The Keys to a Successful Retirement PlaN

Each situation is unique and every client is different. I’m sure you’ve heard similar statements in the past and it’s certainly true. I can think of many examples when we work with people in very similar financial situations, but the final plan turns out to be dramatically different.  What I’ve discovered over the years of developing retirement-specific plans is that there are certain sequences that lead to more successful outcomes. 

Here is a brief summary of this approach.

1.) What would an ideal retirement look like without the constraints of numbers?

I like to ask "How do you envision your ideal retirement?" before we even start talking about the account balances, risk tolerance, and other financial details.

One of the typical issues I see is when people, or even their financial advisors, try to look at the numbers first and then design a plan around them.

There is a strong possibility that this approach will lead to discomfort, as you are essentially forced to fit into the plan instead of the other way around.

2.) Start with the income plan instead of your asset allocation

The traditional approach is to focus on the asset allocation, risk tolerance, and other metrics to essentially prescribe a certain investment plan to the client. 

A better approach is to start with your income plan and work from there.

To give you a simple example, if you plan to spend $100,000 per year and $40,000 is covered by your Social Security income, only $60,000 needs to be covered by your portfolio income. Depending on your portfolio size, the actual percentage that you need to draw each year can be significantly different.  Your overall investment plan needs to account for your actual cash needs so that it’s not overly conservative as this could negatively impact you in the long run. I understand this point can be obvious to some, but it’s not uncommon for people to overlook it.

3.) Discuss different scenarios to accomplish your goals

At this stage, the creativity and experience of your financial planner is of utmost importance.  It’s usually not overly challenging to adjust a few variables in the plan to come up with a more appropriate or appealing outcome.

As an example, your advisor can help you determine how many more years you need to work to safely reach a certain income target. This is a helpful exercise for many, but it doesn’t always work. 

So what happens if none of the suggested options work for you? Will your advisor have enough creativity to come up with a workable alternative?

In one of our previous newsletters titled “Retire 8 Years Sooner: Exploring “What If” Scenarios,” we discussed how we helped a couple of retirees retire in 5 years instead of 13. 

4.) Design a tax-efficient distribution plan

For many, perhaps even most retirees, taxes will be their largest expense in retirement (at least until potential medical expenses kick in later in life).

So what is the actual plan to minimize your tax liability in both the short and long term?

It can be a relatively simple exercise for those who will take the bulk of their distributions from only one type of account, such as a Traditional IRA.

In practice, it’s usually much more complex because we can be dealing with taxable, tax-deferred, and tax-free accounts. There are usually other sources of income, such as Social Security, pension, or self-employed income, that need to be accounted for. 

To make it even more “interesting,” we frequently deal with situations when our clients want to transfer appreciated stock or part of their required minimum distributions (RMD) to charities.

To summarize, a tax-efficient distribution plan needs to take all your income sources and related tax consequences into consideration. It’s not as simple as preparing a projection that tells you how much income you should expect in retirement.

5.) Stress test your own assumptions.

Once you’ve developed a comfortable initial plan, you need to ask “What can go wrong with this picture?” and stress test your own assumptions. What if your portfolio is down by 30% in the year of your retirement? This is what we refer to as sequence of returns risk.

Perhaps the most common concern is evaluating the impact of potential long-term care expenses on your plan. Experiencing these expenses early in your retirement can have a dramatic effect on the plan. The idea behind this part is to cover potential contingencies ahead of time and, hopefully, come up with specific actions to mitigate them.

This is not always possible, but at the very least, you would know which areas of your finances are the highest risk.