The 7 Tiers Of Retirement Needs Explained By A Financial Planner

The final clock-out at your day job can be a glorious thing. For many, the idea of hanging it up one day and never looking back is the goal, and the typical American worker achieves their transition into retirement as early as age 62. Generally speaking, this means that the average American will go to college (the Bureau of Labor Statistics puts the number of direct-to-college high school graduates at 61.4%) and then start working full time for the next 40 years, give or take. That's 40 years to develop and execute a financial strategy to launch this next phase of life — one that averages right around 20 years.

It's clear that saving up for this big change is the only way to ensure that you actually enjoy the retirement lifestyle you envision. The typical American worker will have access to a wealth of tools, including accounts like a 401(k) and a Roth IRA to help drive tax-advantaged investments toward greater levels of growth. But in both your savings strategy and your later drawdown priorities, there's more nuance to explore than simply the concept of saving a lot. In an article for Kiplinger in November, Andrew Rosen, a certified financial planner, spelled out the layered financial needs that retirees experience. Understanding not just a target savings goal but also how that money will enable your future lifestyle can be instrumental in successfully achieving your desires. These seven tiers of retirement needs help put the project of saving for the future into greater focus.

Income is the thing you get for your hours and days put in at the office. It's therefore perhaps a strange thing to consider when exploring the bare bones of your retirement strategy. Income is what you're seeking to replace, after all. But you'll replace income driven by the sweat off your brow with more or less "passive" income generated by the investments you've made along the way. Andrew Rosen says to Kiplinger that "income is the base of any financial hierarchy... Before thinking about tax strategies or estate planning, the first goal must be to generate reliable income that covers essential living expenses."

In retirement, you'll almost certainly get Social Security checks to help supplement your financial load. Savers can turn on the tap, so to speak, for this funding resource at any time they like after turning 62, and those who are able to wait will reap a larger reward from the government funded pension tool. Even so, Social Security was never meant to replace your working income, and you can expect to see, at most, roughly 40% of your pre-retirement income delivered in this format. "Ensuring stable and sufficient income is the bedrock of financial security," Rosen adds, and so prioritizing a means of saving to generate the other half of your retirement income needs is paramount (the typical retiree needs around 70% to 80% of their pre-retirement income to support the same lifestyle).

Establishing a stable plan for funding the income needs of your retirement lifestyle is the first key to success. But after that's been accounted for, Andrew Rosen notes that protection should be your second port of call. After all, no one can guarantee that curveballs aren't coming their way with little to no warning. Rosen suggests to Kiplinger that: "Protection includes life insurance, disability coverage, long-term care planning and basic legal documents such as a will and power of attorney. These tools help ensure that if something unexpected happens — an illness, accident or death — financial hardship doesn't follow." While your income stream is all about delivering stable financial support during the 'normal' times, these additional financial products kick in to keep the ball rolling when things start to fall apart. Rosen adds that "without [protection planning], even a solid income can be derailed."

Some of these tools are more effective than others, however, depending on where you are in your journey. One common retirement regret that older Americans often have comes from underestimating long-term care costs. This protection tool, alongside others like life insurance, gets more expensive the longer you wait to purchase it. Identifying this needs and building it into your plan long before you actually retire helps make the tool far more affordable. On the other hand, whole life insurance policies designed to last throughout retirement can often be a waste of money while structured, term policies that provide specific buffers for loved ones during certain transitional periods can still be valuable.

It's commonplace for those in the workforce to set some money aside with each paycheck for a rainy day. These funds may be specifically allocated in an emergency reserve or as part of a larger pool of resources to help handle setbacks that life might throw your way. Retirees need to keep up the habit of keeping an emergency fund going, even if a retirement portfolio might seem like one large emergency reserve at first glance. Both workers and retirees can lean on their cash reserve in an emergency, and Andrew Rosen notes to Kiplinger that "having a reserve prevents reliance on high-interest debt or making premature withdrawals from retirement accounts when unexpected expenses arise." Once you've depleted your investment accounts, the golden goose is gone. You might be a dividend investor living off the interest produced by these investments, for instance. Selling out of a position can permanently alter (in a negative way) the dividend payouts you receive.

