Retirement can be an exciting transition, offering more time for travel, hobbies, family, and meaningful volunteer work. Yet it can also bring considerable anxiety. For many people approaching retirement, one question overshadows the possibilities: “Will my savings actually last?”
The prospect of running out of money is sure to keep many people up at night. It’s estimated that 2/3 of working US adults are worried that their retirement savings will not be enough.1
Market volatility, potential long-term care costs, housing uncertainty and inflation all add to this stress. In the face of all this uncertainty how can you give yourself more peace of mind that your retirement is secure? The answer, unsurprisingly, is a comprehensive financial plan that lets you plan for your long-term income needs.
A financial plan is only as good as the assumptions that go into it. So, what goes into building a solid plan that gives you the confidence to live your retirement the way you want it to?
Start with a Goal
Too many retirement plans begin and end with investment balances and assumed returns. Those figures matter, but estimating retirement expenses is often more difficult –and more important. Without a realistic picture of what retirement will cost, you cannot determine whether your savings are likely to last.
Retirement expenses will change, so begin by defining the lifestyle you want. Will you travel more? Pursue new activities? Downsize or move to a larger home? Increase charitable giving or help fund a grandchild’s education? The clearer your goals are, the more accurately you can estimate the cost of retirement.
Understand Your Income Sources and Timing
Next, identify every source of retirement income that may apply to you, including Social Security, pensions, required IRA and 401(k) distributions, deferred compensation, annuities, long-term care and disability benefits, mineral rights, part-time or self-employment earnings, and rental income. For each source, determine when it begins, whether it is guaranteed or variable, and whether it adjusts for inflation.
Social Security timing deserves particular attention because claiming age can significantly affect monthly and lifetime benefits. Delaying may increase the monthly payment, but it is not always the best choice. In some cases, claiming earlier can preserve investment assets; in others, drawing heavily from investments while delaying benefits may increase the plan’s risk. The decision should be evaluated within the full retirement-income strategy.
Fill the Gap
Once there is a firm understanding of expenses and income, look to see if there is an income gap. Any shortfall needs to be addressed by investment income the income, sale of investment principal or by additional withdrawals from retirement accounts. Be aware of withdrawal rates that exceed 5-6% which could mean a long-term reduction of your principal and could put the overall plan at risk. The plan needs to be tested to determine if that level of spending is sustainable.
Taxes, taxes, taxes
The tax code can be complex and unintuitive, but taxes need to be considered in every part of the retirement plan. Inappropriate timing of income, investments sales, and retirement distributions can dramatically increase your tax burden. Every extra dollar paid in taxes is one dollar less compounding in your investments. Some typical tax optimization strategies include timing of capital gains to utilize the 0% tax bracket, taking full advantage of itemized deductions, seeking higher tax equivalent yields in fixed income through municipal bonds, using appreciated stock instead of cash for charitable donations, Roth conversions, and understanding trust income and taxation rules.
Working with a financial advisor who understands and incorporates tax planning can lead to better, tax smart financial decisions.
Stress Testing the Plan
Even the best financial plan is built on assumptions that may turn out to be incorrect. Adequate stress testing can give you confidence that the plan is sound. The 3 main variables that need to be extensively tested are: expenses, inflation and market returns. Retirees are often subjected to high health care and long-term care costs. A deficit caused by these expenses can potentially be addressed using long-term care insurance. Inflation and market returns can be addressed using inflation adjusted income sources and proper diversification and investment strategies. Running multiple scenarios which factor all of these into account will give you a better picture of how resilient your plan is to the unexpected.
Confidence Through Preparation
Retirement planning cannot eliminate every uncertainty, but it can replace vague fears with informed choices. At FCA Corp, we help our clients develop a comprehensive plan that begins with the life you want to lead, accounts for your expenses and the timing of every income source, uses investments to close realistic gaps, considers taxes at each step, and tests whether the strategy can withstand difficult conditions.
The plan should also evolve as your health, priorities, markets, and tax laws change. Review it regularly and adjust before small issues become costly problems. The goal is not to predict the future perfectly; it is to create enough flexibility and confidence to enjoy retirement without allowing financial uncertainty to define it. Contact us today to get started.
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