There are some main pillars to retirement planning. They are all large, complex, and quickly changing.
Main Pillars of Retirement Planning has Lots of Moving Parts!
Retirement planning can be one of the most stressful concerns for most Americans. Recent studies show that the average American has just over $100,000 in retirement savings while many rely solely on Social Security. It doesn’t need to be that way. If you plan properly using these main pillars of retirement planning, you can establish reasonable goals and expectations for your retirement years.
The most common questions that persist in people’s minds that are at or near retirement are:
- What type of lifestyle can I expect to have?
- Will I have enough monthly income to meet my monthly expenses?
- Will my retirement nest egg last throughout my lifetime?
- What about healthcare?
- What about Long-Term Care?
- How do I minimize my taxes?
- Is there a way to minimize the end-of-life turmoil for my children?
Retirement Planning – Putting the Pieces Together
Answer these questions and you will have a comprehensive retirement plan! Look at all aspects of retirement expenses and all of your available income from Social Security, pensions, retirement funds, and any other assets you may have. Develop various retirement scenarios based on your life expectancy, your risk tolerance for investing, inflation factors.
Add in healthcare and long-term care (yes, they are different!), legacy and estate planning – those pillars of retirement planning are critical as well. Don’t forget about what you will DO in retirement. Even if you have all the financial aspects figured out, you may find yourself bored if you don’t have a comprehensive “Successful Aging” plan.
Often overlooked, is the most effective spend-down strategy of your invested asset pool. It makes a difference on what assets you spend first to minimize your tax liability. Analyze your spend-down strategy to make the most effective use of your retirement assets and minimize your taxes.
The Main Pillars of Retirement Planning
What will you DO in retirement? The World Health Organization has done an in-depth study on a sedentary lifestyle and the impact on health. Don’t fall into the trap of having all your financials in order and then fall short because you didn’t plan for a mentally and physically healthy retirement lifestyle!
A good resource developed by Kastler Financial Planning may help you answer the questions about what you will DO in retirement and can be found at Successful Aging.
The first part of retirement planning includes an estimate of your monthly cash flow requirements necessary to meet the lifestyle you would like to have. You should analyze your current monthly spending plan and categorize your retirement needs including fixed expenses, discretionary spending, emergencies, travel, and healthcare requirements. Discuss with your spouse any debt pay-off scenarios and how that may impact your cash flow and long term nest egg.
Next, analyze your expected income available from the various sources available to you.
For many people, Social Security is the major and sometimes the only component of their retirement plan. It may also be the only benefit you have that is a Lifetime Benefit. So getting it right is very important! Maximizing your Social Security benefit can make the difference between living fairly well or not.
Social Security planning areas include:
- Claiming strategies to maximize your Social Security benefit
- Spousal benefits
- How benefits are taxed
- How divorce or widowhood affect your benefit
- How working or pension income affects your benefit
- How to apply for your Social Security benefit
If you are fortunate enough to have a pension, we can help you analyze the plethora of claiming options available to you. Such options have a life-long effect and are critical to your income planning for you and your spouse. Just one example is the Joint and Survivorship benefit may have multiple options and each option may have a ‘revert-to’ clause. Sort through all of the nuances and determine the best claiming option for you.
Tap Other Retirement Funds?
If your “guaranteed” income sources don’t meet your monthly expenses, and you can’t trim expenses any further, then you may want to analyze the impact of tapping into your other assets to bridge the income “gap.” Some people call funding the income gap a “retirement paycheck.” I don’t like that term, but it’s already out there in various circles.
Basically, bridging the income “gap” means withdrawing money from your invested assets to maintain the lifestyle that you want. The challenge is to make sure that by doing so, you don’t jeopardize your long term goals, such as paying for long-term care.
Investment planning can help alleviate the concern about outliving your money. Develop an understanding of your risk tolerance for investing. Apply those rules to a well thought out diversified portfolio.
Depending on your situation, develop a portfolio design (stocks, bonds, other assets) that fit your risk tolerance and investing style. Your invested assets throughout your retirement time horizon should generally last until you are age 95 unless there are compelling reasons to plan for a shorter time period, such as a known serious health issue. Make sure to include money for long-term care at the end of your retirement time horizon.
Seek out a finance professional to help you through this!
