Financial Strategies for Retirement

903454062I recently wrote my thoughts about retirement (Lonny, When are you going to retire?) and I’ve spent a fair amount of time over the past couple of years thinking through all the issues related to retirement. On a personal basis, I have no short term interest in retirement, yet I am very interested in the subject given its significance to the large Baby Boomer demographic. Admittedly retirement is far different for a consultant like me than for someone who works for a “company”. My retirement, if it comes, make just be a slowing down of business/engagements.

My personal wants and desires aside, there are crucial issues one faces, most often in your 60s, when retirement (voluntary or otherwise) is straight ahead.

There are articles up the ying-yang on the subject, and there are a tsunami of issues for consideration. I did read an interesting summary recently in USA Today called 20 strategies to help you retire wealthy.

But no one does 20 things well, even for organized folk like me who write “to do” lists, then cross them off as tasks are completed. Anyone who knows me understands that I believe in focus, that “less is more”. Therefore, I am offering 7 things for consideration. Nothing wrong with the full list of 20 or even more. But if your focus on the top 7, you will be on your way. And you might even act on some of these.

So here are my top 7 key issues for better understanding and deeper thought:

1.Where will you live?

Simple question, but fraught with issues. Obviously “where I am now” is the usual answer since status quo always has the pole position in life. But sub-issues for consideration are children/grandchildren (if you have them), desire for more temperate climate, and your ability/desire to live in multiple residences.

Another sub-issue is whether to continue to pay off a mortgage. Simple answer here—see below. Get rid of debt if you can (see #2)

2. Eliminate debt

Debt is not your friend in retirement. Earlier in life surely mortgages and loans are important particularly with home ownership. However, in retirement debt is something you want to reduce and, better yet, eliminate. Debt can be an albatross weighing heavily around your neck. A counter-argument is the value of the money, that one can invest those same dollars and earn a healthy return. Perhaps. But a person nearing, or in, retirement wants to keep expenses down, and the way to do so is to eliminate as much debt as possible.

3. Understand RMDs (Required Minimum Distributions)

Here’s the simple explanation. Remember those 401Ks or IRAs you contributed to (or still are). Beyond saving, part of the attraction was reducing your taxes along the way. Every dollar you contributed into a traditional 401K or IRA reduced your taxable income, and hence your taxes. You surely liked that (then). But the real story is that Uncle Sam just gave you a deferral on taxes. And now he’s coming with a vengeance and won’t be denied. Beginning in the year you turn 70-1/2, you must begin withdrawals and pay ordinary income taxes on the withdrawals on traditional IRA/401K (yes, I know you can stop the clock if you are still working and contributing to a 401k). There are minimums you MUST withdraw, starting roughly at 4% of the total and increasing annually. There are complicated tables for this calculation. Think you can put this off? Think again. Uncle Sam socks you with a 50% penalty of the money you should have withdrawn and then forces you to withdrawn it anyway and pay the taxes. A double whammy. You screw up. Too bad. You pay.

There are wrinkles to all these issues, the biggest one is if you have a Roth 401K/IRA. For a Roth, none of these issues apply since you did not get the benefit of reduced taxes when you contributed. But if you began contributions in the 80s you did so with a traditional plan and unless you converted to a Roth (and paid the taxes) along the way, the tax bill is coming due. But the bottom line here is future planning needs to assume RMDs and associated taxes.

4. Health

How does one cope for the unknown? By planning. Man plans, God laughs is the expression. True, but if you plan for the worst then all other outcomes are better. You need to assume greater expense for health issues. You need to understand what Medicare covers (plenty) and what it doesn’t (also plenty—like long term care). And Medicare isn’t free. And if you are fortunate enough to have big RMDs (see #3) and a decent amount of social security (see #5) you can easily get bumped into paying additional payments based on income related adjustments. Get the details.

5. Social Security

It will not “go bankrupt” as articles claim. But it will surely evolve and there will likely be a series of adjustments over time, including raising the income of which current contributors pay, raising the FRA–full retirement age (currently 66, but increasing to 67 within a few years and probably beyond in the future), and sneaky reductions of Cost of Living adjustments (COLA) which will reduce annual inflation adjustments.

Social security is not simple and there are strategies to be employed to maximize your payments (like delaying payment until 70). But don’t assume social security will cover your lifestyle. It won’t. The average payment at FRA is $1500/month ($18,000/year) and the max payment at FRA is currently $2861/month, or  $34.3k per year.

My advice here is straightforward. Delay payments until age 70. You receive 8% more annually beyond your FRA if you do. There’s math to be done here since you need to weigh the increase payments against payments you won’t get until age 70. If you are not well and have a short life expectancy, this changes the analysis. And if you really need to money now, then do what you need to do. Otherwise, wait, and collect more.

6. “Out-kicking your coverage”

Beyond health, the #1 retirement risk is longevity, “out-kicking your coverage”. By that I mean living longer than you thought. What? Isn’t that good. Certainly, if you can retain your health, it’s what most of us strive for. But you need to model your cash inflows from social security, pensions (if any), RMDs, etc. and determine “when the money runs out”. If it runs out post age 100 you are doing well. Running out at age 70-75 is not so fine.

7. How will you occupy your time?

This really isn’t a “problem” is it? Maybe. Maybe not. But will you live a fulfilling active life or be glued to re-runs of Law & Order (wait a minute, I like Law & Order)? It really is important to think through how your time will be allocated as you will have a lot more of it. Again, not a problem if you will have meaningful ways to occupy your time, but it’s a potentially big problem if you are bored by 9:30 am on day one of your retirement.

By the way, I did not even mention having a will. I assume you have one. Right? If you don’t, shame on you and fix that before you do anything else.

Hope these thoughts are helpful. Most importantly, take the time to think through your back nine and all the related issues. You’ll be glad you did.

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