By Michael Gold, CFP®, MBA
You’ve had your retirement party, cleaned out your desk and are enjoying your long-awaited retirement years. Lots of things end when you retire and you enter a new phase of life, but do you know one thing that should not end? Financial planning. That’s right. You may have thought that those years of saving, investing, calculating and planning are all over now that you’ve reached your goal, but that’s just not the case. You still have decisions to make, actions to take, and plans to strategize so that you can experience a fulfilling retirement, free of worry and regret.
Before we discuss what we’ve found to be the same five financial planning challenges most retirees face during the first ten years of retirement, I would like to walk you through an interesting true story that I believe captures the very essence of retirement planning:
Back when I attended business school, we worked on a Harvard Business School case study titled, “High-Stakes Decision Making: The Lessons of Mount Everest”. On May 10, 1996, twenty-three climbers reached the summit, but unfortunately, five climbers lost their lives on the descent. Two of the five were Rob Hall and Scott Fischer, the team leaders who were both highly skilled mountain climbers. There are many reasons this hiking expedition turned into such a disaster, which is why business schools across the country are still studying this story two and half decades later. Now you may be asking yourself, “What in the world does this have to do with my retirement plan?”. The short answer: Everything.
From my research on this case study, there are specific rules around successfully summiting Mt. Everest and returning home safely. One of the rules is to plan your ascent to reach the summit by a certain time of the day. Think of this as the accumulation phase of your retirement plan. You set a goal to retire with a certain sum of assets by a certain date. You work hard and invest diligently over the course of decades to reach your financial summit.
The problem with climbing Mt. Everest, or saving for a retirement plan, is not that one won’t reach the summit, but it is the descent. In retirement planning terms it’s the decumulation phase. Now back to 1996, there were rules that if you could not summit and turnaround by a certain time early enough in the day, you should stop and just turnaround no matter where you are, because if not, you are at risk of descending at night when the temperature drops, visibility is poor and there is a threat of severe storms. Again, attaining the summit only constitutes half the climb. The absolute hardest part of a climb is the descent. When you are tired, you can become complacent and think the difficulties are behind you, especially coming off the high-flying elation of achieving your goal. The same holds true with your retirement plan. You may have reached your peak but if your descent is not properly planned out, you run the risk of financial storms that can derail your plan.
Unfortunately, due to a lack of leadership, discipline and team camaraderie, these “leaders” made decisions that broke their own rules. Perhaps this was due to a sense of overconfidence in their abilities? Whatever the case was, they put their own lives at risk as well as their climbers; those who had entrusted their own safety with them. It is a sad story and one we can all learn from.
Read on to learn what you should incorporate into your financial and retirement plan. Be prepared and have a plan that accounts for the potential “financial-storms” that may derail you from achieving your financial and retirement goals.
You have saved for years and now you need that money to pay the bills. It is important to know that how you take this money out is even more important than how you put it in. That is why you need to capitalize on your wealth by determining the most tax-efficient way to withdraw funds in your golden years. You need to have an action plan in place to turn your financial assets into a steady stream of income to meet your day-to-day expenses as well as your goals and long-term needs. One of the most challenging aspects of retirement income planning is that you will need this income to last for an uncertain amount of time. The income and distributions carry different levels of taxes and/or additional costs in other parts of your financial life such as Medicare expenses.
Different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s get taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different than your ordinary income tax rate. As you can see, calculating the best time to pull from each account is enough to give anyone a headache. Nonetheless, the last thing you want is to get hit with a hefty tax bill when you are trying to stretch your money for decades. Create a withdrawal strategy with the help of a trusted professional who can make sure you are withdrawing funds at a sustainable rate and that you are doing it in a tax-efficient way.
Many people spend their retirement years doing all the things they never got to do when they were working—a passion project, remodeling the house, traveling the world and more.
