You may be considering retirement but are concerned whether you have saved enough. Are you apprehensive about moving from a regular paycheck to no paycheck? The retirement decision is often psychologically challenging, so you are not alone. Not only will cash flow be cut, but some find that their identity was defined by their job and they miss that as well. From a financial perspective, you need to understand you are moving from the accumulation stage of life to the distribution stage. Let’s run through some considerations.
Wealth Management in Retirement
People who have properly prepared themselves for retirement have generally been “savers” their entire lives. It’s common for them to experience anxiety when they stop working. As soon as that paycheck ends and they start invading principal to pay bills, discomfort is experienced by some.
To help combat these feelings, consider a cash flow system where income from your investments is funneled into your checking account. This mimics the paycheck that is no longer coming and oftentimes provides emotional support. (For more from this author, see: Three Stages of Retirement Account Withdrawals.)
In the distribution phase of life, you should additionally prepare yourself psychologically that your overall worth may fluctuate going forward. Unless you have amassed large sums of money and have not increased your lifestyle, people may spend all if not more than what comes in, saving little to nothing in retirement.
This is especially challenging in the low interest rate environment we are in today where people may find themselves invading principal. There is no easy fix to this. Some are faced with assuming more investment risk, invading principal (usually very uncomfortable) or reducing the lifestyle in which known income matches known expenses.
The key takeaway is to make sure you have saved enough to support your lifestyle as you enter retirement. Create a strategy designed to have 90% of your known expenses covered by known income. Hopefully your portfolio mix can include investments that can combat future inflation while maintaining current positive cash flow.
Investment and Tax Management
There is no “one-size-fits-all” for investments, as each person’s needs are unique. But you should pay special attention to the rules and circumstances surrounding your specific retirement accounts. For example, keep in mind that qualified plan distributions coming from IRAs, 401(k)s and the like are subject to marginal tax rates and not the lower capital gain bracket. This can influence when and where you create income for yourself.
In retirement, the distribution phase often changes the way you approach investment management. A large allocation to growth investments may have helped you attain retirement but may need to be altered to generate more consistent income as priorities have changed.
One goal is to enter retirement debt-free. This could allow people to easily modify lifestyle when economic forces are not friendly. If you enter retirement with a large debt load, you may not have the freedom to easily modify expenses if need be. (For related reading, see: How Mortgage Debt Can Derail Retirement.)
Protecting Your Wealth in Retirement
Re-positioning insurance to cut expenses or reallocating contract values to long-term care protection is a focus for some. Life insurance generally has less of a need unless your estate is subject to inheritance taxes. Disability insurance policies as you approach retirement generally have little to offer in benefits in comparison to the premium, because there’s usually an age limit for payout.
Don’t overlook health insurance planning. If you retire before Medicare eligibility, you may be shocked by the insurance premiums you face. Pay particular attention to this, especially if you have health concerns. (For related reading, see: Top 3 Health Insurance Options If You Retire Early.)
This next chapter of life is about distributing your wealth as effectively as possible. This may be the “golden age” for some, but it can also be the “revenue years” for the IRS as your qualified tax deferred accounts start to distribute. The sources of your retirement income and the tax consequences of pulling from various accounts can differ widely from person to person (cost basis, Roth IRAs, tax free income, pensions, etc.).
Some people put off pulling from their tax qualified accounts until they run out of the “cheap tax” money. While that plan may help reduce taxes today, that may not be the best plan down the road as their wealth becomes concentrated in “tax toxic” assets.
Some retirees had planned for taxes to be lower in retirement than during the working years, but that is not always the reality. Make sure you do some tax projections as well.
(For more from this author, see: Finding Hidden Money During a Lawsuit or Divorce.)
Disclaimer: Mission Wealth is a Registered Investment Advisor