Planning a Confident Retirement: The Top 5 Mistakes that Wealthy Families Make

Transcription

1 Planning a Confident Retirement: The Top 5 Mistakes that Wealthy Families Make Brown & Tedstrom, Inc. 2016

2 As most Baby Boomers approach their sixties, the prospect of retiring successfully has become a very important focus. Unfortunately, planning for retirement is not as easy as it should be. Between volatile stock markets, low interest rates and greater political uncertainty, the task of retirement planning has grown in complexity. The result for many Americans is an exercise in frustration and confusion. In the old days, a retiree could simply look forward to the defined benefit pension that they received from spending their career at a large company. The financial planning, and related investment risk, were outsourced to a former employer. A retiree merely had to walk to the mailbox and collect their monthly pension checks. If only it were so simple today; even wealthy families struggle to map out a clear path to success. Because your retirement is now in your hands, and not in the hands of others, you may be concerned. Your greatest fear realized: You don t want to be forced into becoming a blue-vested greeter in old age!

3 Now for the good news: many of the mistakes that families make in sabotaging their own retirement are quite fixable. In fact, there are several actionable things that you can do to immediately to improve your retirement outlook. With the proper financial planning, you can help prevent a return to the workforce in your golden years. The following are the top 5 mistakes that people make and how to make changes. 1. You haven t completed a financial plan If you haven t taken the time to properly plan your retirement, you are not alone. In fact, you are in the majority. According to a 2015 study by the Employee Benefit Research Institute, only 48% of Americans have attempted to calculate how much money they will need to have saved for retirement. Another 2015 study, this one done by Northwestern Mutual, found that 34% of Americans had literally not done any financial planning whatsoever. The single most important step that you can take in preparing for retirement is to create a comprehensive financial plan. You will address the following topics in your plan, among others: How much do you need to have saved to retire successfully? What is a reasonable spending rate in retirement? Can you survive a large stock market correction? Do you have the right kinds of insurance? Do you have the ability to pay for major medical expenses? Are you being smart about how much you pay in taxes? Do you wish to give money to our children and to charity?

4 Are you confident in your ability to retire successfully? The treadmill of working, saving and investing has left many families unsure about where they stand, even those who have accumulated great wealth. Brown & Tedstrom has created The Retirement Balancing Act, a proprietary tool to assist pre-retirees in clarifying their options. 2. You haven t accounted for inflation In 1986, the price of a Big Mac in the United States was $1.60. Today, a Big Mac costs $4.93. In other words, a Big Mac today is literally three times as expensive as it was thirty years ago. The difference? Inflation. When you plan your retirement, you may have a dollar number in mind for what your annual expenses might be. With the forces of inflation at work, the actual dollar numbers to keep the same standard of living are likely to rise substantially over time. A good retirement plan takes into account inflation, and keeping the same standard of living throughout your older years.

5 The purchasing power of the U.S. Dollar over the last 30 years 3. You claim Social Security too early Today s retirees first become eligible to claim Social Security payments at 62. The U.S. government currently defines Full Retirement Age at 66. According to the U.S. Social Security Administration, more than 40% of Americans choose to take their Social Security payments at age 62. The practice of taking Social Security payments at 62 can be one of the worst financial decisions that you can possibly make. By claiming benefits before full retirement age, retirees experience a 25% reduction in their monthly payments. The breakeven calculation is surprising: even If you just survive into your 70 s, you are still better off waiting to take your payments until age 66. If you survive into your 80 s, the difference

6 in delaying Social Security can be cumulatively greater than $100,000. For every year that you delay payments beyond full retirement age up to age 70, your Social Security check goes up by 8%. Social Security is the best, and cheapest, inflation-adjusted annuity out there for individual citizens. By maxing out (delaying) your Social Security payment, you have provided yourself with a government guaranteed stream of income that has historically included a cost of living increase over time. Do whatever you can to maximize this stream of income. 4. Your investments are not properly diversified The old expression to not to put all of your eggs in one basket continues to hold true. Despite the widespread recognition that we should diversify our risk, the majority of retail investors still make overly concentrated bets with their personal wealth. The following examples are well-known, yet continue to exist. In a 2013 Morningstar study, nineteen blue chip companies in the U.S., including Exxon Mobil, Chevron, McDonald s, Colgate-Palmolive and Lowe s had more than 50% of employee 401(k) assets invested in their own company s stock. It is our belief that employees should never have their retirement assets invested in company stock. Your job and livelihood already rely on the financial health of your corporation you shouldn t be doubling that risk by betting all of your savings on the very same company. Enron employees lost their jobs when the company went bankrupt more than a decade ago. Those Enron employees who had invested their retirement savings in Enron stock lost not only their jobs, but all of their savings as well. Former Lehman Brothers employees can tell a very similar story. If there was one lesson that came out of the 2008 housing crisis, it was that real estate prices can suffer as much, if not more, than other asset prices. Housing prices can go down, and in a manner just as volatile as stocks. But we still love owning our own homes, and concentrate our wealth in our homes. According to The National Association of Home Builders in 2013, the median American family still has 62% of their total wealth tied up in the value of their principal residence. The takeaway is that risky investments can, and do, lose their value from time to time. Because of these inherent risks to investing, retirees must plan for such volatility and properly diversify. A financial plan and a properly constructed asset allocation will go a long way in managing these concentrated risks.

7 Disclaimer: No strategy assures success or protects against loss Brown & Tedstrom s Retirement Shock Absorber is a proprietary model to help families stay the course in a market downturn. By creating a portfolio that is built with the goal to withstand a substantial drawdown in value, families can continue to fund their lifestyle and not sell at the bottom when asset prices are low.

8 5. You ignore taxes For high net worth investors, taxes matter in fact, they matter a lot. For families approaching retirement who are currently in a high income tax bracket, smart tax planning can be extraordinarily valuable. Consider a family that is in the highest marginal Federal income tax bracket today at 39.6%. As that family retires and stops collecting a paycheck, the majority of income from their investments will be taxed at a much lower rate: long term capital gains, dividends and tax-advantaged bonds. Much was made of then Presidential candidate Mitt Romney in 2012: The Wall Street Journal found that his effective tax rate was 22% when running for President. The reason: he was retired and earning tax-advantaged income from his investment portfolio. What to do if you are currently in a high marginal income tax bracket? Three concrete steps that wealthy families should consider taking at pre-retirement are: max out 401(k) and other tax-deferred retirement accounts, defer any retirement account distributions and defer Social Security payments. These choices alone can result in many thousands of dollars in tax savings over time. Maximizing tax efficiency is a focus of Brown & Tedstrom. The Brown & Tedstrom Retirement Tax Filter helps clients evaluate their investment portfolios to minimize taxes.

9 Conclusion Planning for retirement can be daunting. Along the way, there are many decisions that can influence your success: saving, investing, budgeting for inflation, managing a stock market collapse and tax planning are just a few. Many families are not on the right track to a confident retirement. We have highlighted a few of the mistakes that retirees typically make that, once corrected, can contribute to a higher rate of retirement success. At Brown & Tedstrom, retirement planning for high net worth families is our focus. We would welcome the opportunity to start a dialog with your family about these retirement issues, as well as all other forms of advice related to your wealth. We hope to help you avoid the greeter s blue vest in your golden years, along with the financial confidence that comes from a well-constructed plan.