The concerns I hear most when first meeting someone who is considering retirement: Will I have enough money to live comfortably for 10, 20 or 30 years after retirement without going broke? And, what will happen if I live longer than my parents? Years ago, most people could count on receiving generous pension and Social Security checks when they retired. That’s no longer the case and we are living much longer. Income planning is crucial for people in or nearing retirement.
Income planning is serious business. Most people look for guidance and advice when developing their income planning strategy. A knowledgeable and experienced financial planner who has been through the exercise many times can be invaluable in helping you get prepared. Staying on the right track will take discipline and dedication but as when you enter retirement, you’ll be inspired to stay the course. You’ll have a plan.
Here are 10 steps for income planning:
Act Now. As a financial planner spanning three decades, one would think I would favor planning first. Act first. Start now. Do the planning for sure, but don’t wait for the plan. Use periodic and automated methods of saving to avoid procrastination. Capture the money every week or month, directly from your paycheck or your checking account.
Paint a picture. You need to paint a picture of what your retirement will look like. Envision your lifestyle and goals for the first three years of retirement, even longer if you can. Where do you want to live? How do you want to stay active? What type of legacy do you want to leave?
Seek to save a million. A general rule is that someone planning for a long retirement should seek to save $1 million for every $40,000 in annual retirement income desired. While this may be different for you, you need to build your retirement savings.
Hire a professional. If retirement is imminent, get help. (You may have been a whiz at your job, but this is serious stuff). It’s all about big mistakes and little mistakes. And you won’t get a re-take if you make a big mistake now or in the next two to three years. Go to the websites for certified financial planner professionals (CFP®) www.cfp.net or the local chapter of the Financial Planning Association www.fpanet.org/chapters/centralohio.
Seek a consistent income. If no pension, consider converting some of your portfolio and assets to products that offer income and guarantees (but understand that guarantees are based on the claims paying ability of the issuer of the product). Try to provide enough to cover your basic needs like shelter (home or apartment), utilities, food and taxes.
Tax management. Be sensitive to taxes, but don’t let the tax tail wag the dog. While it doesn’t feel like it, we are in a period of historically lower tax rates. Don’t let taxation cause you to delay your savings and investing. Optimize the taxes paid to increase cash flow, preserve assets and/or reduce risk.
We can be incrementally smarter in the tax dimension by using pre-tax programs such as 401(k)’s and IRA’s as well as tax deferred programs such as Roth IRA’s and annuities. Municipal bonds and growth stocks also are tax favored. Learn about these by accessing the thousands of articles online, reading one of hundreds of books on the subject, taking a course or two, and/or asking an accountant or financial planner.
Diversify and re-balance. Asset allocation and diversification is critical to staying Asset allocation is not just stocks, but may include real estate, bonds, annuities, mutual funds, life insurance policies and exchange-traded funds. It is critical that you understand that you can’t control market returns, inflation, taxation, and other government policies. However, you can control your portfolio risk and your monthly spending.
Markets change and so will your needs in retirement. Continuously monitor your portfolio and make adjustments. Manage risk and return through use of asset classes and low correlation. Re-balance if necessary, but resist reacting to events. It’s best to work with a financial planner when making these important decisions to keep your finances on track.
Supplemental income has power. Retirement income typically includes Social Security, pensions, dividends, annuity flows, retirement account distributions, and general savings spend down. Consider consulting, job sharing, or other part time employment income. It takes pressure off your savings while maintaining your focus and social interaction.
Estate in good order. Use time in retirement to develop and implement your plan for the disposition of your assets if you are unable to spend them all. You have three choices: family, charity or taxation. Choose wisely.
Someone very wise said, “It’s about the journey…” You’ll enjoy life a lot more if you’re not worried about your finances. Prepare now.
By following these steps, you can gain a measure of control over your future and retirement years. Moreover, you’ll likely revisit these income planning tips several times before you reach retirement – the point isn’t to have all the answers right away but to start taking the steps to reach your retirement goals.
Paul A. Gydosh, Jr. CFP®, Managing Director of Kensington Wealth Partners, Ltd., provides counseling and implementation strategies for wealth preservation and transfer. Paul helps accomplish his clients’ objectives through financial, estate and investment planning as well as tax reduction and charitable giving strategies. He has been listed in WORTH Magazine as one of the top 250 financial advisors in America in multiple years. Business First of Columbus has listed him among its Top Financial Planners in multiple years. Columbus CEO Magazine has named Paul a Superstar in the Finance and Accounting category. For more information on Kensington Wealth Partners visit www.kensingtonwealth.com
Paul Gydosh is a registered representative of Lincoln Financial Advisors.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Kensington Wealth Partners is not an affiliate of Lincoln Financial Advisors. CRN-1524453-061416