Retirement Considerations
Why do I need an advisor?...
The typical retiree has accumulated significant assets. The side effect of this is that this wealth needs to be protected as much as possible. This includes planning to minimize estate and income taxes as well as potential long-term care risks. A financial advisor should work with you and coordinate your team’s efforts to grow and protect your hard-earned assets. After all, you did not spend a lifetime accumulating wealth to pass it on to anyone but your family or the causes you care about. Because the landscape is continually changing, your strategy should be an ongoing effort with continual updates and modifications as needed. Your financial advisor should be your partner on this journey. It is our belief that you should strongly consider working with a firm that specializes in retirement and not a jack-of-all-trades.
Making the Retirement Transition...
If you are considering retirement, there are some things you should understand as well as a course of action you should consider. Retirement is one of the biggest decisions you will make during your lifetime so it is important to get it right. Take the necessary time and effort to consider all of the options.
FIRST:
Before you retire, you need to objectively make a financial assessment of your situation. Essentially, you should look at yourself from a business standpoint and review your spending patterns, cash flow while working, and tax situation while working. In short, how much do you spend every month?
SECOND:
Once you understand what you are spending now, you can begin to look at "how will you make your cash flow while retired." This cash flow will come from pension income, social security income, withdrawals from 401(k), IRAs, or other savings. Keep in mind, you will need to factor in taxes at the applicable rate for a retiree to come up with your spending dollars.
THIRD:
Once you have a clear understanding of how you will fund your retirement lifestyle, you should review your situation for risk areas. This includes:
Retirement Risks...(after retirement)
Number 1: Living a long, long, long and healthy life
(Outliving your money)
Number 2: Living a too-short life
(Not having provisions, income, and death benefits for your spouse)
Number 3: Living long, but being frail, infirm, or sick
(Spending too much of your money for your care)
Risk number 1 is potentially mitigated though financial planning and ascertaining a reasonable budget while in retirement. Ensuring the “3 legs of the stool” generate ample cash flow to meet one’s budget throughout one’s life expectancy is the focal point. Additionally, a sound and diversified investment plan to generate cash flow during a family life expectancy and provide income and growth is required. Attaining a reasonable, and risk guided long-term rate of return is paramount. This must be done with a reasonable rate of withdrawal from assets throughout the entire retirement lifecycle. Risk number 1 becomes great when a client is taking a larger percentage withdrawal from his or her portfolio than will last, client investment returns are insufficient, or the client takes unreasonable losses within the portfolio.
Risk number 2 is essentially “dying early.” While the emotional toll on the surviving spouse and family cannot be understated, the financial toll can be massive. The cash flow stream must be provisioned such that survivor benefits are ample, and cash flow from investments is sufficient, to allow the survivor to maintain standard of living. It is crucial that survivor options be used on defined benefit pension plans, that each spouse understands the social security structure as it applies to them, and that beneficiary designations and structures be correctly set up to help ensure the survivor can go on, at least financially.
Risk number 3 is the risk of asset depletion (or estate reduction) occurring from one or both of the retirees being medically/financially burdensome. Each financial plan must account for the “what if” scenario of either spouse needing long term care and the resulting burden of those costs. With the cost of care averaging $6,000 to $9,000 per month, very few have an income stream that can easily handle such expenses. Each retiree, after reviewing all the data, can determine if they want to “self insure,” “transfer the risk vis-à-vis insurance,” or “avoid thinking about it”.
FOURTH:
Once you have come this far in your planning, you should now consider how to best position your assets to achieve your goals. The investment decision for your savings should match the goals and objectives of your specific plan. Understanding risk in all of its forms is critical as you decide on positioning the investment of your life savings. Understand the concepts of both market risk as well as the risk of outliving your money.
Retirement Paradigm Shift...
What you need to understand:
Entering retirement, there are a few things you need to keep in the back of your mind. These are critical because the conventional wisdom of what is right, probably no longer apply. After you review this, your specific game plan should make more sense.
Understanding #1:
Your 401(k)/IRA balances are not yours. Yes, you read correctly. You have a silent partner who stands to benefit regardless of the plan of action you choose. Who is this fiend? None other than the federal government. Uncle Sam let you build up this sizeable nest egg through deferral of pretax money going into a plan that grew tax deferred. Investment gains and compounding over time have done the rest. Assuming you live 25 years in retirement, the money will continue to grow. The price of this tax-deferred growth is the knowledge that, at some point, Uncle Sam will be getting his pound of flesh in the form of income taxes. With few exceptions, whoever takes the money out will be paying the tax bill. To get a full understanding of this effect, take your total balance and figure the taxes due if you were to take all of the money out immediately. You need to understand that a plan will, at best, minimize the damage. In some cases, it may make sense to start a withdrawal up front to keep the pile of money from getting too large.
Understanding #2:
As if the income tax insult is not enough, the same government stands ready to extract your assets from your future generation in the form of estate taxes. The most tax-efficient course of planning is to spend all your assets before you check out. In the absence of this, have your assets positioned to allow you to keep as much for your heirs as possible. In some cases, this means giving up some measure of control of assets or positioning assets to bypass your spouse. If your entire estate is worth more than $1 million and it is comprised of your house and IRAs, Uncle Sam is ready to "double whammy" your heirs with both income and estate taxes.
Understanding #3:
For many, IRS qualified money (401(k)s and IRAs) make horrible estate planning pieces. Stated simply, the tax deferral is wonderful for minimizing income taxes but lousy for trust funding. Using an IRA to fund a trust gives up all of the wonderful planning opportunities available to your next of kin.
Understanding #4:
Change is inevitable, especially where money is involved. Knowing this, it is critical that any long-term plan you undertake be flexible and changeable. It is likely that the landscape will change, and hopefully, so will your actions. Keeping this in mind, common sense should be your guide. This means, in the absence of contrary proof, generating liquidity probably makes sense. Again, IRA balances are nice on paper but useless for gifting, spending, or otherwise disposing of.
Understanding #5:
Leaving some of your IRA to your kids, and not your spouse, may endow them with an income stream that lives as long as they do. The targets to remember are before age 70½, and the type of life expectancy calculation you choose.
This is not tax advice and is intended for informational use only.
2013 Retirement Capital Advisors, to be used only as a financial planning summary. It is not intended as specific advice. Not for public or general distribution. Diversification does not assure a profit or protect against a loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved. Fixed insurance products and services are offered through Retirement Capital Advisors.