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Retirement Planning – The Distribution Years – 3 Steps to Making Your Retirement Easier
The day has finally come: you’re ready to pack up the office and say goodbye to the daily grind for good. Long commutes, office politics and demanding bosses. Welcome to the world of retirement. Here are some practical steps to take as you begin the delivery phase.
1. Get your portfolio in order
During retirement, the last thing you want to worry about is whether you’ll have enough money to last you a lifetime. To that end, here are some helpful tips for managing your money so you can focus on the more important task of enjoying your newfound free time.
First, make your life a lot easier (and less paper-heavy) by consolidating your accounts, including rolling any 401(k)s you may have into a single IRA account and consolidating any taxable accounts. Having only 2 or 3 accounts to keep track of makes your portfolio more manageable.
Once your accounts are combined, it’s a good idea to check the portfolio to make sure you’re doing all the right things to make sure your money lasts until your retirement. In particular, pay attention to:
Studies show that asset allocation is a key factor in determining how much risk you take in your portfolio. It’s especially important to make sure your asset allocation reflects the right amount of risk for your situation during the distribution phase of retirement because, unlike the accumulation and transition phases, time is no longer working in your favor. For one thing, you have less ability to cover large market losses with ongoing contributions of new money to your account. At the same time, you’ll likely need to pull money out of your portfolio, which can go deeper as the market goes through a downturn. On the other hand, not taking any risks can be detrimental to your retirement plans. Since an income-only portfolio can be impacted by inflation, we recommend that a retiree’s portfolio include some growth positions (ie, stocks) to hedge against this risk. It may be a good idea to consult an investment management professional to help determine the appropriate amount of risk for your particular situation. However, as a general rule, the percentage of equities in your portfolio should not exceed “120 – your age”.
Equally important to managing risk for a retiree is making sure your portfolio is well diversified. A diversified portfolio consists of owning as many different assets as possible (some ways to diversify: by international holdings, by market capitalization, by owning different asset classes) so that all of your holdings don’t go in the same direction at once. Diversification reduces the volatility of your portfolio so that instead of experiencing wild swings up and down, you get relatively steady long-term growth.
2. Set up your income stream
Once you retire, you will no longer receive a monthly paycheck from your employer to cover your expenses. Many retirees need to draw on their investments to supplement any income they receive from the government (through Social Security) or their employer (through a pension plan). To make life easier, we recommend that clients who need income from their portfolio should set up regular distributions from their accounts so that funds are automatically moved to the account from which they pay their monthly bills. This disbursement will work just like direct deposit for a monthly paycheck and will eliminate the burden of constantly contacting your account custodian to disburse funds as needed.
Keeping an eye on the amount of cash available for withdrawals from your account, especially if you’ve set up regular withdrawals, is an important thing to remember. In most cases, your account will be invested in things like stocks, bonds and/or mutual funds; While the value of these holdings may be enough to get you out, you may run into an “insufficient funds” error with your custodian if actual cash isn’t available. As a general rule, we recommend keeping at least 3-6 months of expenses in cash and available for disbursement. It takes care of your distribution needs and keeps your cash position to a minimum, with the majority of your portfolio invested for high return potential over the long term. In addition, when it comes time to replenish your cash balance, remember that interest, dividends and capital gains distributions generated from your ownership positions will help with this. However, it’s a good idea to be aware of your cash balance so that if you need to sell holdings to fund it, it can be done in time to avoid disrupting your monthly distributions.
3. Make estate planning decisions
If you haven’t already done so, make sure your estate plan is in place early in your retirement. The longer you put off implementing an estate plan, the greater the risk of making decisions when you are less healthy and not as mentally sharp as you once were. One of the main purposes of estate planning is to legally minimize taxes and ease the burden on your heirs in their time of grief, so the decisions you make should be thoughtful and with this in mind. Here are some important things to consider during the estate planning process:
Account Beneficiary Designations:
You should make sure that any accounts or insurance policies you name as beneficiaries reflect your wishes. Because where it is possible for accounts to be named on file to take precedence over any wishes expressed in a will or trust, it is important to ensure that this information is kept up to date.
Wills and Trusts:
At a minimum, you should prepare a will to give your heirs some direction regarding your estate planning wishes. In some cases, especially for estates that exceed the annual exclusion for estate tax purposes ($2 million per person in 2007) it is a better idea to set up a trust to handle your estate. We recommend speaking with an estate planning attorney, who can help you prepare the necessary documents for any good estate plan. Additionally, once you have a plan in place, you should spend some time with the successor trustee or executor, such as estate distribution wishes. In fact, it might even be a good idea to sit down with all the beneficiaries and discuss what your estate plan is, as this reduces the chances of conflict at your passing.
Gifting Strategies Vs. Inheriting:
It’s an age-old decision: Do you gift your assets while you’re alive or wait until you die? Again, this becomes an important question especially for those whose assets exceed the annual exclusion amount for estate tax purposes. Your estate planning attorney can help you create a plan that benefits you and your heirs and minimizes the taxable impact to your estate.
Powers of Attorney:
Establishing power of attorney is very important for financial and healthcare decisions. Although this is a touchy subject, it shouldn’t be avoided, at the very least your family will suffer like Terri Schiavo. Again, consider this to lighten the burden on those left behind to make decisions; If you plan your estate properly, the path will be clearer for them.
You should look at your retirement years as a reward for all the hard work you put in before leaving the workforce. Because of this, you should start the delivery phase by taking the right steps to help make the years ahead less stressful. First, start by making sure your portfolio reflects your risk tolerance and is properly invested so it can meet your income needs during retirement. Then set up automatic distributions from your invested assets to set up a means to tap into that income so you don’t have to worry about cash flow issues. Finally, create an estate plan that expresses your wishes and takes care of you and your heirs. By paying attention to these three things, you can spend your retirement worrying about more important things like your golf game.
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