Retirement is a natural watershed in life, a time for reflecting on our past and speculating a little bit about what may lie ahead. There is an element of sadness in retiring from a job or selling a business. And retiring can stimulate increased awareness of our mortality. Nevertheless, some of what we see as we peer into our misty futures can be very energizing.

Perhaps we see time to pursue interests that always came second to our professional commitments. Maybe we look forward to the chance to visit with family members who are scattered across the country, or to finally kick back and read Dostoyevsky or Augustine! These attractive possibilities often free up retirees to put their history, their dreams and their assets all on the table, like some great Monopoly game, and to consider what might be. It is the retirement advisor's privilege to encourage this sort of optimism and to facilitate the process.

I used to think that a clean-sheet approach to making a retirement spending plan offered the most potential for creativity. And that may work for you. But I seem to get better results when we start by preparing a detailed worksheet describing the preretirement income and spending. This is a cathartic process that flushes to the surface the whys and wherefores of a family's current lifestyle. It brings up memories ("I remember we bought this house thinking that we would expand the kitchen. Then Maggie got accepted at Princeton ...). This is a perfect time to think out loud about whether they still want the bigger kitchen, or would a beautiful, low-maintenance condo by the water be more fun?

Our spending-plan worksheet (see end of article) has an income section and a spending section that is divided among fixed spending, variable spending and taxes (see the sample of our spending-plan worksheet). When planning for impending retirement, I like to develop two versions of the clients' spending plan: One describes "What Has Been" and the other "What Will Be."

We begin by filling out the income section of each version. This allows us to see just how the cash inflow is going to change after the client's last paycheck. For most people, though certainly not all, gross cash income is going to be less when they retire. And most people have already thought about that and felt a certain amount of anxiety about it. Usually, by preparing these two income worksheets first, what was vague and threatening becomes measurable and manageable.

The trickiest number in the income section of our spending plan is "investment income." Should we write in only estimated taxable income? That would be useful when we get to projecting the annual income tax bill. Or we might just count cash income from interest, dividends and mutual fund distributions in both the taxable and tax-deferred accounts. Some clients feel that by planning to spend only cash income they won't be "spending principal," something their parents taught them never to do! Another approach is to plan on withdrawing some fixed percentage of the nest egg each year.

I have found that selecting the best approach to the "investment-income question" depends on client-specific issues. These include whether it is important to preserve their nest egg for estate purposes; whether clients are interested in front-loading their retirement lifestyle with more expensive activities while they are younger; whether it is appropriate to anticipate an inheritance, etc. Sometimes I elect the most conservative figure for "investment income" at this stage of the process, knowing that I may want to revisit it after we examine the spending plans.

So Many Choices

I usually ask the clients to work at home on the details of their current spending rather than going through the list with me. In the case of couples, I encourage them to work on it together. They send me their work before our next meeting. I review it, making notes where I think a category may be underestimated and where I believe retirement may bring a significant increase or decrease in a line item. I also fill out the income tax section myself, for both versions of the plan. Then the fun begins.

At our next meeting, we review my notes and questions and amend the "What Has Been" version of their spending plan. Now we are ready for the "What Will Be" version, for which we have already completed the income and taxes sections. I guide the discussion first to big spending categories that may change in the first year of retirement: Will we change our charitable habits? We can stop saving for retirement, right? Should we pay off the mortgage? Maybe we can move! Oh, my, we have to take care of our own medical insurance until Medicare kicks in. Do we still need that whole-life policy, dear? Hey, it's jeans from now on ... slash that clothing budget!