Retirement planning during the decumulation phase is challenging because your expenses are not a neatly organized thirty or forty-year period that looks the same on day one as it does on day 10,957. There are many phases of retirement. Today we are discussing phase one, the first ten years, which will look very different than your last ten years. Most likely, you will still be very active; playing sports, traveling, golfing etc. While it is not impossible to do these things when you are 95 years old, most people will likely experience declining activity levels and health over time.
In the first phase of retirement, or as some like to call it, “the go-go years”, these are often the most expensive. Every day is like the weekend and the weekends are when people usually spend the most money. Budgeting should also account for the later phases of the descent, during the later years of retirement regarding failing health, long-term care, assisted living, nursing homes and Alzheimers. These are far more challenging as we are forced to look death in the face and realize we are not invincible. Maintaining an active budget to fully enjoy your “go-go” years and plan and budget for your “no-go” years is a critical component to your long-term financial health.
It is easy to underestimate the amount of money you will spend during those first few years when you do not account for all these “extras”. Overspending, even for a short period, can shave years off the longevity of your assets. The solution? Create a spending plan. Calculate your monthly income given your withdrawal strategy and then create a budget. Track your money along the way so you stick to your goals.
Another major challenge we see new retirees face is the desire to play it safe in the stock market. This does more harm than good as it leads to inflation risk.
Too often, investors focus on the dollar value of their portfolios without considering their purchasing power. As the prices of items increase, today’s dollars will buy less in the future. Since 1913, the annual average inflation rate is 3.76%, though it does fluctuate over time. (1) For example, in 1982, the average inflation rate was 6.2%, but in 2019, it was 1.8%. (2) Regardless of how much prices increase, history shows us that prices will continue their long-term trend and rise.
Let’s assume they increase about 3% per year for the next 30 years. An investor who currently needs $50,000 to cover annual living expenses will need approximately $67,000 in 10 years, $90,000 in 20 years and about $120,000 in 30 years. And this is just to maintain the same purchasing power!
As tempting as it may be, resist the urge to worry about short-term stock market volatility. With a retirement that could easily last 20 to 30 years, inflation is still a significant threat to your nest egg. Sit down with a trusted professional who can help you strike a balance between protection and growth.
Could you comfortably pay for an unexpected, major expense in retirement without jeopardizing your financial future? For most of us, the answer is ‘no’. Just as you were taught to have an emergency fund in your formative years, it’s even more critical to have one in your retirement years.
Most professionals recommend having at least 12 to 18 months of expenses in an easily accessible savings account. (3) This may sound like a lot but an emergency fund serves two purposes: it covers unexpected expenses and it provides stability during economic downturns. This means you can optimize your portfolio to beat inflation, as suggested above, while having a safety net to fall back on.
It took decades of strategizing to grow and protect your wealth up until this point. Don’t just wing it in retirement and try to manage your money and wealth alone. Having a trusted wealth advisor by your side may be the difference between having a retirement fund that potentially dries up or having one you can’t outlive. If you want to experience what planning for a secure retirement looks like, let us help. Reach out to me at email@example.com or (800) 303-2533 to schedule a complimentary consultation and start taking control of your finances.
Michael Gold is the founder, president, and CEO of Gold Family Wealth, an independent wealth management boutique and named one of the Top 100 People in Finance. Michael has 20 years of experience in the financial industry and has a bachelor’s degree in business and economics from the State University of New York College at Oneonta, an MBA from NYU Stern School of Business, specializing in Quantitative Finance and Leadership, and his CERTIFIED FINANCIAL PLANNER™ (CFP®) credential. He serves business owners and entrepreneurs by stress-testing their financial plan to identify red flags and missed opportunities. Michael strategically outsources professional experts from various fields such as tax, insurance, retirement and trust and estate law to collaborate on potential solutions to help position his clients to achieve their desired goals.
Michael currently lives in Westport, CT. When he’s not working, you can find him spending time with his wife, Giselle, their three children, Sebastian, Aria, and Pierce, and their dog, Charly. To learn more about Michael, connect with him on LinkedIn.
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