1) Retirement age/life expectancy:
- Currently, the average life expectancy in the U.S.is between 75 and 80. ( 1)
- But this increases to 82 for men and 85 for women if you live pass the age of 60. ( 1)
2) Source of retirement income:
- Some potential income sources are pensions, annuities, social security, rental income, part-time work, retirement accounts.
- What social security strategy is optimal for you considering retirement date, break evens at different ages, life expectancy, and other sources of income?
- If pensions are in the picture, what is the proper strategy? How does the pension grow each year in comparison to other assets? Are survivor benefits for the other spouse available? Does an insurance purchase to cover the other spouse from premature death make sense? Is there an inflation rider with the pension?
3) Expenses and retirement income needs:
- These could include unexpected medical expenses, new home purchase, education costs, annual travel budget.
- Medical expenses are often retirees’ largest expense.
- What total amount do you need to sustain your desired lifestyle? This can be very difficult to determine. Often, we work backwards from current income, debts, and desired changes in retirement.
- I recommend estimating on the higher end of your expected living expenses to increase the likelihood of success.
- Retirement income needs to be determined by you.
4) Investments and other available assets:
- Take inventory of your assets.
- Making reasonable assumptions about future returns is critical. This can make or break the success of a retirement plan, so I recommend estimating on the conservative side with regards to this.
5) Inflation/purchasing power:
- Inflation needs to be factored into your retirement plan. A dollar today is not worth the same as a dollar 10 years from now.
- Many don’t understand the power of inflation until you see how the difference between 2% and 5% inflation affects your goals. It’s huge difference.
- Historically, inflation runs at about 2-3% per year but will differ year to year as we have seen recently!
6) Required minimum distributions:
- If you have tax deferred accounts (IRAs, 401(k)s,403(b)s, etc.), you will have required minimum distributions beginning at age 73 if born between 1951-1959 or beginning at age 75 if you’re born in 1960 or later (given current tax laws).
- Reinvesting RMD’s and other income in excess of withdrawal needs can have a positive impact on your portfolio if you have large RMDs or live a long life.
- RMDs can cause increased tax liability for individuals that defer withdrawals all the way until RMD age. This can result in paying taxes on these assets at higher rates, Medicare premiums increasing, etc.
- Often, Roth conversions in earlier years can help alleviate this issue and reduce the impact of taxes over the course of your retirement. Roth conversions should be a consideration.
7)Withdrawal rate:
- A general rule of thumb is the 4% withdrawal rate. This means withdrawing 4% of your portfolio adjusted for inflation on an annual basis. This is not a bad rule of thumb but is not perfect either.
- You need to personalize this for your situation.
8) Withdrawal Strategy:
- The traditional approach is to distribute taxable accounts first, tax deferred accounts second, and tax-free accounts last. The goal here is to allow tax deferred assets to grow without tax for as long as possible.
- Assets should be invested based on time frame of usage. Investment risk generally increases on assets with a longer time frame.
- If you are funding retirement needs through taxable accounts (non-qualified), this can provide an opportunity for Roth conversions in early retirement years. Doing so can provide multiple advantages such as lowering future RMDs, paying tax on assets at a lower tax rate, lowering future Medicare premiums, increasing tax-free assets, etc. See my article titled “Roth conversions” for more details on how Roth conversions work.
- But each person’s strategy needs to be tailored to them.
9) Estate Planning:
- Updating beneficiaries on accounts. Beneficiary designations supersede the estate plan. What this means is that if a beneficiary and will do not read the same thing, the assets will go to the named beneficiary.
- Updating or looking over wills and trusts.
- Charitable considerations such as QCDs from IRAs, donated appreciated stock, gifting assets, donor advised funds, etc.
- Long-term care planning. This can be important given costs nowadays!
- Utilizing assets to meet your goals and passions.
Together, we can work to keep you on-track towards your financial goals.
Request a consultation with me to learn more.
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