Now that you are nearing the conclusion of your career and are already at or are near retirement, you may wonder if you have saved enough to actually retire. Of course, the answer to this question is different for everyone. It involves painting a picture of what retirement living means to you, as well as making quite a few financial calculations regarding savings, other assets, expenses, social security, health, and many other factors. The goal, quite simply, is to replace your monthly earnings before retirement with a well managed “retirement salary”.
These concepts may seem abstract and complicated, but a consistent and simple plan will make it easier. At Geier Asset Management, Inc. we have helped hundreds of households best implement a plan to make retirement happen!
Our checklist offers simple steps that can help you organize your finances as well as to help determine if you have sufficient assets to retire. Here are a few of the basic steps you should follow:
When determining social security benefits, It is important to determine your “primary insurance amount” (PIA). Once this is determined, we can begin strategizing how best to claim benefits depending on your unique situation. Our software will present a clear understanding of all the scenarios on how and when to claim your benefits. Furthermore, you will be able to compare different strategies so you can be sure you are making the best decision. Not fully understanding the process can cost you literally thousands of dollars!
For many households, a good portion of expected expenses may be covered by the monthly social security benefit. Understanding your benefit therefore becomes very important to best match the benefit to your income need. This can easily be done by understanding what makes the most sense for your situation. For example, if you are able to delay starting your benefit to a later age, you could increase your benefit by as much as 32%. Conversely, if you claim your social security benefit before full retirement age your monthly benefit could be reduced by as much as 30%.
There is no cookie cutter approach to planning your social security benefit. Your benefits will be impacted by how your career earnings were taxed, if you were divorced or widowed (or both), the age difference between spouses, and how much taxable income you will have in retirement. This is why it is important to work with a financial advisor to analyze your retirement picture.
One of the biggest steps in creating a plan is taking inventory of your current assets. Taking inventory helps you arrive at your net worth, as well as beginning the process of planning of how you will withdraw from your assets you have accumulated throughout your working career. Typically your largest assets will include:
All of your assets are netted against your liabilities to determine your pre-tax net worth. It’s important to note that this is pre-tax because your retirement accounts are taxable as you take distributions. Therefore, it is prudent to discount these accounts 15-30% to better understand their net benefit to you in retirement. Collectively, these accounts will be analyzed to determine how much annual appreciation, dividends and interest they can generate for you and your spouse to successfully meet your retirement expenses.
Our financial planning questionnaire also helps you to analyze your fixed and discretionary expenses as this will help us forecast what expenses you will have in retirement. The other side to analyzing your expenses is to be sure you are allocating costs appropriates such as adequately protecting your assets with insurance. Proper insurance will ensure your assets are sufficiently covered without having to dip into retirement resources if an unforeseen event occurs. Also, projecting healthcare costs is of equal importance, which is why Long Term Care (LTC) Insurance should almost always be considered because of how quickly healthcare costs can deplete retirement resources. For example, Fidelity Investments (Fidelity Consulting Services) estimates a 65-year-old couple that retired in 2014 with an average life expectancy will need over $260,000 to cover health care costs in retirement.
Knowing your retirement goals is perhaps the most important component when it comes to how to manage and allocate your resources. Without specific goals it is impossible to effectively implement a retirement plan. It is our intent to aid in crafting a retirement plan that is purposeful and rewarding for you and your spouse.
Once you Now that you have determined your annual expenses, there are a variety of withdrawal and funding strategies you can implement. These strategies can be complemented with products such as traditional annuities, indexed annuities or even exploring the option of a rental property or two. Having a diversified mix of retirement assets may prove ideal when generating income in retirement. One strategy some follow is to cover their fixed/essential expenses with guaranteed income sources (bond ladder/annuities) while using their investment portfolios and social security to fund discretionary expenses. Below is a chart that illustrates components of this diversified retirement income strategy:
Image from Fidelity Investments
Having multiple accounts, as presented above, does require tax coordination as well as managing the investments in your taxable and retirement accounts. It is important that your investments remain diversified, align with your risk tolerance, are consistently rebalanced, and are managed to your annual tax liability. Lastly, having a tax-efficient withdrawal strategy can potentially save you thousands of tax dollars in retirement. Here at Geier Asset Management our financial advisors and tax professionals work seamlessly together to ensure you are being efficient as possible with your withdrawal strategy.
If you soon are planning to retire or are currently retired, it pays to simplify your accounts by tax status. For example, if you have accumulated several 401(k)’s it may make sense to consolidate/rollover these accounts into one or two Individual Retirement Accounts (IRA). The rationale for considering an IRA is that you typically have more investment choices to align with your goals and risk tolerance.
