Last year, my colleague Alex Murguia and I spent considerable time developing and testing a Retirement Income Optimization (RIO) Map™ for commercial use at McLean Asset Management, where I serve as the Director of Retirement Research.
The starting point for this process is to understand one's financial goals for retirement, which we have summarized as the "4 L's of Retirement." These goals are as follows:
First, longevity goals center on the lifetime sustainability of the core or essential expenses in retirement. These goals largely relate to housing, health care, basic living expenses, and maintaining a basic level of financial independence without becoming a burden to others.
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Next, lifestyle goals relate to how you want to live your life and maintain your desired overall standard of living in retirement. Components of lifestyle may be a bit more discretionary in nature, including items such as travel and leisure, self-improvement activities, social engagement, and helping with financial needs such as tuition for family members.
These goals require maximizing your spending power so spending can remain consistent and sustainable while allowing for an accepted degree of risk that these expenses may need to be scaled back at certain points in retirement. For these goals, there may be a sense of seeking more upside growth potential at the risk of downside losses at a level beyond that which is feasible with longevity goals.
Third, legacy goals typically relate to any financial impact you wish to leave on your family and community. Such goals include leaving assets for subsequent generations or to charities, in addition to contributing in other significant ways with your time and talent to impactful activities. The thought of leaving behind a legacy is a consistent theme here. As a caveat, legacy goals can also be met while you are living.
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Finally, liquidity goals are about maintaining additional assets that can be tapped quickly to provide funds for unexpected contingencies. Such assets must not be earmarked for other goals, as unexpected contingencies relate to anything falling outside of the planned retirement budget.
Possibilities include supporting family members during emergencies, major repairs or home improvement necessities, resources to help with an unexpected illness or death, potential long-term care needs, renovating your home to allow for aging in place, or other life transitions.
Building such a framework guides you toward prioritizing the relative importance of these four goals in your life. Once you prioritize these goals, you can assess and prioritize the tactics for your RIO™ framework to best meet the goals and manage their risks.
