Part 2: 10 Years from Retirement, What is Your Financial Focus?

In Asset Allocation, General Financial Planning, Retirement Planning by Chip Hymiller

This article is the second of a three part series titled: 10 Years from Retirement, What is your financial focus?

In Part 1, we discussed the importance of tracking and managing your living expenses, as well as, making projections around how much you will spend in retirement.  We also stressed the importance of making strategic Social Security decisions. In this article, we wanted to spend some time addressing pension decisions, ideas for strengthening your personal balance sheet and helping you think through how much money you will likely need during retirement.

Making Strategic Pension Decisions

While pensions are gradually fading away for most, many Baby Boomers are very fortunate to have a traditional pension plan that will pay a monthly income stream during retirement.  Those who are eligible to receive a pension should incorporate the impact of this pension when planning for retirement.

It is very important to understand, and make strategic decisions around, your pension.  We would suggest that at least 5 years prior to retiring that you contact the plan administrator of your pension to determine what your options will be and get an estimate of those benefits.

Here are questions that a professional advisor can help you address:

  • Do you need a survivor option for your spouse? Doing so would reduce your overall payout, but would protect your spouse should you predecease them.
  • Rather than taking a reduced survivor option for your spouse, is it better to take the single life pension and purchase life insurance to cover your spouse?
  • Does your pension offer a pop-up option, whereby the pension returns to a single life annuity should your spouse predecease you? If so, should you consider this alternative?
  • Should you consider a lump sum rollover of your pension into an IRA rather than taking the pension payout?
  • What is the rate of return and breakeven on the pension versus the lump sum rollover?
  • What will the tax impact be as a result of your pension and other expected sources of income like Social Security, required minimum distributions from IRAs, etc.? Are there strategies to consider that would help you minimize the future tax impact of your pension?

Pension decisions are irrevocable!

We cannot stress enough the importance of carefully considering all of the options available to you regarding your pension.  For those people who have pensions, this fixed source of income represents a meaningful component of their retirement asset base.  Decisions regarding this important asset should be made with diligence.

For more information regarding pension decisions, check out our article “Pension Decisions – Consider Your Options” or contact us directly.

Preparing for Retirement by Strengthening Your Personal Balance Sheet

In the 10 years leading up to your retirement, with appropriate planning and personal focus, it is possible to make tremendous strides to ensure financial success in retirement.

For most of those who are soon-to-be-retired, personal income is at an all-time high.  In addition, children are out of college and are financially independent.  During this period of high earning and stable living expenses, it is possible to “super fund” your retirement, by concentrating on both debt reduction and personal savings.

Retirees with low debt loads tend to be happier, more content and empowered!

Entering retirement debt free–including paying off your mortgage–will put you in a position of maximum flexibility when it comes to modifying your monthly expenses in retirement should the need arise. On the other hand, entering retirement with a mortgage, personal loans, and credit-card balances can limit your options when unexpected expenses occur.

We suggest that you formulate a plan to pay off your debt before retirement and aggressively work towards this goal.

Super Charge Retirement Savings…

In addition to reducing your debt load, we would suggest that you also aggressively save for your looming retirement in the 10 years leading up to your retirement.  In fact, those above the age of 50 are granted “catch-up” savings provisions in IRAs and 401(k) plans allowing for increased deferral rates.  In 2016, maximum contribution levels for those above the age of 50 are as follows:

  • $24,000 per year ($18,000 under age 50) on 401(k) and 403(b) accounts.
  • $6,500 per year ($5,500 under age 50) for IRA and Roth IRA contributions.

For those who really want to aggressively save – don’t stop with funding retirement accounts, consider also saving to a personal brokerage or mutual fund account. Doing so, will increase the “capital at work” component of your asset base, while also providing you access to an account that can provide flexibility as you begin taking withdrawals from your portfolio.

See our article titled, “Considerations for Retirees:  Which Account?” for more information on the concept of tax flexibility when taking portfolio withdrawals.

Assess How Much You Will Need in Retirement

How much money will you need to secure a comfortable retirement? In other words, what is your “number?”

Answering this seemingly simple question is actually quite complex.  There are many unknown variables including:

  1. What will investment returns be during your retirement period?
  2. Is your portfolio allocated in a manner that will achieve acceptable returns?
  3. What are your annual expenses?
  4. Will inflation have a meaningful impact on living expenses?
  5. Will you have average medical and long term care expenses?
  6. How long will you live?

To make confident and informed financial decisions leading up to retirement, you need to actually “simulate” your retirement through retirement planning/scenario planning.

The purpose of going through the retirement planning process (Beacon calls this a Retirement Feasibility Analysis), is to obtain a realistic idea of how long your money will last and also identify areas that could increase the probabilities of a successful retirement.

The sooner you go through this process with a capable professional advisor, the more time you will have to make adjustments to your plan if necessary.  Common areas we scrutinize for our clients include:

  • Which accounts are you saving towards and is this the most effective choice given your current (and future expected) tax rates and spending needs?
  • Should you save more, or to different “buckets?”
  • Is your portfolio allocated in a manner that will maximize returns, while limiting investment risk?
  • Should you consider long term care insurance? If so, what type of policy is best and where should you go to obtain cost-effective coverage?
  • How should you approach Social Security and any available pensions?

Answering these questions in the years prior to your retirement can give a peace of mind that you are moving in the right direction.  Stay tuned for Part 3 in our three part series titled, “10 Years From Retirement, What is Your Financial Focus?” where we will address managing taxes and planning for health-related expenses.