While Trade Wars, Inverted Yield Curves, and Brexit make great fodder for the financial media it is unlikely that any of these events will ultimately make or break your retirement. My experience helping retirees navigate the last market downturn that started in 2007 and ended in 2009 shaped my approach to financial planning. As with any endeavor in life, the best advice is to control what you can control. Focusing on these factors below can improve your chances of success in retirement.
Maximize Social Security and Pension Income.
For most out there, one of the biggest decisions you will make regarding retirement is when to begin drawing your Social Security benefits. As of 2019, the maximum annual Social Security benefit at full retirement age is $34,332. If you consider that it would take over $1.6 Million invested in 10 year treasury bonds (paying 2.12% currently ) to generate the same level of guaranteed income, this is an important resource to consider for just about everyone approaching retirement. Delaying benefits past your full retirement age can yield even greater benefits as there is an 8% increase for each year you delay benefits past your full retirement age up to age your age 70.
For married couples, you may have even more options to choose from including electing spousal benefits. Widows, widowers and divorced individuals may have even more options to choose from. Because there is a limited window to make changes to your Social Security benefits once you have filed, it is important to ensure you make the best decision for you and your spouse. Not using the optimal filing strategy could cause you to miss out on an additional $100,000 or more in Social Security benefits over your and your spouses’ lifetimes. While the Social Security office can be helpful in explaining your options, working with a financial planner knowledgeable in Social Security benefits that can also see the “Big Picture” of your finances can also help you avoid making a mistake.
If you have access to a pension in retirement, you may not be able to decide when to begin drawing it once you retire from the company. For married couples, you typically do have choices to make about how much income will remain for the surviving spouse in the event of your death. Some companies may even offer the option of taking a lump sum so it can be helpful to look at your entire retirement income plan to make an educated decision on the appropriate option for you and your family.
Minimize taxes, penalties and unnecessary expenses.
When entering retirement you may also be entering an entirely different tax situation. Retirees often lose many itemized deductions and their taxes could be higher than they expect. Social Security benefits are also taxed differently than other types of income. We have been able to help some affluent families pay little or no income tax on their benefits through proactive planning. For those approaching age 70.5 they may also soon be forced to begin taking taxable distributions from 401k’s, IRA’s and other pre-tax retirement plans causing their tax bill to soar.
Maximizing your investment returns while avoiding withdrawal penalties is also important. Many investment products have multiple layers of fees and/or withdrawal penalties associated with them. Even retirement plans at work have underlying costs and a fiduciary advisor (one who places your interests above theirs and their firm’s) can explain what your “All-In” cost of investing is as well as any potential withdrawal penalties associated with various investment products.
Plan for the What If’s
While we always hope for the best it is important to plan for the worst. Will your family live comfortably if you pass away early? Will you be able to remain independent as you age? How will your family’s lifestyle be impacted if you or your spouse needs long-term care? These are all questions you may want to consider when planning for retirement.
Investment returns have been favorable over the past decade with the S&P 500 having averaged over 11% the past 10 years. While we would prefer that this continue indefinitely, we know it is not a matter of if but when we enter another downturn. It may be a good time to revisit your allocation to stocks, bonds, inflation hedges and cash to see if any adjustments are warranted as you enter retirement. Suffering major investment losses in the early years of your retirement can be devastating. You should make sure that you account for many potential market environments particularly bad ones so that your retirement plan can pass the “Stress Test”.
As an entrepreneur, financial planner and portfolio manager, I have learned that embracing uncertainty can be profitable but it is even more important to manage potential risks. This is particularly the case for retirees. This is one of the reasons that we developed the Retirement Confidence Score, as a measure of a family’s probability of success in retirement considering all of the variables. Even for those that have been retired for many years, we believe it is important to review this regularly to make sure you are staying on track. While there are no guarantees in life, we believe sound planning and maintenance can help you weather the storm and adjust as life happens.
(sources: all index return data from Morningstar.com, Yahoo Finance, NBCNews.com. Social Security data from Investopedia)
Nick Hughes, CFP® is a Wealth Advisor with Visionary Horizons, a Registered Investment Advisory Firm in Chattanooga, TN. Nick has been helping retirees and widows simplify their financial lives and develop more clarity about their future since 2007. He has contributed to articles for Market Watch and FinancialPlanning.com and is a regular contributor to the Visionary Horizons blog.
all index return data from Morningstar.com, Yahoo Finance, NBCNews.com. Social Security data from Investopedia
Visionary Horizons, LLC is a SEC Registered Investment Advisor located in Knoxville, Tennessee. Clients establish fee based accounts with a third party custodian, such as Charles Schwab & Co., Inc. (Schwab) and TD Ameritrade Institutional, a division of TD Ameritrade, Inc. (“TD Ameritrade). Both firms are independent and unaffiliated SEC-registered broker-dealers and members of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). These firms offer us services which include custody of securities, trade execution, clearance, and settlement of transactions.
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