Money Matters: A financial guide to approaching retirement

Preparing for your retirement is one of the most critical aspects of wealth management. After all, many of the efforts and sacrifices you made throughout your career were based on the principle of “save and plan now so you can enjoy later.” Said another way, “If you do the things you should do when you should do them, you can do the things you want to do when you want to do them!”

With this in mind, we thought it helpful to provide you with a financial guide to approaching retirement. The guide is designed to identify many of the important elements that should be addressed as you consider your plans for retirement. Each element is based on a simple formula we suggest you use in managing your wealth:

Wealth management = investing + advanced planning + relationship management

Each aspect of this formula needs to be addressed to help you move toward a successful retirement, financially and emotionally. From a financial aspect, it makes sense for you to strive toward achieving independence (the ability to do what you want to do) and dignity (the ability to do what you want in the manner you wish). From an emotional aspect, it makes sense for you to prepare to make the best use of your time and pursue the activities and interests you find most fulfilling.

"An appropriate balance should be maintained in cash reserves and invested assets to ensure your long-term goals are funded," writes Ronald J. Paprocki, JD, CFP, CHBC.

Understanding what you can control, what you can influence, and what you have no control over will help set the stage for further consideration. For example:

• Total control: savings vs spending; asset allocation and amounts in taxable or tax-deferred accounts

• Some control: employment earnings and duration, retirement age, personal longevity

• No control: market returns, policy changes regarding taxes, etc

Let’s examine each variable of the wealth management formula using a question/answer format.

Investing

How should you consider a change to your long-term investment plan?

The level of fluctuation you were able to endure during your working years may need to be adjusted as you approach the time when your assets will produce a substantial source for your spending needs. You should review your current approach and identify the possible impact of changes you may consider. This will give you the ability to assess whether your investments are on track for your long-term goals.

How do you best position your investments to balance one of the biggest risks individuals face during retirement (inflation) with one of the most common investment goals (consistent annual rates of return)?

Analyze your investments and stress test them (by assuming a wide range of possible annual returns—both positive and negative) under various scenarios to determine whether you can maintain your purchasing power for the rest of your life. This can help identify the best scenario to meet your desired level of independence and dignity.

Advanced planning

What is your current standard of living?

Start by understanding how much you spend on the things and activities you enjoy doing today. Work to uncover the frequently overlooked items that contribute to total living expenses.

What living standard do you require during retirement to provide you with the desired level of independence and dignity?

Next, estimate how much you will need to spend each year during various stages of retirement. There may be substantially more travel planned during early retirement years, followed by a more modest amount of spending in later years. Then, evaluate potential changes to your current living expenses (either increases or decreases) once you retire. Think of your goals regarding travel, family, second career objectives, hobbies and new interests, and continual personal fulfillment.

How will you know that you will not run out of money as you enjoy the years you have worked so hard to prepare for?

You can run projections using the latest financial modeling technology to ensure your spending goals are achievable. If there are insufficient assets, try to identify alternative options to balance savings levels, spending models, return, and inflation assumptions. All should be designed to minimize uncertainty and build your financial confidence.

What are alternative uses or start dates for your Social Security benefits?

There are various Social Security start ages that can be considered to determine the optimal time for you to begin to maximize benefits and lifetime spending. This information provides the clarity to make the most of the benefit you have contributed to for your entire working lifetime.

What is the best way to support your required living standard during the bridge years from retirement until the beginning of distributions from your tax-deferred retirement accounts, such as pensions, individual retirement accounts, or 401(k) accounts?

The decision can have critical income tax implications. Addressing the bridge years by considering tax, investment, and estate planning considerations should help you to know that all aspects of your financial world are arranged to satisfy your goals.

What is the appropriate amount of cash reserve to maintain during retirement?

An appropriate balance should be maintained in cash reserves and invested assets to ensure your long-term goals are funded. Review your short- and long-term goals to determine the appropriate balance to maintain as cash reserves.

What is the impact on your long-term tax planning if using Roth conversion strategies?

This strategy can reduce total long-term tax liability for you and your heirs. Model Roth conversion strategies to illustrate the current impact of conversions (higher current taxes) and potential long-term impact (lower lifetime taxes and reduced tax impact on heirs).

How might a change of residency be beneficial to you?

States have different approaches to income and estate taxation. Review your alternatives so you can balance your personal interests with potential taxation benefits.

How might long-term health care costs or assisted living costs impact your retirement years?

These costs continue to skyrocket. Analyze your risk exposure and evaluate whether you are financially prepared for a potential long-term stay, or whether changes to your retirement spending should be considered to better position yourself. Analyze this important risk with an eye on your available assets, all with the goal of you not running out of money.

Given the potential of changing estate taxation and planning strategies, what should be considered to make certain your assets are distributed to family, friends, or charities in the most efficient manner possible?

Consider the alternatives that may be available for you. Your plan should do as much as possible to ensure assets are titled properly and are distributed to your heirs according to your wishes. This is especially important given the expected changes to this tax structure.

Should your retirement change the way your assets are protected from potential legal actions?

We live in a litigious society, and the threat of being sued always exists. Make certain to review your current potential risks and consider alternatives for you and your legal team to consider.

What are the best ways to accomplish your charitable giving objectives given your approaching retirement?

There are so many ways to pay it forward by supporting the organizations that are important to you. Review alternatives such as qualified charitable distributions, gifts of appreciated assets, or the use of donor-advised funds to make certain you accomplish this important goal in the most efficient manner possible.

Relationship Management

How can you be certain each of your advisers understands your plans?

Make certain all the professionals working for you, such as your attorney, certified public account, insurance broker, banker, and others, understand what your goals and objectives are and are all working together to help you.

What are your other advisers’ plans regarding their own retirement?

Said another way, “How deep is your adviser bench?” It is critical to make certain you have the appropriate backup plan in place to accommodate your needs if one of your other advisers is entering into a new phase of their life.

Conclusion

It is not a difficult process to prepare for retirement. However, with some careful thought and with appropriate guidance (when needed), you can feel confident you have done as much as possible to make your retirement years financially satisfying.