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Retirement Income Planning Checklist: 5 Questions To Answer Right Off The Bat

Retirement planning is something that people should always think about, but the way that they think about it and its level of precision changes as they approach retirement. Earlier in life, you’re trying to figure out how much to save and put towards retirement. Within 5-10 years of desired retirement age, you should be thinking about the below checklist to prepare for a smooth transition to retirement:

1. How much money do I need in retirement and where is that money coming from? 

Let’s start with the question that’s on everyone’s minds, AKA the money question. The foundation of your retirement planning is determined by how much income you anticipate needing. If you started to plan for retirement early in your career, you likely focused on how much to save and how to invest, but you didn’t think as much about what life would look like in retirement or know when you’d be ready to pull the professional plug. 

Having a general idea of what you’d like your future to look like is really important because it’ll give you a sense of how long you’ll need to rely on your portfolio to replace the income you were accustomed to. Perhaps during retirement, you’re looking to stop working altogether (no, really) and either maintain or increase your lifestyle. Maybe you’d like to spend your days post-career simplifying your life, focusing on your interests, or traveling. While the sky’s the limit for your retirement pursuits, it’s also critical to be honest with yourself. Dream big, but dream intelligently too.

The two primary sources of income to consider when retirement planning are:

  • Fixed income– These are your pensions, social security, and annuity payments. These should form the base of your retirement income as “fixed” amounts and help you plan the amount needed from variable sources.
  • Variable income– This is your income and interest generated by investments, portfolio withdrawals, future Required Minimum Distributions (RMDs) from tax-deferred retirement accounts, and Health Savings Account withdrawals.

How much fixed income vs. variable income you should have in retirement will greatly depend on factors that may be out of your control, like employer benefits and government policy surrounding social security. Thankfully, there are people out there who can help you assess what to expect and remove the anxiety of the unknown. 

2. What should be included in my post-retirement budget?

It’s important to take into consideration how financial needs may adapt and shift over time as we age. For example, as you get older and your personal health changes, the funds that used to be allocated for travel and leisure might be replaced by increased healthcare expenses. That’s why when considering your retirement income needs, you should take every potential expense into account like:

It’s also crucial to leave room for extra money in your budget for the unexpected things that come up or shifting priorities as your family changes and grows. You may find yourself wanting to transfer some of your wealth to your children immediately, care for extended family, or want to provide for things like education for the next generation. Don’t forget to take into account any outstanding debts that you may owe as well. By anticipating and estimating future monthly expenses, you’ll have the ability to quickly adjust your lifestyle to fit into what works best for you in the long run.

3. Should I tweak my investment strategy?

There’s no denying that retirees need some kind of stability in their portfolios as they begin to rely on their portfolios to sustain their lifestyle. The reality is that the cookie-cutter 60/40 mix between stocks and bonds doesn’t create the kind of income that most people need in retirement, nor are bonds providing the kind of inflation protection that you need for a long retirement. 

While the right allocation is highly individual and dependent on your unique circumstances, a good rule of thumb is to plan to have 12-18 months of cash at the start of your retirement to maintain your lifestyle and weather the ups and downs of the market, reducing sequence of returns risk.  

A portfolio should not be “set it and forget it” as you plan for your unique needs and circumstances–a wealth advisor can help you navigate a sea of uncertainty and adjust your allocation to ensure that you have a high likelihood of success in retirement, all while managing the tax impact of reallocating taxable portfolios. 

4. How should I think about taxes when planning for retirement income?

While a lot of this discussion depends on the particular investment vehicles you used to fund your retirement, it’s important to manage all taxable income where possible and consider the impact taxes will have on the actual amount available to fund your lifestyle. Unfortunately, your income leading up to retirement and through retirement will have some unexpected implications for your retirement expenses. For example:

Most people have a mix of investment vehicles dedicated to funding their retirement lifestyle. If you invested in a Roth IRA, the money was taxed before going into the account. Therefore, no taxes need to be paid during the withdrawal, even on the earnings. In accounts such as traditional IRAs and 401ks where contributions have been made with pre-tax dollars, withdrawals are recognized as ordinary income and will be taxed as such. When looking at tax-deferred balances in non-Roth retirement accounts, you should mentally reduce the amount available for lifestyle expenses by 30% to account for income taxes. 

Many people will have taxable investment accounts that are also part of the retirement income picture. Unlike withdrawals from tax-deferred retirement accounts (which have benefits in the form of deferred income taxes while you accumulate savings for retirement), realizing capital gains to create cash for your needs in retirement will incur taxes at a lower tax rate, usually 15-20% under current tax law. Your taxable portfolio may also generate an income stream that will add to your taxable income. 

You’re responsible for paying taxes, but you no longer have the benefit of having taxes withheld from every paycheck like you would have when you were working. An advisor can partner with your accountant to help you understand the different sources of taxable income in your portfolio and how to plan for making estimated taxes, removing the hassle of going it alone.

5. What should I be doing now? 

While we can’t deny that long-term, patient investing is the way to go, that doesn’t mean your portfolio should go on auto-pilot. Your wealth plan must adapt and change over time, aligning with your life and goals as you and the world evolve. Our collective mastermind of wealth management professionals can help you navigate a sea of uncertainty, communicate with complete transparency, and manage your tax impact to ensure that you have a high likelihood of success in retirement.

Look, we know that you’re used to doing it all yourself. This is why at Monument, we prioritize serving YOU and your entire retirement vision during our strategic Private Wealth Design process. During this series of meetings, we’ll craft a completely customized and collaborative plan specific to your needs and desires. You’ll never be left in the dust because retirement stability should be a top priority for everyone, and straightforward, zero B.S. advice is what helps secure a strong financial future. 

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument.

Please remember that if you are a Monument client, it remains your responsibility to advise Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.

Insurance specific:

The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. Generally, early surrender charges may apply during the life of the policy. Those charges may decrease the value of the policy substantially depending on how early the policy, or any portion of it, is surrendered or accessed. While a policy allows for access to the account value in the short-term, through loans and withdrawals, there are costs and risks associated with those transactions. There may be little to no account value available for loans and withdrawals.

Estate taxes may apply to insurance proceeds. Consult a financial or tax advisor about your specific financial situation.

Insurance Products are made available by unaffiliated third-party licensed insurance companies. A contract’s financial guarantees are subject to the claims-paying ability of the issuing insurance company.

Variable/Universal Life:

Variable life insurance is a complex vehicle that is subject to market risk, including the potential loss of principal invested. You should consider the investment objectives, risks, charges and expenses of the variable insurance and its underlying investment options carefully before investing. You should review the product prospectus carefully before you invest. Variable universal life insurance is permanent life insurance that offers protection and an opportunity to build cash values. You will incur mortality and expense fees and subaccount expenses and you may also incur optional rider expenses, surrender charges, and policy charges. Please Also NoteIF you are a Monument client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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