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Retirement Income Planning


The concept of retirement has evolved greatly over the last fifty years. We are living longer, perhaps retiring earlier. Fewer of us have pensions and we are increasingly responsible for providing our own income in retirement, a period of our lives that may well last thirty years.

As you approach the end of your working career, you may have questions about how to support yourself in retirement. How do you know what you'll need to live on?  Which pension option should you select? When should you start collecting Social Security? How will you pay for health care?

Three Bearings Fiduciary Advisors approaches retirement planning using an eight-step process:

  1. Set your retirement goals
  2. Assess your current financial position
  3. Identify retirement income sources
  4. Evaluate retirement risks
  5. Understand health care issues
  6. Invest your retirement assets
  7. Manage your retirement income
  8. Monitor your retirement assets

Here are some details for each step.

Set your Retirement Goals
Start by listing thirty retirement goals on a sheet of paper.  We suggest thirty because the first ten are easy to identify, the next ten are somewhat harder to recognize, and the last ten make you discover your inner dreams.  Arrange your goals into short, medium and long-term goals.  Assign a dollar amount to each where appropriate.

Assess your Current Financial Position
To help you achieve your retirement goals, you need to take stock of where you are today. A net worth statement will identify all of the assets from which retirement income may be derived. You must also assess your retirement budget needs. What do you spend to support your current lifestyle? You may need at least 80 to 90% of your pre-retirement income to meet your goals in retirement. Preparing a retirement cash flow statement (budget) is a very important task.

Identify Retirement Income Sources
Retirement income may come from a variety of sources and the percentage of each may change over time. These sources may include a pension, Social Security, IRA accounts and other savings, and even part-time work. The after-tax benefit of each source of income needs to be considered.  The timing of when to use each source also needs to be determined.

Evaluate Retirement Risks
You must consider the risks that affect your retirement income.  Inflation will erode the purchasing power of your income over time. The various investment markets may occasionally falter. You may well live to be 100 years old. All of these risks need to be taken into account.

Understand Health Care Issues
Retirement usually brings a change in health care insurance coverage. If you retire before age 65, you may need to secure health insurance on your own. After 65, Medicare is available, though you may wish to consider Medigap insurance to cover the cost between your doctors’ fees and what Medicare pays.
Long term care insurance proposals often present a confusing array of choices. How do you determine if it is right for you? Not everyone needs it. A careful evaluation of your personal situation is required.

Invest your Retirement Assets
With goals identified and portfolio withdrawals requirements defined, develop a written investment policy that will govern your investment approach. The investment policy statement is your retirement investments road map. An asset allocation (the mix of stock, bonds and cash in your portfolio) should be clearly stated. The policy should also provide diversity of investments, be appropriate for your goals and time frame, and be in line with your risk tolerance. Only then should specific mutual funds, bonds or exchange-traded funds be selected and purchased to reflect your investment policy decisions.
Within the various retirement sources, understanding the character of the asset is important.  Some income, such as wages and interest, may be taxed at ordinary tax rates, while dividend income and long-term capital gains may be taxed at reduced rates.  Always take into account the tax consequences of asset purchases and sales.

Manage your Retirement Income
While in the working world, we are accustomed to getting income from our employer or from our business. With the onset of retirement, however, the paycheck ceases. Now income has to come from a number of different sources. Properly managing these retirement income sources requires planning and monitoring.
You probably know that the size of your Social Security payment depends on when you start collecting benefits. The longer you wait, the larger your monthly payment.  Determine the optimum time to commence Social Security payments based on your specific circumstances.

At age 70-1/2, IRS rules require that certain amounts be withdrawn from your IRAs. Required minimum distributions (RMDs) are based on several factors including your age and the amount in your portfolio at the prior year end. Failure to withdraw the minimum amount results in a 50% tax penalty on the amount that was not timely withdrawn.  Calculate the required minimum distribution and then ensure that the amount is properly distributed to you each year.

Monitor your Retirement Assets
It is important to conduct periodic reviews of your financial situation. Using the net worth statement and the retirement budget, a portfolio withdrawal rate may be calculated.  By monitoring your portfolio withdrawal rate, you can assure yourself that you will have sufficient assets to fully fund your retirement.  At worst, you may discover that you may need to engage in part-time work during retirement.  You need to maintain a sustainable withdrawal rate strategy.

A quarterly review of your portfolio performance is important to detect early signs of inappropriate asset allocation. Quarterly reviews will give you the confidence to live the retirement lifestyle that you planned.

In summary, retirement income planning is a complex task and cannot be left to chance. If you need help sorting things out, please call us or send us an email.

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