In Retirement Planning, Don't Forget to Do the Emotional Math, Too

Talk to a typical financial advisor, and you'd think that retirement planning was an exact science. Sophisticated financial calculators will spit out numbers down to the penny, offering you the appearance of being able to calculate almost to the day when you'll be ready to quit working for good.

Reality, however, isn't nearly as exact. Calculators are only as good as the assumptions that they make, and they never incorporate every aspect of what actually happens over a lifetime of saving and investing. Then there are the subjective emotional factors that are vital to one's happiness in retirement. There's no calculator that can handle inputs like that.

In order to prepare for retirement, you have to meld the financial factors with less concrete subjective factors to come up with the perfect mix -- yet also remain flexible to handle potential bumps in the road.

Have You Really Thought About This?

Recently, Kenn and Patricia Tacchino took on the daunting task of painting a broader picture for would-be retirees. (He's a professor of taxation and financial planning at Widener University, and she's a social worker.) The result was a research paper (to be published in Benefits Quarterly) that includes a checklist of more than two dozen factors to take into account when making the big decision.

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As you'd expect, the paper includes plenty of basic financial analysis, including weighing expected income and expenses, life expectancy, and the returns potential of your investment portfolio. But the checklist also includes a deeper look into financial matters, considering things like the cost of health insurance and the various ways to claim Social Security or retirement-plan benefits. Moreover, if options like easing into retirement by working part-time or taking an early-retirement package are available, they can affect the analysis considerably.

Moreover, the paper notes that a complete analysis goes well beyond strictly financial measures.

What's Missing from Most Planning Models

The Tacchinos note that it's important to evaluate your health, not just your medical coverage. A recent Fidelity survey showed that average 65-year-olds would need about $240,000 to cover medical expenses throughout retirement. Obviously, those who already have potentially expensive medical conditions could end up spending a lot more than that, which means this factor must be considered in any retirement plan. Similarly, certain occupations give workers more opportunities to work past normal retirement age than others.

Another issue the paper points out that many people fail to consider is whether they'll actually want to be retired. After a full career, many people find that quitting work leaves them without a clear direction of what they really want to do.

Giving up a typical job situation that includes strong relationships with co-workers and fulfilling work to do can require a huge adjustment, and it's one that many people aren't equipped to handle abruptly.

How to Prepare for Life's Curveballs

Building on the takeaways from the paper, the key to planning a secure retirement is understanding that it's impossible to be certain about how everything will work out. Yet you shouldn't take that uncertainty as an excuse not to plan at all. Rather, the best way to handle the inherent uncertainty of retirement is to build flexibility into your plan. Specifically:

• Plan for spending fluctuations. It's important to be able to deal with spending less money than you might prefer. It's all about controlling expenses. If you have expenses you're willing to give up, then it lets you handle contingencies like having to retire earlier than you thought, an unexpected market decline, or needing to support a loved one financially.

• Be flexible with your final retirement date. If your plan only deals with how things will happen if you retire at age 65, then you'll be less able to deal with the possibility that you won't have as much money as you'd hoped by then. Other unexpected events like disability or an early layoff can wreak havoc on a rigid plan. But if you have a broad idea of what retiring at 60 might look like compared to retiring at 65 or at 70, then you'll be in a better position to choose the right option once you get a little closer to the actual dates involved.

• Remember the other people involved with your retirement decision. A spouse and other family members have an obvious interest, but the impact of retiring ripples throughout your social circles. Having others buy in to your retirement concept can be a massive benefit.

Retire Your Way

Deciding when to retire is unquestionably complicated. But by thinking about the right things, you can put together a big-picture look at your golden years that will be a lot more realistic and useful than simply plugging numbers into a computer and having it spit out an amount to save every month.

Motley Fool contributor Dan Caplinger has fun mulling over retirement prospects. You can follow him on Twitter @DanCaplinger.


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