Don’t Overlook This Critical Retirement Planning Step

Recently I was approached at a holiday party by Elaine, a 60-something family friend. She asked for some advice about her retirement.

Elaine guessed that she’d saved about $300,000 in various retirement accounts, although she wasn’t sure about the exact amount. She assumed this money would be enough for her to retire in the next year or so, but she wanted to check with me first.

When I asked her how much she’d receive from Social Security, she said she didn’t know. She also wasn’t sure if or how much she might have earned in pension benefits from prior employers.

Elaine was definitely “winging it,” which is a bad way to plan for retirement! Does Elaine’s story sound familiar?

As a first step, I suggested that Elaine take inventory of all of her financial assets and debts, her current living expenses, and how they might change when she retires. During the next few months, she did as I suggested. The good news is, she now has a more informed view of her retirement finances and can create a retirement plan based in reality.

Given the meager retirement savings of many baby boomers, taking inventory is a critical first step—doing so will help you make informed decisions about when to retire and how to manage your finances in retirement. Tax season is an excellent time to take a financial inventory, since you’re already reviewing and assembling a lot of your financial information.

The following are three key areas to inventory.

Financial resources

Since money is an essential part of your retirement, your first step is to take an inventory of all your financial assets so you can realistically assess the retirement income you’ll receive from Social Security, savings, and pensions. As you compile the information, be sure to include your spouse or partner’s resources, if applicable.

Here’s a list of typical financial resources you should include in your inventory:

• Estimates of your Social Security income at various starting ages
• Accounts in employer-sponsored retirement savings plans such as 401(k), 403(b), 457(b), or profit-sharing plans, including summaries of the plans
• Any estimated benefits from employer-sponsored pension or cash balance plans, including the plan summaries
• Account balances in your IRAs and investment accounts with mutual fund companies, financial institutions, or financial advisers
• Estimated cash values and retirement income amounts under any annuity and whole life insurance policies you may own
• Account balances in any bank accounts that aren’t used for your day-to-day money management
• Estimated market value of your home
• Any other assets, such as rental real estate
• Any other sources of income, such as divorce settlements, including amounts and payment periods

While taking your inventory, investigate any options you might have for converting your account balances into a stream of lifetime retirement income for any accounts at employer-sponsored retirement plans, IRAs, or financial institutions.

Your debts

Many people enter their retirement years with substantial debt obligations, which is why payments toward any debt need to be considered in your budget for living expenses. You’ll also want to develop a plan for reducing or eliminating your debt at some point during your retirement years.

Debt repayment can profoundly influence how long you need or want to keep working. For instance, some people plan to work until they’ve paid off substantial amounts of their debts, so they don’t have to devote retirement income toward debt repayment.

Here’s a list for taking inventory of your debts; in each case, find the outstanding balance, the regular monthly payment, the date the loan is scheduled to be paid off, and the interest rate:

• Home mortgages
• Car loans
• Student loan debt
• Credit card debt and any other debt

Your living expenses

In order to get an accurate picture of your living expenses in retirement, you’ll want to understand what your living expenses will be for both your basic needs and your “wants,” and how they might change throughout the year. For example, some expenses, such as heating and cooling bills, might be higher during certain seasons.

In addition to your regular monthly expenses, find any other bills that are paid less frequently—such as property taxes, car and home insurance, and home repairs. Make sure you review an entire year’s worth of bills in order to be sure you’re including all essential expenses.

You’ll also want to assess how your living expenses might change when you retire. Some expenses, such as utilities, property taxes, car and home insurance, and food might not change very much. Other expenses will most likely increase substantially, such as premiums for medical insurance, copayments, and deductibles. On the other hand, there’s a good chance your income taxes will decrease substantially when you retire.

When it comes to living expenses, most people spend more than three-fourths of their budget on just six categories:

• Housing
• Transportation
• Medical premiums and out-of-pocket expenses
• Food
• Entertainment
• Taxes (federal and state income taxes, and local property taxes)

Since most people will receive less income in retirement compared to their working years, they’ll need to reduce their living expenses in retirement. The inventory of your living expenses can help identify possible targets for savings.

Taking inventory might seem a lot of work, but it’s definitely worth your time and effort to learn where you stand regarding all your financial resources. You’ll be ready to start building the foundation for your financial security in retirement.

To obtain a more extensive financial inventory and to learn about strategies for managing your finances in retirement, please see my latest book Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life .

This article was written by Steve Vernon from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.