Dear S&B: I am considering retirement but concerned if I have saved enough and a little apprehensive of moving from a regular paycheck to none. Any tips I should consider to calm the nerves? Stanley – Santa Barbara.
The retirement decision is often psychologically challenging so you are not alone. Not only will cash flow be cut but some find that their identity was defined by their job and they miss that as well. From a financial perspective, you need to understand you are moving from the accumulation stage of life to the distribution stage. Let’s run through some considerations.
Wealth Management (confronting your emotions): People who have properly prepared themselves for retirement have generally been “savers” their entire lives. It’s common for them to experience anxiety when they stop working. As soon as that paycheck ends and they start invading principal to pay bills, discomfort is experienced by some.
To help combat these feelings, consider a cash flow system where income from your investments is funneled into your checking account. This mimics the paycheck that is no longer coming and oftentimes provides emotional support.
In the distribution phase of life, you should additionally prepare yourself psychologically that your overall worth may fluctuate going forward. Unless you have amassed large sums of money and have not increased your lifestyle correspondingly, people may spend all if not more than what comes in; thus, saving little to nothing in retirement.
This is especially challenging in the low interest rate environment we are in today where people may find themselves invading principal. There is no easy fix to this. Some are faced with having to assume more investment risk, invade principal (usually very uncomfortable) or reducing the lifestyle in which known income matches known expenses.
The key takeaway is to make sure you have saved enough to support your lifestyle as you enter retirement. Create a strategy designed to have 90% of your known expenses covered by known income. Hopefully your portfolio mix can include investments that can combat future inflation while maintaining current positive cash flow.
Investment and Tax Management: There is no “one size fits all” for investments as each person’s needs are unique. But you should pay special attention to the rules and circumstances surrounding your specific retirement accounts. For example, keep in mind that qualified plan distributions coming from IRA’s, 401k’s and the like are subject to marginal tax rates and not the lower capital gain bracket. This can influence when and where you create income for yourself.
In retirement, the distribution phase often changes the way you approach investment management. A large allocation to growth investments may have helped you attain retirement but may need to be altered to generate more consistent income as priorities have changed.
One goal is to enter retirement debt free. This could allow people to easily modify lifestyle when economic forces are not friendly. If you enter retirement with a large debt load, you may not have the freedom to easily modify expenses if need be.
Risk Management: Repositioning insurance to either cut expenses or reallocating contract values to long term care protection is a focus for some. Life Insurance generally has less of a need unless you estate is subject to inheritance taxes.
Disability insurance policies as you approach retirement generally have little to offer in benefits in comparison to the premium, because there’s usually have an age limit for payout.
Don’t overlook health insurance planning. If you retire before Medicare eligibility, you may be shocked by the insurance premiums you are facing. Pay particular attention to this, especially if you have health concerns.
This next chapter of life is about distributing your wealth as effectively as possible. This may be the “golden age” for some, but it can also be the “revenue years” for the IRS as your qualified tax deferred accounts start to distribute. The sources of your retirement income and the tax consequences of pulling from various accounts can differ widely from person to person (cost basis, Roth IRA’s, tax free income, pensions, etc.).
Some people put off pulling from their tax qualified accounts until they run out of the “cheap tax” money. While that plan may help reduce taxes today, that may not be the best plan down the road as their wealth becomes concentrated in “tax toxic” assets.
Some retirees had planned for taxes to be lower in retirement than during the working years but that is not always the reality. Make sure you do some tax projections as well. If you have questions you would like answered, please submit them to email@example.com.
Author’s Note: Brad Stark, MS, CFP®, AAMS, CMFC and Seth Streeter, MS, CFP® are Co-Founders of Mission Wealth Management, LLC (MWM), a Registered Investment Advisor. The information contained in this article is general in nature and should not be construed as comprehensive financial, tax, or legal advice. As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action. Advisory services offered through MWM. Securities offered through National Planning Corporation, Member FINRA/SIPC. NPC and MWM are separate and unrelated entities. Certain statements contained within may be forward-looking statements, including but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties; all statements are subject to change without notice. Also, historical performance cannot predict future results.