RETIREMENT PLANNING
"At what age can I comfortably retire with the lifestyle I want to enjoy? Will I outlive my resources? What about the effects of inflation? How should my portfolio's assets be allocated as I approach retirement? What about during retirement?" - These are some questions my clients ask every day.
Retirement planning should be designed to suit your goals and comfort level as well as take advantage of tax saving opportunities. For any plan to be effective, it is necessary to periodically review 
your goals and progress.
Planning for retirement can be a complex task. One can never start too early. I examine your specific objectives, risk tolerance, and time frame, and come up with the best way to plan for retirement regardless of age. As part of my financial planning process, investment management, or wealth management together we can look at different ways to save and invest for your retirement.
We review your current situation and retirement assets in IRAs, ROTHs, 401k's, deferred executive compensation plans, non-qualified accounts, stock ownership plans, stock options, pensions, life insurance plans and social security benefits. By analyzing your assumed retirement spending need we can come up with a reasonable sum that you will need at the start of retirement. Then, taking into consideration taxes and inflation, I can help you develop a comprehensive retirement savings & investment plan to reach and maintain your goals pre- and during your retirement.
INVESTING FOR RETIREMENT
It's never been more important to save for retirement.
If you are considering retirement, it is likely that your income is at its peak. Now is the time to take a serious look at what your financial needs will be in retirement, and set up a savings and investment plan utilizing tax-advantaged retirement accounts to maximize your earnings and help meet those longer-term financial goals.
Get the benefits of tax advantaged investments.
When it comes to saving for retirement, making sure you maximize your tax-advantaged investment vehicles is the key to success. Start with those accounts that also provide immediate tax benefits like 401(k)s, and then make sure to maximize tax-deferred IRAs. And finally, consider saving more with cash-value life insurance or a tax-deferred variable annuity.
SUPPLEMENT YOUR SAVINGS WITH AN IRA
After an employer-sponsored retirement account, such as a 401(k), an IRA is one of the most advantageous retirement savings vehicles available. There are two types of IRAs to consider: Roth and Traditional. With the Roth IRA, because you pay taxes on the money before you deposit into the account, earnings on the account are tax-free when you reach age 59 ½ and the five-year aging requirement has been satisfied. Contributions can be withdrawn at any time penalty and tax-free.
A Traditional IRA allows tax deferral on earnings and any deductible contributions you make until they are a withdrawn. Withdrawals before age 59 ½ may be subject to a penalty. Even if you are already contributing to an employer-sponsored plan, if you are within the income limits you may be eligible to open a Roth IRA, or a traditional IRA you are under 70 ½.
What are Annuities?
You can think of an annuity as another way of saying "annual payments." An annuity is a series of payments paid at regular intervals over a specified period of time, usually for life (based on life expectancy.) It's usually issued by an insurance company that pays a guaranteed steady stream of income. An annuity can be fixed or variable. A fixed annuity makes guaranteed fixed payments, while a variable annuity pays an amount depending on the performance of the underlying investments. Annuities can get very complex with many traps, rules and caveats and proper advice from an independent financial planner is highly recommended. Don't do it alone.
START AN IRA FOR YOUR CHILD
A ROTH IRA is hands-down the most attractive retirement plan available for people with at least 15 or more years until retirement, since it provides tax-free withdrawals if you wait to withdraw funds until after age 59½ . The smart thing to do is to start contributions while your children are young, which allows compounded growth for possibly another 30-40 years before they would consider using the funds in retirement.
Today you're looking forward to making retirement the best years of your life. But as recent market volatility has shown, unforeseen events can impact even the best-laid plans for retirement. It's critical for your retirement portfolio to withstand unpredictable market conditions or unexpected changes in your lifestyle.
As with individual investments, there are unique risks in retirement that, if not managed properly, can dramatically alter the quality of your retirement years. Now, when you're nearing or in the early stages of retirement, is the time to understand and address key risks you face in retirement.
Risk: Outliving your retirement income
The good news is that we're living longer as a result of more healthful lifestyles and advances in medical science. But living longer could be challenging if you're not prepared with a reliable income stream that lasts up to 30 years or more. Will your retirement portfolio generate income for that long?
Risk: Coping with rising costs like health care
Soaring health care costs concern everyone. They're an even bigger threat in the years when health issues are more likely to arise. Medicare only covers a part of medical bills and prescriptions, so your out-of-pocket costs are likely to rise in retirement. Then there are taxes and inflation, both comparatively low today compared to the last 70 years. Rising costs may be a reality retirement investors will need to face.