There is a myriad of claiming options for Medicare. Part A (hospitalization). Part B (medical). Part C (Medicare Advantage) and Part D (Prescriptions). There are also “gap” plans that can be added to traditional Medicare. Or instead of Medicare plus “gap”, you can opt for a Medicare Advantage plan. Whew! That’s a lot of possible combinations! The only way to sort through all that to get the best possible plan for YOU is to have a Medicare specialist provide you with various quotations. Then you can compare the services and costs.
Also, your neighbor’s Medicare plan may not be best for you. Everyone is different and has different medical and prescription requirements. Often times, even spouses will have a different Medicar plan than the other, depending on their individual medical situation.
Keep in mind that Medicare is no longer linked to Social Security and has its own claiming strategy and timing. If you don’t apply in a timely matter, a penalty may be added to your yearly premiums – forever!
Important note: Long-Term Care is not covered by Medicare.
With the soaring cost of nursing home care now averaging well over $90,000 per year in Michigan, Long-Term Care (LTC) is a critical component of retirement planning and your risk management plan. Determine if you can self-fund or if LTC insurance is a viable option for you. Some life insurance hybrid policies can also be a useful strategy.
It is true that Medicaid may be invoked for long-term care, but that is only after significant qualifications are met, such as only $2,000 in assets and one home. It is not a pleasant option.
Nobody wants to pay more taxes than they have to. What’s a really bad situation is when you end up with a surprise tax bill for lack of tax planning. Run some projections on what your tax bill will be when you first retire and compare that to a later tax bill, at 70 1/2 for example, when RMDs kick in. You want to know in advance how you can minimize those tax payments in later years!
Roth Conversions can be a useful tool to help reduce those later year taxes and add significant dollars to your overall asset pool through your retirement years. But when do you convert? How much should you convert? Those are all critical questions that you, your Planner, and your CPA need to tackle!
Estate and Legacy Planning
Estate Planning isn’t just for the wealthy. Everyone needs a Will, Power of Attorney, Medical Power of Attorney and Beneficiary Designations. Not having these documents in place can cause great consternation at times of crisis. It’s best to have your wishes nailed down in writing.
Not everyone needs a trust, but your Estate Planning Attorney can advise you the pros and cons. Generally, a trust is advisable if you have significant assets, want to specifically exclude certain individual(s), are a blended family with children from previous marriages, or simply want to avoid the public probate process.
If you focus on these main pillars of retirement planning, you should be in a good position to understand where you are at, and what you need to do to meet your retirement goals.
Is a “Bucket Strategy” Best for You?
If you are like most people, you have worked hard for the money you have and you want the best retirement that you can afford. It’s also nice to sleep well at night knowing that you have a strategy to cover yourself. It’s critical to navigate the complexity of retirement planning, run various retirement scenarios, and come up with a written Plan with recommendations and actions so you can have the best lifestyle possible.
Additionally, you may benefit from a “bucket strategy”. Think of your retirement plan in terms of 3 buckets:
- Income bucket to meet your monthly expenses
- Cash reserve bucket to meet your emergencies (and to limit the risk of the invested portion of the portfolio)
- Investment bucket that is the portion of your portfolio that is invested for long term goals, such as funding your long-term care
About Kastler Financial Planning
We are a fiduciary firm, providing fee-only, professional financial services with affordable and a transparent Fee Schedule. Our core purpose is to help improve your financial situation and to help you Get Retirement Ready. We do not sell financial products. We believe everyone should have access to financial advice without the pressure or bias of product sales or commissions.
For individuals, we offer fee-only Financial Planning services, Retirement Planning services, and fixed flat-fee Investment Management services. We have a special affinity toward Step Families and their unique financial planning needs.
For business owners, we offer Small Business Retirement Plan Consulting to help you and your employees leverage your company retirement plan. If you don’t have a company retirement plan, we’ll help you navigate the options to get one for you and your employees with our Guide to Selecting a Company Retirement Plan.
We perform these services either as hourly, a one-time fee-only project, as on-going financial planning, or Assets Under Management (AUM), depending on your needs. Whether you live in our backyard or across the country, we aim for a pleasant client experience through our Client Portal and computer screen-sharing technology.
If you have any question on how our services may apply to you, please contact us at the number below or submit an email through our Contact Us form.
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