[Retirement Planning Guide]

Transcription

1 [Retirement Planning Guide] In today s economic environment, what does it mean to be retirement ready? What are the key questions, hurdles, and avenues to success? Scott Hanson and Pat McClain, the principals at Hanson McClain Advisors, have spent 20 years paring the sometimes chaotic process of retirement preparation down to the 7 Personal Decision Points that every working person needs to embrace and implement in order to achieve the post-work lifestyle of their dreams. It s your retirement, and you need a comprehensive approach to planning and goal setting that protects you from the unknown, but also, at its foundation, incorporates your core beliefs, wants, needs and sensibilities as a guide. Welcome to the 7 Personal Decision Points by Scott Hanson and Pat McClain.

2 Point 1 Retirement Income Needs The first step of the 7 Personal Decision Points is concerned with analyzing what your income needs will be once you leave your job. We ve found the best method to determine your income needs is through a process that adds up your current income sources, and then subtracts various taxes, savings and expenses that won t occur once you retire. This analysis will help you determine what income will need to be replaced when you stop working. Money NOT going out is the same as money coming in. Pat McClain Here s A Simplified Retirement Income Needs Example: Step #1: Mary by the numbers 60-years old Income: $100,000 Wants to retire in 3 years Has 2 years left on her mortgage Estimate $1.6 million in 401(k) at retirement Wants to maintain current standard of living Step #2: Subtract expenses Mary will no longer have in retirement 10 percent of income to 401K ($10,000) 7.65 percent of income to FICA taxes ($7,650) 15.6 percent of income to mortgage ($15,600) Total: $33,250 per year (33.25 percent) Step #3: Income that Mary actually needs to replace $100,000 yearly income $33,250 (33.25 percent) in annual expenses will cease $66,750 needs to be replaced Step #4: Calculate income A reasonable 4 percent rate of return on $1.6 million is $64,000 Step #5: Assess retirement situation $64,000 puts Mary Smith at nearly 100 percent of her adjusted pre-retirement income. Mary Smith should not have to use her savings principal for her day-to-day expenses. Not a real client. For Illustrative purposes only. A Final Thought On Retirement Income Needs Remember, it s not just about the amount of money you ve saved, it s about evaluating your entire financial picture your assets, tax liabilities, income sources, debts, fixed expenses, and your goals and dreams and then calculating how much money you ll need to thrive. Yes, it s complex. But it s also straightforward: If you don t plan and invest wisely, and you use your savings to pay your day-to-day expenses according to the Employee Benefit Research Institute (EBRI), a full 33 percent of Americans in the second-highest tax bracket will run out of money a full 10 years before they die you too run the risk of running out of money.

3 Point 2 Expense & Debt Management The second key decision point is concerned with the correlation between debt and achieving a financially-healthy post-work existence. That s because after ill-health, debt is probably the single biggest obstacle to living your retirement dreams. Basics Of Retirement & Debt Management Cover your fixed expenses with fixed income. Fixed costs are the expenses that you have to pay on a regular basis, such as utilities, insurance, mortgage, property taxes, and so on. Fixed income is income you receive, say, from a pension or Social Security, that is set at a particular figure and doesn t vary or rise with the rate of inflation. Basically, it s consistent, guaranteed income. The simplified reason you want to cover your fixed expenses with fixed income is that you can always skip a vacation, but you can t just decide to not pay your mortgage for very long before someone knocks on your door and takes your house away. Key Things To Consider: Cover your fixed expenses with fixed income. Pay off debt before you retire. Pay off your mortgage before you retire. If you can t retire debt free, it may be best to lower your monthly payments by restructuring the loans out 10, 20 or even 30 years. Many people come to us with their homes paid off, zero auto loans and no consumer debt. They ve worked hard to minimize or eliminate their obligations. But some people still have a home mortgage, and many have other kinds of debt, such as car loans and lines of credit. But for those people where zero debt in retirement is simply not reasonable, we build a plan that helps reduce debt loads as much as possible prior to retirement, and then we shift to a plan during retirement that reduces monthly payments as much as possible (even if that means extending loan durations to lower those payments). A Final Thought On Expenses & Debt Management Even if you have a button-down debt management plan, it can pay emotionally and financially to work with a credentialed advisor you can trust. These are complex times for retirees, and guidance from a professional who is looking out for you can go a long way toward helping you create and follow a plan that helps you achieve your goals.