Risk: Managing market uncertainty
The last few years offer a sobering reminder about market volatility: even with a solid retirement plan, you can still have the misfortune to experience a market downturn just before you retire. Short-term losses during these critical years can deplete your retirement savings, making it difficult to recover. Reacting emotionally to market uncertainty can often lead to poor investment decisions, overriding years of thoughtful planning and compromising your long-term retirement security. It may be critical to hire a professional who can devote the time, knowledge, and discipline to help protect and grow your investments.
A person retiring at age 65 in good health has a life expectancy of over 20 years, so some allocation to stocks would be appropriate to counter "purchasing power risk" - this is inflation eating away at your money (see this chart on this erosion of purchasing power.) A major risk and concern for a retiree is outliving his or her financial resources. This is called longevity risk. One situation that increases longevity risk is to have a large part of the portfolio in stocks and encounter a major bear market shortly after retiring. Such a sudden, large loss to a portfolio can impact a retiree’s financial well-being for the rest of his or her life. One measure to protect against this is having three to five years, if possible, of living expenses in safe investments, such as 1-year staggered maturities in Treasury notes or certificates of deposit. These can be used to pay these living expenses rather than having to sell stocks at depressed prices. The disadvantage of this strategy is the relatively lower returns from these securities; but that is the trade-off for capital preservation. A three-to five-year time frame would usually be sufficient to ride out a bear market.
An article in the Journal of Financial Planning (Bengen) addressed the question of how long an investor’s money would last assuming certain withdrawal rates and certain stock/bond allocations. The study assumed withdrawals beginning between 1926 and 1976, with special attention to periods that included major bear markets. Bengen makes a strong argument that with a 4% withdrawal rate and 60% to 75% of the retiree’s portfolio in stocks (with the remaining part of the portfolio in intermediate-term Treasury notes), the money in the portfolio will not run out in any 30-year period. Such an allocation to stocks at first glance seems high, but Bengen’s studies came to this conclusion. The overriding consideration of managing a retiree’s portfolio is balancing the needs for cash flow (which might include some principal as well as investment income), capital growth, and capital preservation.
A majority of people do not have the bandwidth to look at their 401K portfolio, leaving it up to their employer’s financial management firm to make, what is often a generic choice. If this is you, I can help with structuring an optimized portfolio based on your age, risk-tolerance and time-horizon until retirement. Generally, you retain control over the mutual funds in which you invest your 401k plan. It is extremely important to come up with a good game plan (asset allocation) for your 401k. A good and reasonable option to set things up is a 401K check-up and portfolio make-over package and investment plan and it can be found under fees.
Asset allocation is one of the most important considerations in investing because the asset allocation of a portfolio determines its risk/return characteristics.
It is important to remember that the asset allocation of a portfolio should be tailored to an individual’s goals, needs, preferences and individual circumstances. As such, the asset allocation models often seen in financial magazines, while interesting in a general sense, should not be directly applied to individual clients.
See this Money magazine graphic — why a lot of people need help with proper asset allocation in their 401k (the right mix of investments.) It illustrates how - without help - some 401k owners are taking inappropriate risks with their investment choices.
In order to make your money to last it is crucial to have a proper plan in place at the start of retirement. Coordinating between a Social Security, pensions, minimum annual withdrawal requirements (by the IRS) can be a complex task. There are no "one size fits all" rules. Once the annual need is established and projected to continue into future years considering inflation one strategy to use is a "bucketing approach":
- Bucket #1: short-term cash equivalents (for 1-3 years) to use for monthly withdrawal needs
- Bucket #2: intermediate investments mostly in bonds, continued income generation
- Bucket #3: longer-term (10+ years) investments for fighting inflation
Staggered fixed annuities can be added to the above strategy for further stability because they're guaranteed income products, but there may be a trade-off in terms of income. This is a fairly complex plan that involves a set of investments put into various asset allocations that need to adjust over your retirement years. Contact me and let's discuss.
This website is for informational purposes only and is limited to the dissemination of general information on products and services , not for the rendering of personalized investment advice . This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold any security. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. The value of your investments will fluctuate over time and you may gain or lose money. Investment strategies or asset allocations shown may not be suitable for you.
Financial Mastery Wealth Management LLC expressly disclaims all liability in respect to actions taken based on this website. FMWM LLC does not guarantee the accuracy or completeness of the information on this site. The site is not intended to be a substitute for specific individualized tax, legal or investment planning advice. FMWM LLC is a registered investment adviser in the state of California and may only transact business in other states of the USA if first registered, excluded or exempted from state registration requirements (not having more that 5 clients in any one state outside of California.) Please read Terms of Use.
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