How to Create a Resilient Retirement Plan

••• Ascent Xmedia/Getty Images

Resilience is defined as the ability to deal with life events and essentially “roll with the punches”. When you take a few moments to think about all the events that challenge our resiliency the list of those life experiences can appear to be quite extensive. Those important life events could be positive (e.g., the birth of a child, starting a new job) or they could end up being negative (e.g., medical problems, job loss).

How you choose to respond to those potential obstacles on the path to retirement has a major influence on your overall financial well-being. As such, financial resiliency can end up being the difference between thriving during your retirement years and just trying to survive.

What It Means to Have a Resilient Retirement Plan

Being resilient is not considered a personality trait, but it represents a dynamic learning process. Resilient individuals do not view potentially stressful situations as being unsolvable. But instead, they perceive them as a learning experience and an opportunity for personal growth and development.

The concept of financial resiliency refers to the ability to bounce back and withstand life events that have a major impact on your income and/or assets. The ability to recover from financial setbacks is enhanced with financial resources such as adequate savings, health insurance, and reliable income. Some examples of financial action steps and other behaviors you can take to help improve your own sense of financial resiliency include:

  1. Maintain a low debt-to-income ratio.
  2. Maintain an emergency fund of at least three month’s expenses.
  3. Consider your education or career training an ongoing process.
  4. Take care of your physical health and well-being.
  5. Purchase adequate life and disability insurance to protect loved ones against a potential loss or reduction of income.

If you are confident that you are on track to reach your retirement goals, you are in the minority. Findings from the National Retirement Risk Index (NRRI) revealed that 52 percent of households are at risk of not being able to maintain their same living standards during retirement. With retirement confidence levels so low it’s important to avoid letting fear and anxiety take control. A resilient retirement plan shifts the focus to the things you can do and empowers acting today to improve your chances for success. One basic step is to run a basic retirement calculation to see how much you should be saving to reach your goals.

It is anticipated that you will experience potential obstacles on the pathway to retirement. Some of the most common financial setbacks that hurt retirement plans include the following:

  • Increased cost of living
  • Limited resources left to save for retirement
  • No access to a retirement plan at work
  • Traumatic life events (illness, disability, divorce, etc.)
  • Accumulation of debt
  • Education costs
  • Paying for current and/or future health care costs
  • Caring for an aging parent or other loved one

From a retirement planning perspective, here are five important signs that your retirement plan has the resilience to weather the potential challenges and obstacles that may interfere with your plans to achieve financial independence.

1. Your Financial Life Plan Includes Long-Term Plans for Retirement

Setting financial and other life goals on a regular basis can positively impact your ability to make smart financial decisions. Financially resilient individuals use goals to prioritize their decisions and stay focused on what matters the most. Goal setting also helps prepare for the things that could potentially put important plans off track. But simply creating a written financial plan is only the first step to take. You must have the diligence to follow through on the plan and stay focused on financial behaviors that make a difference. You can create your written retirement plan by listing short and long-term financial goals and ask yourself these important questions about your retirement

  • Why is having a financial life plan so important to me?
  • What do I look forward to doing the most in retirement?
  • Why is accomplishing these retirement goals so important?
  • How much income is needed to live a comfortable lifestyle during retirement?

Once you have answers to these retirement planning questions you can start putting your plan in writing. For more information on how to make this process seem a little less daunting consider creating a simple one-page financial plan.

2. You've Taken Steps to Protect Your Family and Your Wealth

Financial resilience requires more than a strong will and determination to get through difficult life events. You must also have a wealth protection plan and the first place to start is to establish an emergency savings account. Then, you can shift the focus to protecting against catastrophic health-related events with adequate health insurance. Disability insurance planning is another way to protect against the risk associated with loss of income. Check with your employer to see if you have long-term disability coverage. If you are in your 50's or older, long-term care insurance becomes another area of concern for wealth protection. The bottom line is to prepare yourself and your family for those big life events that can significantly hurt your chances of retiring on your terms.

3. You Retirement Savings Plan Is on Track to Meet Your Income Goals

Financial wellness is a term use to assess your overall financial health. Financial wellness consists of more than just our perceptions and feelings about our own financial health. The concept of authentic financial wellness is measured by a combination of factors including the overall satisfaction with our current financial situation, actual financial behaviors (i.e., budgeting, saving, paying off credit card balances in full), financial attitudes, financial knowledge, and objective financial status. Financial Finesse defines financial wellness as a state of well-being where an individual has achieved minimal financial stress, established a strong financial foundation, and created an ongoing plan to help reach future financial goals.

Financial wellness doesn’t guarantee resilience when setbacks occur or obstacles stand in the way. Focusing on your overall financial health can go a long way in helping you prepare for retirement while dealing with challenges. You can track your financial progress by regularly assessing important financial measurements such as your overall net worth, debt-to-income ratio, and savings ratios. See ​"Ways to Track Your Financial Wellness" to find out how resilient you are. Checking your financial health at least a few times a year should be just as important as regular health and wellness checkups.

After you have examined your financial foundation you can continue to track your financial health as it specifically applies to retirement goals. It's often suggested that running a basic retirement calculation at least once per year should be part of an ongoing financial plan. Most financial planners recommend setting a ballpark goal to replace 70 to 90 percent of your pre-retirement income. This goal can be adjusted to account for your retirement lifestyle. Once your planned retirement date is 10 years or less it usually makes sense go beyond the income replacement approach and run a budget plan for retirement.

4. You've Created a Foundation of Basic Financial Knowledge

Financial resilience requires a base of financial knowledge to help make important decisions. It's also no surprise that general financial knowledge is an important aspect of financial wellness. When it comes to financial decision making there is a disconnect between knowledge and action. The knowing-doing gap is usually mediated by confidence. Researchers have identified that our own perceptions about how much we know about financial topics is a better predictor of the financial behaviors we will actually exhibit. 

Here are some specific retirement planning steps to educate yourself on future options:

5. You Have More Than Financial Capital Built Up For Retirement

Building adequate savings for retirement is obviously important. But have something commonly referred to as “psychological capital” is another important component of retirement preparedness that can be a difference maker.

You cannot simply think your way to retirement success. But having a resilient mindset can help you get through major life transitions. In addition to the important aspect of resilience, it is also important to have hope, optimism, and self-efficacy (or your belief in yourself). These are the core components of psychological capital which can be helpful tools to help you thrive during retirement. 

An additional aspect of resilience is human capital. Continuously taking steps to learn and advance your work and personal skills can create career opportunities and reduce the risk of a financial setback that could impact your ability to increase your earnings and grow your retirement savings. 

During major life transitions, you may turn to friends, co-workers and extended social networks (including social media outlets) to provide a support. This so-called “social capital” is a helpful tool to survive difficult transitions and to help you demonstrate resilience.

How to Create a Plan That's Resilient

If you have some obstacles standing in the way of achieving your own sense of financial resilience the awareness of these potential roadblocks can help identify the need for change. Assessing potential weaknesses in your financial plan will help you use that awareness to take action and create a retirement plan for today that also balances current priorities. As a result, improvements in the financial resilience department will better prepare you for the next major life transition and you will ultimately be better prepared for retirement success.

To summarize, consider setting aside a few moments to think about what stands between you and living your current life as you want to. Now fast forward to your retirement years. What are some obstacles that stand in the way of you reaching your most important life goals for retirement? The more resilient you can become, the less likely those obstacles will become permanent roadblocks.