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Roger Whitney, CFP®

Glossary

We try our best to keep information approachable here on The Retirement Answer Man® podcast. That being said, there are a few financial terms in our regular lexicon that you’ll want to understand in order to get the most out of our show. Grab your nerd hats, and get ready to dive in!

The 8 Pillars of Retirement Planning

A fulfilling, enjoyable retirement is founded on eight financial and non-financial pillars.

Financial Pillars

  • What do you want? That’s a tricky, even intimidating, question, but it’s critical to answer for a successful retirement.

  • Review your financial resources, and determine how to fund your vision. Remember, you’ll need to think outside the box and consider creative levers for making most of your dreams possible.

  • An unexpected life event can easily blow a feasible plan off track! Stress test your plan against major risks like a bear market early in retirement, losing a spouse, or a healthcare shock. Look for ways to mitigate these risks to your plan.

  • These are the fine-tuning decisions around matters like tax planning, Roth conversions, gifing strategies, or Qualified Charitable Distributions (QCDs). Optimization becomes part of your ongoing retirement planning. An agile project is always a work in progress!

Non-Financial Pillars

  • You’ve got big plans for your retirement! Cultivating practices that nurture your energy, like getting the proper amount of sleep and fueling your body with healthy nutrition, are critical for enjoying a satisfying retirement.

  • Your ideas about retirement can make or break the experience for you. We espouse positive mindsets focused on growth, abundance, and possibility.

  • Happy people have projects! Passions provide you with purpose and a sense of identity outside of your paid career, whether your passion project is being an incredible grandparent or starting a new side business.

  • As the natural social opportunities provided by work wane, you’ll be required to think more strategically about building and maintaining close relationships. Consider ways to forge new friendships, strengthen your marriage or romantic partnership, and build closer community ties.

Listen to our series on the 8 Pillars or download the easy to reference worksheet from our Resource Library.

 

Financial Capital

The financial assets contained in your investment and bank accounts.

Fundedness Level

This measures an individual’s or couple’s financial preparation for retirement. To calculate, compare your projected financial consumption during retirement with projected income, current assets, projected returns, and the impacts of inflation. A plan can be Underfunded, Constrained, or Overfunded. Listen and learn more about fundedness.

Funding Philosophy

You have a few strategic options when it comes to how you will fund your retirement.

  • Systematic Withdrawal: This approach takes periodic withdrawals from investment accounts to fund the costs of retirement that exceed income from Social Security,  pensions, and annuities. When implementing this approach, it is sometimes recommended to use a Safe Withdrawal Rate (think the 4% rule) to ensure that funds are not exhausted before the end of life.

  • Asset/Liability Matching: This approach focuses on allocating financial capital to match the timing of planned consumption (liability).  When implementing this approach, assets are divided between contingency, floor, upside, and longevity categories.

  • Safety-First: This approach emphasizes creating guaranteed income streams using tools like pensions and annuities to cover annual expenses.

  • A blended approach. Most people implement a strategy that incorporates elements of both of these approaches.

Listen to our series on Retirement Withdrawal Strategies.

Human Capital

Project income from working, either full or part-time.

Monte Carlo Simulation (MCS)

A simulation tool that utilizes randomized market returns to test the sustainability of financial plans through various market environments. Results are reported as a probability of success, or the percent of cases where the plan meets retirement goals without completely depleting assets (a.k.a. Running out of money).

Net Worth Statement

A summary of assets vs. liabilities. Access our free Building Your Net Worth template in the Resource Library.

Noodle

Our favorite way to say think, contemplate, ponder, consider, mull over, cogitate, you get the idea…

Pie Cake

An investment allocation method designed to reduce market risk to retirement funds in the near term while accounting for long-term risks like inflation and longer than expected life. A pie-cake strategy can provide psychological comfort on how retirement will be funded in the near-term and permits continued growth for future expenses. Each cake “layer” consists of a different allocation pie chart. Before creating your allocation, you will want to have a resilient Plan of Record and a funding plan for the first five years of your retirement.

  • Layer 1 (Contingency Fund) - Like an emergency fund, the intent is to create financial margin to manage unexpected changes to circumstances, goals, and inaccurate assumptions. This layer contains primarily cash or cash-like investments.

  • Layer 2 (Income Floor) -  This layer consists of the Base Great Life spending that is needed from your financial capital in the near term. We use 5 years as the default. The intent is to create clarity on how goals will be funded, manage sequence of returns risk, and increase flexibility. You’ll want some stability in this layer but also some income. It could be made of bonds that will be maturing, stable value funds, and some cash.

  • Layer 3 (Upside) – This is everything left after filling Layers 1 and 2. The intent is to position these funds to grow, provide a long term hedge against inflation risk, and be used to fill up Layer 2 as life moves forward.  The investment objective of this layer is growth with income. A good mix could include equities, bonds, and real estate. The time horizon on these investments could be 6-20+ years. 

Plan of Record

Your initial baseline retirement plan. To arrive at the plan, you’ll want to consider all your needs, wants, and wishes, as well as review all the income sources available to you in retirement. Once you have arrived at a Feasible plan of record, you can consider ways to make the plan Resilient and finally Optimized. Detailed instruction on creating your Plan of Record is available through Rock Retirement University. For a general overview, listen to our How to Plan Your Agile Retirement series.

Retirement Policy Statement (RPS)

A guiding document produced at the conclusion of the first round of the retirement planning effort and is modified/updated with each revision to the retirement plan. Captures the overarching vision of the retirement experience, the values and virtues that influence that vision, along with specific dreams and goals. It includes the preferred funding strategy and highlights near, mid, and far-term actions with an associated timeline that will ensure its success. While it is possible to create an RPS after developing a Feasible Plan, the RPS will provide the most value if the Plan is subjected to Resilience and Optimization review before it is completed.

Social Capital

For financial planning purposes, the income projected from pensions, social security, and annuities.

S.W.A.G.

Sophisticated wildly awesome guess. There are so many assumptions that go into retirement planning. We’re never going to get it 100% right, so the best we can do is SWAG it!