Income Strategies for Retirement – Five Common Considerations
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 Spend-Down Plan”?
These are actually 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”, so we wanted to take a look at strategies for a secure retirement by examining the five common planning issues people may have.
According to the The Aegon Retirement Readiness Survey 2014, only 18% of Americans have a written strategy for retirement1?
“If you fail to plan, you are planning to fail.” – Benjamin Franklin
Therefore, Ideal-Living spoke with financial advisers, Lawrence Tundidor, AAMS, AWMA®, Daniel Weiss CRPC® of Tundidor & Weiss Investment Group and Anthony Chirchirillo, CRPC®, CFP® of ING Financial Partners to help you avoid these 5 common issues:
1. Take Control of Your Money
2. Not having a Proper Retirement Income Spend-Down Plan
3. Having an Antiquated Investment Portfolio
4. Underestimating Risks
5. Lacking Protection for Your Family and Estate
1. Take control of your money
Many people don’t even read their monthly investment statements. Upon retirement, some just leave their money in the same plan that it has been in all along. Taking into account your personal situation, you may want to consider your options, such as: keeping your assets where they are; withdrawing your assets (taxes are generally due upon withdrawal and any applicable tax penalties that may apply): or you may choose to rollover your assets to an employer-sponsored retirement plan that accepts rollovers, or to another eligible vehicle such as a traditional IRA. Take control of your money when you make the decision to retire from your company. By doing so, it gives you the freedom to work toward maximizing your investments by considering other options.
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 typically can opt for a lower monthly amount to ensure your spouse is covered until “end of plan.” This might be the best option, but it might not. This is an irrevocable decision, so consult with a financial planner before finalizing your election.
Did you know there is a return of premium term life insurance policy that may present an opportunity to enable you to get all of your premiums back at the end of the term assuming all terms and conditions are met?
The majority of pension benefits do not increase with age, therefore consider what the money will be worth in 20 years. Assuming above a 3% inflation rate, a $4,000 a month pension would only be worth about $2,000 a month in 20 years.
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 still have 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 can be stressful, and most advisers show you how and where to save, but not how to create an income stream out of it.
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 find 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
Many pre-retirees/retirees have invested with a 60/40 stock/bond ratio and think their portfolio is diversified. In the past, bonds have yielded 5 to 7%, but now most estimates put projections for bond returns at an average of 2%. 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
There are three major types of risk that people fail to analyze: Market Risk, Longevity Risk and Inflation Risk.
A market 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. Many 401Ks turned into 201Ks in 2008. 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 under $20 in 2008; you may not have been able to wait for it to recover and then sell when the price was much higher.
People are living longer today and this forces us to evaluate “longevity risks.” There is a 50% 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% out per year, they will have enough income to last. Some have argued that number should be about 2.5% to 3% per year. And, in the first three years of retirement, the average retiree tends to spend more than they did before they retired. This overdraw can also contribute to insufficient sums for the later years.
Don’t forget inflation. At above a 3% inflation rate, the value of a dollar in 20years is about half of what it is worth today. A 2013 Bankrate survey concluded that some Americans have become more risk averse and leave 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.
5. Lacking Protection for Your Family and Estate
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, such as considering disability insurance? Do you have a plan to deal with rising health care costs, such as long term care insurance? By the way, according to the US Department of Health and Human Services, around 70% of adults over the age of 65 will need long term care insurance at some point in their lives. Memory care units can be the most expensive care there is. Protect yourself and your family.
As far as a strategy for estate planning is concerned, all pre-tax retirement plans and traditional IRAs require a minimum annual distribution after obtaining the age of 70 and a half. Most take that distribution and simply put it into a savings account. Other options can be to take the cash and invest post-tax, contribute to long-term care protection or to leave a legacy. What type of legacy would you like to leave? You could gift money to your children/grandchildren, set up an endowment for charity or protect the assets in a trust. There are countless options and strategies to create the legacy you choose.
Post-retirement living is very different so, take the time to explore your options well in advance of your retirement age. We encourage you to sit down with an unbiased independent financial adviser to help you compose a written personalized or holistic financial strategy with the goals of protecting your retirement investments and securing your financial future.
Securities and Investment Advisory Services offered through ING Financial Partners Inc, Member SIPC.
Tundidor & Weiss Investment Group is not a subsidiary of nor controlled by ING Financial Partners.
Neither ING Financial Partners nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.