4 Point 3 Tax Planning We are not accountants, but we recommend that most of our clients meet with a qualified tax professional on an regular basis. Tax planning heading into retirement is especially crucial, as the amounts and timing of withdraws from retirement accounts can potentially cost or save you thousands or even tens of thousands of dollars in taxes. That s because tax obligations change once you retire. While you are working, there is often little that can be done to reduce your taxes. But during retirement, there are many factors related to controlling your tax obligations that are under your control, such as how much to withdraw from your IRA, how to convert money to a Roth IRA, or the spreading of the sales of securities over a couple of tax years, just to name a few. The expertise required to know precisely when to file, when to transfer money from investments, and when to cash out a pension or even retire, these are just a few of the things related to tax planning that can save you money, time and frustration. What Is Preemptive Tax Planning? Proper retirement transition tax planning takes into account all the different parts of your financial life. This important area of planning includes the when, where, what, and how of your income, investments, and purchases, along with your filings and deductions. Specific Items To Consider In Preemptive Tax Planning: When you should take distributions What your year-to-year tax bracket will be When you should make major purchases How much income you have What amounts are distributed Which types of accounts are utilized Which types of investments are chosen Which state you live in A Final Thought On Tax Planning Tax planning is both complex and ever-changing (the current US Tax Code is 70,000 pages long). Meet with a qualified, credentialed advisor AND a qualified credentialed tax accountant before you begin the retirement transition process. That s because, in Hanson McClain s more than 23 years of advising clients, we have never once met with a client who didn t financially benefit from preemptive tax planning.

5 Point 4 Investment Management Investment management is concerned with maximizing the returns on your investments to create sufficient income to preserve your principal. With that in mind, when it comes to retirement preparation, what s paramount is to have a firm grasp of the two key foundational aspects of the investment process: risk tolerance and time horizon. What Is Your Risk Tolerance? Risk tolerance is the degree of variability in investment returns that you are willing to withstand. Can you stay on course when the market hits a rough patch? What Is Your Time Horizon? Time horizon is the length of time over which an investment is held before it is liquidated or drawn down by the investor. How long will it be until you ll need the money? Knowing your risk tolerance while taking into account your time horizon, should guide each and every investment decision you make. What Is Diversification And Why Does It Matter? Diversification is the practice of allocating investments in a manner that lessens the exposure to any one particular risk by emphasizing asset class (or sector) variety throughout a portfolio. The individuals who survive market crashes, recessions, and Black Swan events with their investments and savings all (or mostly) intact, are generally those people who are the most well diversified. The four most dangerous words in investing are: this time it s different. Sir John Templeton Final Thoughts On Investment Management Improper investment management is the single area that is most likely to derail your retirement. In respect to this, when it comes to investing, the two things you must know about yourself are your risk tolerance and your time horizon. Knowing your risk tolerance will help you avoid emotional investing (jumping in and out of the market), and this should, over time, keep you invested over the long haul, which should increase your odds of a successful transition to retirement. Knowing your specific time horizon allows you to choose investments that should have the most value at the point in the future when you need access to your savings.

6 Decision Point 5 Risk Management Risk management is intended to control (or minimize) the impact of unfortunate events, such as lawsuits, on a person s personal life. But it s also necessary to protect your investments. Risk management addresses questions such as how do you protect yourself against a major stock market correction? Should you self-insure, or is an umbrella policy right for you? Are your investments too risky for your personal tolerances, or do you perhaps have too much risk exposure for your proximity to retirement? What is insurance risk management? We conduct a comprehensive assessment of the needs of our clients, and then, if necessary, make insurance recommendations. That s because, according to the United States Financial Educational Foundation, from dog bites (17,000), to car accidents (1 million), each year there are 30 million lawsuits filed in the United States. Your Risks Evolve As You Do As you age and move through life, your risks change and evolve. For example, when you are supporting a family, an early death would wreak financial havoc on your loved ones. But That Doesn t Have To Happen During the asset accumulation stage of life, the financial impact of the death of an income earner can be mitigated with the purchase of life insurance. But then that risk changes over time. Once the kids have grown, the fiscal impact of an early death may diminish, and the need for life insurance can be reduced. Helping you figure out what your insurance needs are is an important part of what a good investment advisor should do. Working with a qualified, credentialed advisor that you can trust will help you answer these questions in a way that s best for you. Business people need to understand the psychology of risk more than the mathematics of risk. Paul Gibbons A Final Thought On Risk Management Most of us don t want to think about what might go wrong in our lives. But when it comes to retirement, the advantage of being cautious is that you re more likely to take the steps that are necessary to protect yourself, such as buying the right types of insurance, and electing to work with an advisor to help you identify risks, budget your finances, and allocate and maximize your savings. Proper risk management provides you with the opportunity to protect and prolong the life of your money, which should go a long way toward giving you peace of mind, and helping you to enjoy your retirement to the fullest.

