Financial Planning Considerations for a Successful Retirement

How much money will you need to retire? Do you have a financial plan to help you meet the needs of retirement? Do you have enough assets to last a retirement of 20 to 30 years? Do you have a Retirement Income SpendDown Plan? How will you manage rising health care costs and long-term care?

These are loaded questions; many factors are involved, and a “cookie cutter plan” will not meet the needs of everyone. Baby Boomers were most impacted by the “Great Recession” 10 years ago. Given the economic rebound since and inevitable recessions in the economic cycle, we wanted to take a look at strategies for a secure retirement by examining the five common planning issues people may encounter.

According to a recent Schwab survey, only 25 percent of Americans have a written strategy for retirement.

Therefore, Ideal-LIVING spoke with Lawrence S. Tundidor, AIF®, AAMS®, AWMA® of Tundidor & Weiss Investment Group, to help you avoid these common issues: one. Take control of your money two. Not having a proper retirement income spend-down plan three. Having an antiquated investment portfolio four. Underestimating risks: longevity, investment, inflation five. Lacking protection for your family and estate six. Working with a financial advisor who puts your best interests first

1. TAKE CONTROL OF YOUR MONEY

Upon changing employment/retirement, some keep their money in the original employer sponsor plan. It is important to take into account one’s personal situation and consider the various options, which include: keeping your assets in the original plan; withdrawing your assets (taxes are generally due upon withdrawal and any applicable tax penalties that may apply); or choosing to rollover your assets to an employersponsored retirement plan that accepts rollovers or to another eligible vehicle such as a traditional IRA. It is imperative to take control of your money when you make the decision to retire from your company. Considering your options will give you the freedom to work toward maximizing your investments.

Pension Maximization Possibilities

Examine pension survivorship benefits. If you are one of the lucky ones to retire with a pension, at the time of retirement, you must elect how you will disperse the benefit. To protect your spouse, you can typically opt for a lower monthly amount to ensure your spouse is covered until “end of plan.” This may or may not be the best option. Some clients choose to opt for the single life benefit and instead have an Insurance policy to protect their spouse or beneficiaries. In some cases, not only can it protect loved ones, but some insurance policies allow for the death benefit to also be used for long-term care. This can ensure that the benefit will be used during one’s life, death, or both. This is an irrevocable decision, so consult with a financial advisor before finalizing your election.

The majority of pension benefits do not have a “COLA”

(Cost of Living Adjustment) increase with age, therefore, consider what the money will be worth in 20 years. Assuming above a three percent inflation rate, a $4,000 a month pension would only be worth about $2,000 a month in 20 years. For those with a lump sum option, consider the option to invest and generate an income stream that has the ability to offset inflation pressures over time.

2. NOT HAVING A PROPER RETIREMENT INCOME SPEND-DOWN PLAN

Where do you draw your money from when you need it? From an IRA? Sell stocks? 401Ks? Real estate? Brokerage accounts?

You have worked very hard for your money and decisions on when and where to use your money can have ill-intentioned consequences.

Plan where your money will come from instead of putting it all into one pot. In retirement, you should consider having long-term, mid- term, and short-term investments to help protect you from market fluctuations while maximizing your income potential. More conservative investments go in short-term, moderate investments for mid-term, and more aggressive in long-term. Picking and choosing investments to liquidate on a monthly basis can be stressful, and most advisors show you how and where to save but not how to create an income stream from your investment assets.

When drawing income directly from a 401k, the plan provider will typically sell shares or “units” to send you a monthly amount you requested. The issue with this strategy is that you are indiscriminately selling shares in an up or down market regardless of price. In a down market, you are selling shares at a lower price and therefore cannot allow time for those shares to recover essentially burning the candle on both ends. Consider investments that provide a dividend or yield that allow you to draw income without selling shares.

Having an income spend-down plan can help minimize taxes. For example, if you are taking all of your income from your IRA, this could potentially put you in a higher tax bracket. The goal is to determine how much money to draw from each of your investment assets to maximize your returns and minimize your tax consequences.

