The retirement question: Part II

“What decisions do you need to make, and what mistakes do you need to avoid in order to have a successful retirement?”
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This is part two of a three-​part series in which we ask a group of the region’s leading financial advisors to address retirement-​related questions.


Barbara Layton
First Vice President
JANNEY MONTGOMERY SCOTT LLC

Americans are taking better care of themselves and living longer, so you have a better shot at a longer, healthier retirement than your parents. However, this raises the risk that you’ll outlive your savings. Even as you start relying on your 401(k), pension, Social Security and investments, you should continue to manage your investments and mitigate your risks.

Many Americans are not taking the single most important step to retirement security, and the simplest: working with a professional financial advisor, who will recommend investments based on age, savings and risk appetite, to plan for retirement. Too many people are still “winging it,” or relying on Social Security. Here are some basic strategies to help you manage your money and risks, even if you’re going to do it alone.

  1. Plan how you’ll take your retirement assets. When is taking a lump-​sum distribution the best plan? Or will periodic distributions give you the best value? The order in which you withdraw your funds (interest, dividends or capital gains) can have a significant impact on taxes, which can then in turn have a significant impact on how long your retirement savings will last.
  2. Make a budget and stick to it. With more time on their hands, many people spend more right after they retire. Whether it is travel, new interests or hobbies, or simply the freedom of good health and free time, many Americans spend more at the outset of retirement than later. With savings in the high six or even seven figures, they feel rich enough to splurge, forgetting that this money has to last 10, 20, even 30 years. Enjoy your retirement, but use restraint. Establish a reasonable budget for your spending, and stick to it.
  3. Manage your debt. Even when you can afford to pay off your mortgage, some people in and approaching retirement hold onto mortgage debt for tax breaks or to maintain liquidity.
  4. Monitor where your money is invested. Diversification is important at every stage of saving, but especially after retirement. Make sure your money is spread out enough to buffer against losses in any one industry or market decline.
  5. Consider buying, or buying more, guaranteed life income. The Society of Actuaries finds the three most-​cited financial concerns for people in and approaching retirement are paying for adequate health care, not having enough money for long-​term care, and that their savings won’t keep up with inflation. Products that provide guaranteed income for life can help you manage the risk of exhausting your resources.

Kevin E. Miller
Managing Partner
NORTHWESTERN MUTUALPITTSBURGH

You’ve worked hard, planned carefully and saved diligently. Now that you have a retirement date in mind, you need to plan for the transition from the working world.

Emotionally, you’re likely ready for what retirement will bring — flexibility, relaxation and enjoyment. But financially, it’s important to prepare for, and have a clear answer to, how you will maintain financial stability once regular paychecks stop coming in. With this in mind, consider the following:

  1. Apply fixed income streams to cover fixed expenses. Make certain that when your paychecks come to a halt, you have a plan in place to cover fixed expenses, including mortgage and car payments. Products such as an annuity can guarantee a steady source of income that will last throughout your lifetime and be used to cover these types of expenses. However, an annuity decreases your flexibility over time because the fixed payout does not adjust for inflation. Given this, I often suggest viewing an annuity as one of many tactics to be included in a comprehensive financial plan.
  2. Optimize Social Security benefits. When nearing your retirement date, weigh the pros and cons of delaying Social Security benefits. For many — including those without existing health problems — delaying distributions can be advantageous. Consider this: By delaying payouts just three years, from age 65 to 67, you could be eligible to collect thousands more in Social Security each year.
  3. Re-​evaluate risk. New retirees often feel compelled to move to a more conservative investment strategy. It’s important, however, to maintain a diversified portfolio that includes long-​term investments that help you keep up with inflation and maintain your purchasing power. Expect your retirement income to come from a combination of fixed-​income sources and withdrawals from your retirement savings accounts.
  4. Plan for longevity. Plan not just to retirement, but through retirement. A major concern many have is outliving their money. To factor for costs associated with longevity, consider long-​term care planning, or incorporating products such as permanent life insurance into your portfolio. Permanent life insurance carries living benefits that individuals can tap into now to meet their goals.

Creating a successful strategy during retirement involves investigating an array of options. Work with a trusted advisor who can help guide you during this process.


Carrie Coghill
President/​CEO
COGHILL INVESTMENT STRATEGIES

For this article, obviously I cannot give readers specific advice, but I can provide guidance, or a roadmap. What comes to mind is a famous poem…

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth.

That famous Robert Frost poem, “The Road Not Taken,” reminds us that we must make choices — seldom can we choose both. However, in retirement, I recommend people can travel two roads: the roads of financial health and physical health.

But in traveling those roads, use the barometers and mileposts that make sense for your life. By barometers, I mean plan retirement income based on what makes sense for your life. As a counterpoint, a barometer that might have no bearing on your life is the one of the standard market indexes.

Why? For retirement, it is best to calculate projections based upon what is realistic on the way you will live given your risk tolerance. Using a market index as a benchmark can be a mistake if you are planning to pull out distributions during retirement years. You simply won’t have the same percentage invested to recover compared to someone who plans on leaving all of their money invested through a downturn.

So, plan retirement income based on a milepost on your road. That road builds financial principal used to generate income that works in your life.

Physical health is the other road. Obviously, to be healthy, we also have to be lucky. However, working within your parameters, most people can eat a healthy, balanced diet and exercise. And that can start well before retirement. And, to state the obvious, exercise can be walking three to four times per week — it does not have to be an unrealistic barometer for you, such as running a marathon.

Paying attention to both roads is important because they intersect. Physical health problems can put a tremendous strain on one’s financial health. The rising cost of healthcare is something that individuals typically don’t plan for and can cause an otherwise successful retirement plan to be turned upside down. Retirement planning requires we build a strong physical foundation as well.

So, the time to invest in retirement is now — and this is one time in life that the choice between two roads is both. Here’s to good health — financial and physical.


Stuart M. Miller
Principal Founder
PRIVATE WEALTH ADVISORS, INC.

You have decided that you have sufficient income/​capital to retire and live comfortably in your new lifestyle. Are there other issues you need to consider? Yes, and it is a complex, integrated web.

  1. Taxes/​government benefits:
    • How do you plan to maximize the use of the $5 million gift/​estate exemption? Can you afford to give today? Can you afford to wait?
    • How will you plan your portfolio and portfolio distributions to minimize income tax? Is deferring income tax on retirement funds always the right thing to do?
    • When will you take your Social Security? Same for your spouse?
    • How will you integrate Medicare/​long– term care/​other health insurance?
  2. Charity:
    • Do you and your family want to include charity for personal/​tax reasons?
    • Should you do it now and get income tax benefits or wait until death?
    • Which assets are best left to charity? During life? At death?
    • Have you considered the legacy of a charitable fund requiring your children to carry on your charitable intents?
  3. Family:
  4. Do you want to share your estate with your heirs today? At death?
  5. Should all children be treated equally? Are there children with special needs?
  6. Should you keep old life insurance poli– cies or buy additional insurance today?

Case Study:

A couple in their mid-​60s has the capital/​income to retire comfortably. They believe their Social Security is a bonus they do not anticipate needing. Should they take it at 66 or at age 70? They decide to take it at age 66 and forgo the higher benefit later, and leverage half of the after-​tax benefit ($25,000) to buy $2 million of life insurance payable to their children. If their expenses are higher than anticipated and they use up part of the estate, the kids will be reimbursed from the insurance. If the estate continues to grow, they will switch the beneficiary to their family charitable fund.

In planning for life after retirement, as the case study demonstrates, there are numerous decisions in the realm of government, charity and family that must be considered.


PQ Staff

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