Will Your Golden Years Be Golden?
In the past, most people relied on Social Security, pensions, and personal savings to see them through retirement. But with doubts about Social Security’s continued solvency, the decline of traditional pension plans, and savings rates at or near zero, this model just doesn’t work anymore. And simply contributing to qualified accounts (401(k)s, IRAs) isn’t enough. In this post, we’ll look at how to put together a comprehensive plan to help ensure your Golden Years are truly golden.
First, it’s hard to reach your destination if you don’t know where you’re going. Setting goals for retirement, while relatively simple, is critically important. The best way to manage the goal-setting process is to ask yourself some basic questions.
When do I want to retire? Timing is everything. While the average life expectancy in the United States is 77.97 years, you can potentially live for decades after retiring. This means the difference between retiring at 50 or retiring at 70 can be huge, especially when it comes to Social Security.
What will I do in retirement? You can expect to live 30 years or more in retirement. Whether you choose to further your education, travel the world, or spend more time with your grandchildren, you should treat your lifestyle choices as goals.
What is my money for? This is an especially important question because it affects other aspects of your retirement plan. You can spend all your money, leave it to your heirs, or pay for a new library at your alma mater. Whatever you choose to do, you should express your choices as goals in your retirement plan.
A comprehensive retirement plan has many components including—in no particular order—investments, estates, insurance, capital needs, and, of course, taxes. Each of these components, while inextricably linked, has its own unique challenges when it comes to planning.
- Estates―Planning for the ultimate dissemination of your assets is a key piece of your retirement plan. Determining who will receive the assets is likely the first step. Then you need to decide how they will be distributed. Finally, you must have the proper legal documentation in place to ensure that your assets are dispersed according to your wishes.
- Insurance―You should consider insurance as a tool for income protection and wealth retention. Review your current coverages and make any necessary adjustments to ensure that they align with the goals you’ve established for retirement.
- Capital Needs―How you spend your money in retirement is just as important as how much you have. Making well-informed assumptions about future expenses is crucial to your long-term financial success. Medical expenses, housing, and leisure spending should all be considered when formulating a capital needs plan. Don’t forget to account for inflation and general increase in prices over time.
- Taxes―When you consider all the taxes you pay (state, federal, FICA, sales, real estate, etc.), it’s no wonder that taxes represent one of the biggest obstacles to growing and preserving wealth. That’s why your plan must include a strategy to limit your potential tax liability during the accumulation phase of your life and position you in the lowest tax bracket possible during retirement.
For retirement accounts such as a 401(k) or IRA, you should consider a portfolio that features global allocation with diversification across asset classes. This will help limit volatility and give you more predictable returns over longer periods in preparation for retirement.
Make sure you allocate the right asset class to the right type of account. For example, you should generally allocate less-tax-efficient assets, such as bonds and dividend-paying stocks, into qualified accounts and more-tax-efficient assets, such as stocks or ETFs, into taxable accounts.
If you engage a financial planner to help implement your retirement plan, be sure he/she is experienced and make sure he/she has the right credentials (CFP®, CFA, CPA/PFS). If you decide to do it yourself, choose a custodian who provides his/her services at a reasonable cost. In addition, be sure to engage an experienced attorney to prepare your estate documents, a qualified tax professional for help with tax planning and preparation, and an independent agent who represents many different carriers for your insurance needs.
Your retirement plan is a living document that needs to be reviewed periodically and adjusted if necessary. This will ensure that the plan meets your current needs and that it is on target to help you achieve your long-term goals.
Remember, hope is not a strategy, and promises—like past performance—are no guarantee of future returns. So create and implement a realistic plan and make the commitment to see it through.