3. HAVING AN ANTIQUATED INVESTMENT PORTFOLIO

A recent Vanguard study projected investors’ portfolio returns over the next 10 years to be between three and five percent annually versus nine to 11 percent they have enjoyed over the last decade. Many pre-retirees/ retirees have invested with a 60/40 stock/bond ratio and think their portfolio is diversified and able to generate enough income. In the past, bonds have yielded five to seven percent, but now most estimates put projections for bond returns at an average of two percent. It is important to examine having some portion of your investments in alternative assets or alternative strategies to work to minimize volatility and potentially increase return. As few as two percent of the U.S. population has a truly diversified portfolio with alternatives. Diversification may allow you to hedge against inflation and interest rates.

4. UNDERESTIMATING RISKS: LONGEVITY, INVESTMENT, INFLATION

There are three major types of risk that people fail to analyze: investment risk, longevity risk, and inflation risk.

Investment risk (tied to sequence of returns) is the possibility that your investments could lose value because of movements in financial markets. A recession historically comes once or twice every decade. If you had retired during that time and were forced to sell investments to fund your retirement expenses, then you would have lost a great deal of the upside when the market recovered. For example, Disney stock had dipped down to $20 in 2008; you may not have been able to wait for it to recover and then sell when the price was much higher. Now that it has been 10 years since the last recession and many have enjoyed great returns since then, it would be wise to re-evaluate their investments to make sure they are in line with their time horizon. Many Ideal-LIVING readers were still working and still had many years to retirement in 2008; but now that they are closer to retirement, it is important that they evaluate their current situation.

People today are living longer, and this forces us to evaluate longevity risks. According to the Wall Street Journal, there is a 50 percent chance that a Baby Boomer today will live to age 90. If you don’t plan accordingly, your income could run out before you do. Most people think if they draw 4 percent out per year, they will have enough income to last. Some have recently argued that number should be about 2.5 to 3 percent per year. In the first three years of retirement, the average retiree tends to spend approximately 20 percent more and this overdraw can also contribute to insufficient sums for the later years if not planned for correctly.

Don’t forget inflation. At above a three percent inflation rate, the value of a dollar in 20 years is about half of what it is worth today. A 2018 Bankrate survey concluded that some Americans are still risk averse and have left a large amount of money sitting in cash. If the bank gives you a yield at a rate under inflation, you are actually earning a negative return during that time. Be aware of how inflation affects your bottom line and focus on inflation adjusted income in retirement.

5. LACKING PROTECTION FOR YOUR FAMILY AND ESTATE

According to Fidelity, a 65-year-old couple retiring this year will need an average of $275,000 to cover out-of-pocket medical expenses. And that doesn’t include the costs associated with long-term nursing home care.

Often times, retirees might have a last will and testament, but not a comprehensive estate plan. Adequate protections should be evaluated for health, as well as leaving a legacy. The US Census indicates that one in five Americans may become disabled for a period of time. Do you have a plan in the event a disability occurs years before retirement due to an accident or poor health? Do you have a plan to deal with the rising cost of long-term care (LTC) insurance? According to the US Department of Health and Human Services, around 70 percent of adults over the age of 65 will need long-term care insurance at some point in their lives, and it is usually at the tail end of a financial plan when assets tend to be at their lowest point after 20 to 30 years of withdrawals. Consider ways to mitigate those long-term care costs. Traditional long-term care can be a good option for some as they can lock in a specific benefit and have the ability to grow it to offset inflation. The downside is that if you don’t use the benefit, you typically lose it, and as you get older, the premiums are not fixed and can go up over time. A Hybrid Life Insurance policy with a long-term care rider allows one to have a life insurance benefit while still working or in retirement, with the ability to use some or all of their death benefit for the purposes of long-term care in their later years. This option can give clients the ability to pay for a benefit that they know will be used in one way or another, potentially eliminating the feeling of “use it or lose it” that some may have with traditional policies. Also, Hybrid policies can be structured with “fixed” premiums or a lump-sum and therefore, reduce the risk of rising premiums that some may experience traditionally. The downside is that underwriting requirements are typically more stringent since you are underwriting a death benefit and living benefit together. Many individuals have older cash value policies without a LTC benefit that may consider re-evaluating those policies to create a new benefit. The third option is asset-based; using either retirement accounts or cash to generate an annuity stream during retirement that can continue to pay for long-term care costs later in life. This option can also be useful to individuals who are not able to pass the medical examination requirements of traditional or hybrid policies, as well as those in risk classes such as smokers and those with Diabetes where the price may be prohibitive.