7 Point 6 Estate & Legacy Planning What happens to your money when you are gone? When you die, your assets essentially fall into two categories: those that avoid probate, and those that require probate. Anything that you have in your physical possession, such as artwork, clothing, jewelry, heirlooms, furnishings, vehicles, entertainment equipment, and other personal property and possessions, do not require probate. Tips For Getting Your Legacy In Order: While not a pleasant thought, the hard truth is that when it comes to your estate and legacy, not only is dying not free, worse, it can actually be quite complicated. As you engage in estate planning, you also have to take the cost of death itself into consideration. What kind of funeral and burial or death arrangements do you want? Make certain you designate funds and directives in the amounts and to the degrees that will be necessary to cover these costs. Key Things To Consider: Formulate an estate plan with your partner. (Yes, it s difficult. But you must do it.) Have a series of family discussions to set expectations. Gather a team of experts (investment advisor, attorney, accountant, insurance agent) to help you protect your wishes, as well as to help you meet the needs of those you leave behind. Remember, working with your advisor and your estate planning attorney will save your heirs time, stress and money. Those assets which you do not have in your physical possession, such as bank accounts, stocks, credit union accounts, insurance policies, mutual funds, annuities, bonds, certificates of deposit, as well as real estate, are all subject to probate unless you have named beneficiaries on the title. In this world nothing can be said to be certain, except death and taxes. Benjamin Franklin A Final Thought on Estate & Legacy Planning Estate planning is the process of anticipating and arranging for the dispersal of your estate (property or assets) while you are still living. Simply, it helps to limit uncertainty and carry out your wishes in the event of your death. It s intended to reduce stress, limit the impact of taxation, and to keep your assets out of expensive and time-consuming probate court.

8 Point 7 Distribution & Income Source Where will your money come from? When it comes time to plan for and transition into retirement, you need to calculate which investment and retirement accounts are the best sources from which to derive your income and in what sequence. But this can be a tricky process. Make no mistake, from both a taxation and a longevity perspective, the source and sequencing in which you draw upon your savings matters. Ideally, when you are transitioning into retirement, you have developed several sources from which to draw income. You may have an IRA or two. You probably have an employer-sponsored retirement plan, such as a 401(k) or 403(b). Maybe you re one of the fortunate few who still has an employer pension. You might have some after-tax monies in a brokerage account or in mutual funds. Plus, at some point, you ll probably have Social Security to tap in to. Simply put, if you have two or more of the income sources mentioned above, how and when you go about taking your distributions will matter to you and impact your financial health, in both the short and long term. Making Your Money Last If you have two or more resources from which to draw income, you essentially can do one of two things: You can use those resources up, or you can make them work for you and turn them into wealth. Key Things To Consider: Decrease waste; increase efficiency. Are your money flow options at the lowest fee and taxable rates possible? Are your income and growth assets performing? Are there areas in your day-to-day life where you can downsize expenses without downsizing quality of life? Are there areas for improvement? Turn savings into growth. Once you ve trimmed some fat, turn those savings around and invest in areas that will help you increase your revenue streams. A Final Thought On Distribution & Income Sources Obviously, as we near retirement, careful planning needs to be emphasized. If you take the big-picture view and look at your entire portfolio as one entity, ideally you want those high-incomeproducing investments inside the retirement account, and the high capital gains producing assets outside the retirement account. That s why it makes a great deal of difference what assets you hold, and where. And that s why you need an advisor that you trust who can guide you through the ever-changing and complex financial landscape that faces everyone as they transition into retirement.

9 Conclusion Retirement preparation is something we all think about, but many of us hesitate to begin the process. The people who live well throughout their retirement usually do so because they took the initiative and worked with an expert to create a comprehensive plan. We ve used our 7 Personal Decision Points methodology to help thousands of individuals and families achieve their goals. It s an important decision, and our experience has shown us that you usually only get one chance to retire right. Let us help make your goals and dreams a reality. Contact us today! Contact us for more information: Hanson info@hansonmcclain.com Hanson McClain Advisors is an Investment Advisor registered with the Securities and Exchange Commission.