Furthermore, it can be explored if it makes sense to change the taxable disposition of these accounts via a Roth IRA conversion. Within your taxable accounts you have even more options in how you diversify these assets. For example, some use a percentage of their assets to build a bond ladder and to fund an annuity while using the remainder of these assets in dividend oriented equities. Other retirees, may use some of their assets to buy a vacation/rental property. However, it is important to remember that your investments must be aligned so that they can meet your expenses for several decades and should offer for some flexibility.
In addition to healthcare costs, one of the biggest unforeseen expenses facing retirees is inflation. Inflation is the weakening of your purchasing power, and it is reasonable to expect in the future that inflation will rise 1-3% annually. This impacts your bottom line because the money you have in your savings and checking accounts will decrease in purchasing power with the rate of inflation. For example, in 10 years it may cost $5.00 to purchase a loaf of bread versus the $2.50 it costs today. Therefore, if you have all your assets in checking and savings accounts with nothing to protect you from inflation (real estate, pension, etc.) it is highly likely that down the road you will not only have less assets, but the dollars you have saved today will be worth considerably less as well to meet the costs of your living expenses. The best way to protect your assets from inflation and maintain the same quality of life you have become accustomed is to diversify your resources in equities, fixed income and high interest savings accounts. Put simply, your portfolio needs to generate higher income in the future so it can minimize the impact of inflation.
After implementing your retirement plan, it becomes necessary that you and your advisor meet at least annually to review your investments and goals. Inevitably, your goals and expenses may change as you go through retirement, and it is important that you note these with your advisor to keep your investments and retirement plans on track.
Here at Geier Asset Management, Inc. we align your investment portfolio to meet your retirement time horizon. This shifts our thinking of investment success not by benchmark, but to your goals and income need. We execute this by segmenting your investments in buckets by when you will need to withdraw from your assets. Specifically, funds needed in the immediate future for living expenses should be kept in savings, money market instruments, short term treasuries and minimal equities. Funds needed in 5-10 years should be held in short and intermediate-term bond holdings with modest equity exposure. Lastly, funds needed to replenish existing funds after 10 years should be balanced between equity and fixed income securities focused on income and capital appreciation.
As cited above, the purpose of segmenting your portfolio is to separate the money you need in the present from the money you need in the future into investment buckets. We believe this allows for your portfolio to have reduced volatility and to avoid inopportune selling to meet expenses. For example, if you see your account go down in value and you know you will need those assets in the immediate future your instinct would be to sell out of the market to preserve those assets. Ironically, this is the wrong thing to do, and we structure your portfolio to reduce these knee jerk reactions. The chart below presents the emotional curve of investing (source: CEG Worldwide), and this effectively presents how emotions can be your worst enemy to the long term success of your retirement portfolio.
As the chart above shows, every investor needs to distance themselves from their emotions. This is even more important for retirees that can’t afford to panic and sell because retirees don’t have the time or resource to recover from a poorly executed sell. This is why we align your portfolios through diversification to both try to minimize selling at inopportune times while affording other assets in your portfolio the necessary time to hopefully appreciate before taking your paycheck from your investment portfolio.
The chart below conceptualizes how we can segment your investment portfolio into investment buckets to meet your capital need while managing risk and volatility with time horizon:
If you consistently withdraw funds for your “moderate growth” bucket it is likely you will significantly reduce the potential of account appreciation because you will be selling assets at an inopportune time. Consequently, you may run out of funds early in retirement as a result. That said, if you allow at least 10 years from when you fund your “Moderate Growth” account to when you transfer the funds to the other accounts it is likely that your account will appreciate enough to replenish your “Capital Preservation” and “Conservative Growth” retirement income buckets (Important to note that these results are not guaranteed. Data drawn from historical performance). This bucket approach keeps enough liquidity to meet each year’s withdrawal ($45,000 per the illustration) from the “Capital Preservation” bucket. For a complimentary consultation for how to structure this approach with your existing portfolio please feel free to contact us.
One of the biggest changes retirees face is adjusting to the changes in cash flow. Throughout your entire working life you most likely were paid bi-weekly or bi-monthly, and now it all has changed! It is up to you now to determine how you would prefer to receive paychecks from your investment portfolio. The chart below presents how we can structure a monthly paycheck from your investment accounts in retirement:
Throughout the course of the month you’ll most likely receive a check from social security, dividends and interest from your investment accounts, and a payment from an annuity. To simplify this process you can have all these funds deposited to one brokerage account and then establish an automatic monthly transfer or check issued to you based on your fixed and discretionary expenses. This will allow you to not only stay on budget with your cash-flow, but you will also have a simplified process when it comes to managing your accounts.
Throughout your retirement, you will have financial questions, and will need to have a trusted resource and friend who will be there to advise you. As financial fiduciaries, our interest and success is predicated upon helping you realize and achieve your financial goals and interests. Our unique skills address:
We encourage you to pick up the phone and speak to us as we are here to listen and help make your retirement happen!