Preparing for Financial Independence in Retirement

a couple smiling sitting on the beach

Dave

by Dave Sadler, Principal

How do I plan for the financial issues that I will face in retirement?  This seems to be a critical concern for an ever increasing number of Americans.  As Family CFOs, our clients face these challenges on a daily basis and we guide them as they plan accordingly.  The following article will highlight some of the financial issues that we assist our clients with overcoming through the retirement planning process.

Cash Flow

In contemplating retirement, one of the most important questions to assess is “what cash flow does our desired retirement lifestyle require?”  While this might be difficult to know until one actually gets into retirement mode, we encourage clients to think about their monthly cash needs well in advance of retirement. Think of your post-retirement monthly cash needs as your “retirement paycheck” or “paycheck replacement.” This amount is generally based on pre-retirement lifestyle, and takes into consideration, among other things, each person’s desires in terms of future travel, entertainment and housing.

Once the desired monthly cash need is known, identify the sources of non-portfolio post-retirement income. These sources typically include some combination of social security, pension and/or retirement benefits, and rental income. The difference between these income sources and the desired cash flow is what is referred to as the anticipated monthly supplement from the portfolio.

So, how does this monthly supplement get funded? In many cases this process is facilitated by establishing a money market reserve. This reserve typically has a target balance of 6-12 months of supplemental cash needs that should be replenished on an ongoing basis through the management of portfolio assets and monthly transfers.

While different than a budget, this combined monthly transfer from the portfolio, along with any other income, provides a perfect framework for assessing your retirement spending. Adjustments should then be made to the monthly supplement as appropriate to account for inflation or other desired family objectives. Ultimately, the goal is to have a regular source of monthly cash flow, much like a paycheck during the working years.

Portfolio Strategy

Significant lifestyle changes like retirement are also an important time to revisit your overall portfolio strategy. While portfolio shifts often occur in the months and years leading up to retirement, the ability to rollover a company 401(k) balance or lump-sum pension distribution into a self-directed IRA provides another opportunity for portfolio repositioning.

Tax Changes

The transition from the working years into retirement can often involve significant changes to an individual’s anticipated tax situation. This is one of the reasons it is important to evaluate your overall taxable income in the final year of employment relative to the first year of retirement. For example, if you anticipate that the last year of work will result in a much higher tax year than the first year of retirement, consider accelerating deductions, like charitable contributions, into the final work year.  At Moneta, we often utilize a donor advised fund for this purpose because it allows individuals to accelerate their charitable deductions while retaining control of future grants to charity.

Corporate Compensation Plans

For corporate executives, employee benefits might include stock options or a deferred compensation plan.  It is important to understand the vesting schedule and expiration dates for any stock option plans and the payout schedules for any deferred compensation plans. These elections are an important part of managing investment risk and tax considerations in retirement.

Expenditures

There are also various insurance expenditures that may be incurred.  For example, the cost difference between a company group health insurance plan and an individual or family policy can vary depending on the ages and health history of the individuals involved. It is important in these situations to have a knowledgeable advisor who is willing to work with medical insurance experts to provide you with assessments and recommendations to help you avoid these kinds of potentially unanticipated expenditures.

Long-term care costs are also a real risk to anyone in retirement, as these costs can negatively impact the family budget. Long-term care insurance is typically a prudent way to provide some protection against this potential risk. Much like medical insurance, it is important to have a knowledgeable advocate willing to work with experts in the long-term care field to design the appropriate insurance policy for your specific situation.

Planning for retirement should be an exciting time; however, the amount of change often includes an element of anxiety.  While this blog highlights some of the more significant issues that individuals may want to consider when planning for retirement, each family situation is unique and often times unique situations require certain level of service—a ‘Raving Fan’ level of service, which is what a Moneta Group Family CFO can provide. As Family CFOs, we take pride in tailoring our services and recommendations to the retirement goals and available resources of each unique client.

We are thankful for the clients who have entrusted their financial lives to us and welcome the opportunity to coach others through retirement and other family milestones.

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Moneta, established in 1869, is a Registered Investment Advisor providing financial advisory services primarily to high net worth individuals and institutions.  For more information, you may contact us at 314-726-2300.

 

 

© 2015, MONETA GROUP INVESTMENT ADVISORS, LLC. ALL RIGHTS RESERVED. THESE MATERIALS WERE DEVELOPED FOR INFORMATIONAL PURPOSES ONLY AND DO NOT TAKE INTO ACCOUNT YOUR INDIVIDUAL NEEDS, FINANCIAL OR OTHERWISE, AND SHOULD NOT BE RELIED UPON BY YOU WHEN MAKING ANY PARTICULAR FINANCIAL RELATED DECISIONS. THE INFORMATION HEREIN WAS DERIVED FROM SOURCES DEEMED TO BE RELIABLE BUT HAVE NOT BEEN INDEPENDENTLY VERIFIED, AND NO REPRESENTATIONS OR WARRANTIES ARE MADE WITH RESPECT THERETO.