Rosen adds that this cash fund "might look more like a buffer [than the cash reserve workers require] within an investment account." It can be leveraged to support both new investment opportunities when changes in the market present an opportunity to strike, or a cash reserve to protect you against a market in trying times. Growth investors are those who will have invested heavily in assets that they intend to gradually sell out of to fund their retirement, banking on huge upswings in value over the years or decades of owning shares. But a market correction can dramatically change the pace you'll have to sell at to maintain stability, unless you have a reliable cash reserve waiting in the wings.

Americans live with debt on a daily basis. Some pundits suggest that all debt is bad, but there is more nuance to this conversation than meets the eye. One basic framework for differentiating good and bad debts comes in the form of assessing the thing it was used to purchase. Good debts tend to help increase your net worth or add value to your life over the long term (mortgages and student loans, in many cases). Bad debts accumulate interest much faster and ultimately weigh you down, such as a high interest credit card or even a costly auto loan considering the depreciation rate of the typical car.

Andrew Rosen warns in the Kiplinger article that "in retirement, carrying high-interest debt can put added strain on those living on a fixed income. Prioritizing debt reduction increases financial flexibility and reduces risk." Failing to clear away big debt obligations before retirement puts you at risk of going broke during this new phase of your life. Servicing old debts eats away at your war chest, and for some payments, like those on credit card balances, you won't actually be spending your money on something that enhances your life. A mortgage, for instance, isn't necessarily a bad thing to carry into retirement because you're actively buying equity in the property you live in: The expense benefits you directly. Poor debt management habits can follow you into retirement, however, and pull the rug out from under an otherwise stable financial picture.

Andrew Rosen adds retirement savings into the mix here. Prioritizing your retirement savings can come in two overarching flavors. Those who start early (as in, during their first foray into the workforce as a twenty-something) can expect a slow, steady buildup of wealth in their retirement portfolio. The contribution pace is gradual, with time performing most of the heavy lifting. However, Rosen notes to Kiplinger that "Saving for retirement often competes with other priorities, such as college funding or lifestyle upgrades. But retirement is one of the only major life expenses that can't be financed. You can borrow for college, not for retirement." Therefore, prioritizing it, even if achieving financial balance means sacrificing some other desires in the short term is important.

On the other hand, if you don't start early, your contribution schedule will be a bit more frenetic. Saving more money each month is the starting point, and savers might also seek to invest in riskier assets to make up for lost time, placing their entire future in a greater state of fragility. Specifically however, Rosen suggests that solid retirement savings strategies will seek to create a greater wealth of choice for your future. "Contributing to IRAs, 401(k)s or other tax-advantaged accounts builds future optionality — the ability to choose how and when to retire without financial pressure," Rosen says.

After establishing a stable financial platform and launching a gradually improving retirement position, Andrew Rosen suggests to Kiplinger that "your next step is to ensure that wealth is protected, transferred efficiently, and taxed appropriately." Obviously, if you haven't saved anything, or much (somewhere between 20% and 46% of Americans have no retirement savings, for instance), there's little benefit in exploring tax strategies or drawing up estate planning documents to transfer that wealth.

But, if you've followed through on your financial plan, there may be a substantial nest egg sitting in your accounts. Ideally, the bulk of these savings will outlive you, allowing for a consistent delivery of retirement income during your lifetime and a notable estate to pass on to your loved ones afterward. Rosen says, however, that estate planning tasks and tax minimization strategies aren't just about signaling how to pass on assets or strategically withdraw funds. These tasks "might involve Roth conversions, strategic withdrawals or gifting strategies. Estate planning isn't just about leaving a legacy — it's also about ensuring your wishes are carried out smoothly and effectively."

The final level of financial prioritization for retirees comes in the form of luxury spending and other niceties. Once you've taken care of the essential spending categories, you can afford to splurge on the finer things in life or prioritize taking care of others. Luxury expenses come in many forms, and Andrew Rosen suggests that for retirees seeking an upgrade to their lifestyle, purchases like dream vacations or second homes, as well as gifting decisions like charitable donations may be elements that come into focus. However, he warns that "these are important and meaningful — but ideally addressed only after the core needs are met."

Another area where retirees might want to spend involves things like additions to a loved one's 529 plan. These are college savings tools with tax benefits attached. Anyone can add to a child's 529 plan, meaning grandparents can deposit funds into an account to help younger generations afford this growing expense with any leftover dollars they might have. Yet, this too falls under the luxury spending umbrella. "while education is important," Rosen says to Kiplinger, "college funding is a luxury in the context of financial planning — it's a goal with many solutions (loans, scholarships, grants), and one that shouldn't take precedence over retirement security."