Planning for retirement

The sooner you start to plan, the easier those golden years will be

With people living 20 and 30 years into retirement, planning for retirement has become far more important than it was for your grandparents. Retirement planning can be a daunting task. For many, it is something given far too little consideration. People will spend more time planning for a vacation than they will spend planning for their future.

Retirement planning connotes different things to different people.  It is an exercise that has two phases: the accumulation phase and the disposition phase. Both of these disciplines focus on asset allocation and the tax efficient use of assets.

The best retirement plan is started when one is 20 or 30 years old. Many years of consistent saving and planning will enable one to accumulate a comfortable nest egg for retirement. Regardless of how early or late when one starts saving and whenever one decides to retire, there are many different topics that need to be addressed leading up to and through retirement.

Social Security is an important asset for retirees. Social security planning is not as straightforward as it might appear. Should one apply for benefits early and incur a reduction in normal benefits?  Should one take benefits at normal retirement? Or might it be even better to delay social security and get an increase in monthly benefits? Of course each strategy depends on myriad factors including health, family history, and current financial resources. A married person approaching retirement needs to know what social security benefits a spouse might be entitled to. Thoughtful Social Security planning can create significant additional lifetime income for a couple, if they can wend their way through the various rules and regulations.

Distribution Planning helps create the greatest chance that you won’t outlive your money or ensure assets are preserved to be passed to heirs, if desired. With greater life expectancy today, retirees have to meet the challenge of creating adequate income for 20 to 30 years. Too often, the cash needed in retirement is underestimated. Unexpected health expenses may destroy a retirement plan budget. Inflation can wreak havoc with the best intentioned plans.

Monte Carlo simulations have proven that limiting distributions to 3.5% to 4% of assets creates a very high likelihood of not outliving one’s assets. Spending above this threshold will most likely involve invading principal over time. This may not be a bad thing, but retirees need to be aware of a diminishing estate throwing off less income.

Annuities can be one successful strategy to provide certainty of income during retirement years. An annuity can reduce investment risk for a portion of one’s estate, but often such vehicles do not address the issue of inflation. However, a steady stream of income that will return some of the principal over time can boost retirement revenue. For people who may have a charitable purpose, charitable gift annuities might fit quite nicely into retirement planning, particularly if an estate includes highly appreciated assets that do not currently generate income. Using such assets for charitable annuities can escape capital gains tax and also provide a tax deduction. Because such strategies can be complicated, it is best to consult an expert. Such a strategy should only be considered for a portion of one’s assets.

Creating a budget and limiting expenses can help stretch the dollar you have worked hard to save. Know what your expenses are and strive to live within those limits. Modest savings habits can create additional savings.  If you are lucky enough to have paid off your mortgage, you won’t have that monthly expense hanging over your head. One might consider downsizing. Reverse mortgages have created additional cash flow for retirees.  This strategy requires careful investigation, as there are some pitfalls that one needs to be wary of.

Estate Planning is not only for the rich and famous. Retirement planning should not be done without including a will and durable power of attorney. Having a well-constructed will is not enough. Assets and beneficiary designation must be properly titled, executed, and coordinated. This is an important planning element that is often left incomplete. If the assets do not mesh with a carefully crafted plan, the plan is of little utility.  Even the simple task of creating and providing a list of all your accounts and assets for a spouse or child will save countless hours and headaches for your heirs.

Retirement planning is not a one size fits all exercise. Although there are some general rules and principals, each situation stands on its own. The ultimate plan depends on many individual factors that all need to be assessed. The best plans are started early and reviewed periodically.

JEFFREY A. BROWN JD, LLM, QPA, ChFC, ERPA and GRANT E. BROWN ERPA, QPA, TGPC, CFP® are owners of Compensation Planning Inc., a Warwick based firm focusing on the design and administra-tion of 401(k), 403(b), and defined benefit plans for small business.