I’ve been paving my path to retirement since I held my first job selling beach tags in Sea Isle City, New Jersey. I wasn’t thinking about retirement at age 15 per se, but I did deposit the money I earned in a savings account.

Fast forward to today. I’m a bit farther along on my path to retirement, but 1 thing hasn’t changed—I’m still laying the groundwork for the future. And my ultimate investment goal isn’t just being able to retire. It’s having financial security in retirement.

Generally speaking, financial security is peace of mind that comes from having confidence you can attain all of your financial goals both now and in the future. To me, it means being able to educate my daughters, travel abroad, own a second home, and leave a modest legacy.

Prepare for the road ahead

Retirement isn’t a 1-stop destination—it’s a phase of life that may span 20 years or more. The priorities, challenges, and resources you have at the outset of your journey may change over time, so be prepared to follow a winding path.

There’s no universal route to financial security in retirement, but there are common steps in the journey. The direction you take at each juncture will determine the path you’ll follow.

  1. Determine goals. Identify and prioritize the things you want to accomplish.
  2. Understand risks. Be aware of potential risks that could get in your way.
  3. Assess financial resources. Take inventory of your present and anticipated future assets. Most of us will rely on several financial resources in retirement. Different resources can meet different needs.
  4. Develop a plan. Create a long-term strategy that takes your highest-priority goals, biggest risk factors, and available resources into consideration.

The key elements of retirement planning

Here’s a closer look at the important things you should consider when mapping out your plan.

Goals

Retirement isn’t a single goal. It’s a combination of multiple goals that vary in importance. Generally, you’ll want to allocate your assets toward your goals in order of priority, using reliable, easily accessible resources to achieve your highest-priority goals.

Let’s say you have 4 main goals, which you’ve prioritized in this order:

  1. Living expenses (food, clothing, housing, recurring health care expenses, etc.).
  2. Contingency reserve (home repairs, unanticipated health care expenses, etc.).
  3. Discretionary spending (vacations, eating out, entertainment, etc.).
  4. Legacy (transferrable wealth).

Risks

Retirees face several risks, which can be grouped into 5 categories:

  • Market and investment risk: The risk your portfolio will lose purchasing power due to market variables, including investment returns, inflation, and interest rates. Your lower-priority goals (such as discretionary spending or legacy) may be able to withstand greater levels of market and investment risk.
  • Health risk: This risk is twofold. It’s the risk you’ll need care because your health is declining plus the risk you won’t be able to afford care. You can determine your health risk by evaluating 3 factors: your overall health, available coverage, and desired level of care.
  • Longevity and mortality risk: Longevity risk is the risk you’ll live longer than expected and potentially outlive your savings. Mortality risk is the opposite—it’s the risk that you’ll live shorter than expected, potentially widowing a spouse or leaving behind more wealth than anticipated. The average life expectancy around the world is increasing, but your own life expectancy is influenced by several factors, including gender, lifestyle, and genetics.
  • Event risk: The risk you’ll face an unexpected event with a large financial impact, such as an unplanned family expense or an extensive home repair or relocation. Roughly 72% of current retirees report having experienced at least 1 such “shock” in retirement, according to the 2015 Risks and Process of Retirement Survey from the Society of Actuaries.
  • Tax and policy risk: The risk that rules about public health coverage, retirement benefits and pensions, and taxation of retirement benefits and estates will change. This risk can be lessened by controlling your asset allocation, asset location, and spending plan.

Resources

Your retirement resources include more than your portfolio. We categorize the resources you may have in retirement into 3 groups:

  • Guaranteed income (Social Security, pensions, annuities).
  • Liquid assets (investment accounts that you control).
  • Other resources (insurance policies, employment income, property).

Align your resources with your goals

The orange chart below shows the resources that best align with each of the 4 goals identified above. The maroon chart shows the risks each resource mitigates.

Note: Relative effectiveness is a measure of how well the resource either supports a goal or mitigates a risk.

Here’s a closer look at how you can plan to meet your goals:

Basic living expenses

Consider using guaranteed income to cover your basic living expenses. Guaranteed income, such as Social Security benefits, annuities, and income from pensions, provides effective protection from market and investment risk as well as longevity and mortality risk. This makes it your most dependable source of income.

If guaranteed income doesn’t cover all of your basic living expenses, employment income can be used because it also offers protection from market and investment risk.

Contingency reserve

Consider using liquid assets to cover these expenses. Liquid assets include investments in an employer-sponsored retirement plan or savings in a taxable account.

Your asset allocation should align with your risk tolerance and the time horizon of the goals you want to support. If your investment portfolio needs to support multiple goals with different capacities for risk, your asset allocation should reflect a blend of objectives.

Liquid assets provide effective protection against tax and policy risk because they can adjust to changing regulatory and tax environments. Additionally, insurance and employment income or property income can be used to cover these expenses.

Discretionary spending

Because this type of spending is lower on your list of priorities, you may be able to tolerate higher degrees of uncertainty. Liquid assets or employment income may be the most adaptable resources to meet this objective. Any guaranteed income that exceeds your daily living expenses can also be used to meet this goal.

Legacy

This long-term goal requires a surplus of assets that can be passed on to heirs or support charitable objectives. Leaving property or liquid assets that are appropriately invested can maximize the value of your bequest. Life insurance can also be used as long as the benefits outweigh the costs.

Forge your path

Achieving financial security in retirement may be a universal goal, but the strategy that’s right for you depends on your own circumstances—your goals (and how you prioritize them), the potential risks you face, and the resources you have.

Retirement is complex. You may have competing objectives that require you to make difficult choices. But the good news is, you have options. You can identify your priorities and align your financial resources to pursue your goals and mitigate risk. See Vanguard’s roadmap to financial security: A framework for decision-making in retirement for more information. Or you can work with a financial advisor so you don’t have to figure it all out for yourself.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • We recommend that you consult a tax or financial advisor about your individual situation.