

But when it comes time to spend their retirement savings, participants are faced with additional decisions.

  • How much can I spend each year—so I can enjoy my retirement but not worry about running out of money?
  • Which account should I spend from to minimize taxes and/or maximize spending or a legacy?
  • When should I claim Social Security?
  • Do I need additional guaranteed income beyond Social Security?
  • Do I need to change my asset allocation?

To help answer these questions, we have constructed a retirement planning framework that allows participants to capture their unique priorities and use their financial resources in a way that best aligns with achieving their goals and mitigating their risks.

We understand that for some retirees, a successful retirement may be defined as continued growth of their asset portfolio. But for others, it may mean maintaining a specific level of monthly income. Our framework—like our retirement income solutions— takes an even broader approach.

It's an approach based on the concept of "financial security": the peace of mind that results when retirees feel confident that they will attain all their financial goals and be able to continue doing so in the future. This framework gives every retiree the opportunity to develop a personalized roadmap toward financial security.

Financial Roadmap image

Determine retirement goals

To achieve financial security, investors must first establish their retirement goals, which provide a starting point for the planning process. For the purpose of our framework, we identify four goals for retirement:

  1. Basic living expenses.
  2. Contingency reserve.
  3. Discretionary expenses.
  4. Legacy.

Prioritizing these goals and assigning varying degrees of relative importance to them will put retirees on the road to financial security.

Understand the risks

The next step is to understand and evaluate the potential risks retirees may face. Many risks noted in retirement literature can be grouped into five categories: market risk, health risk, longevity and mortality risk, event risk, and tax and policy risk. Individuals will face them in different ways depending on their own unique situations. But addressing them in the context of their potential impact on achieving goals and the resulting implications for allocating financial resources increases the likelihood of a successful retirement.

Assess available financial resources

The role of financial resources in retirement is to help reach the goals that have been set and protect against the risks that could ruin the chances of achieving them. The resources included in our framework are defined benefit pensions, private annuities, asset allocation, spending policy, insurance, work, and housing wealth. Individuals will arrive at retirement with different resources, and some may align better than others with their goals and risk mitigation needs. A thorough assessment of the resources attained or available will ensure the most efficient use of capital.

Develop a plan to achieve goals and mitigate risks

This framework is a powerful tool for understanding retirees' unique priorities and applying their financial resources to best align with their situation. Competing priorities and finite resources require investors to assess trade-offs when they arise. Our framework will help retirees understand the choices that need to be made and ensure that their financial decisions will align with what matters most to them.

Vanguard's Roadmap to Financial Security: A Framework for Decision-Making in Retirement provides foundational knowledge about the goals, risks, and resources individuals will need in planning for their retirement. This planning framework can be applied regularly throughout retirement and adjusted as needs and circumstances evolve.

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  • All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.