Retirement: Expectations Versus Reality

Retirement: Expectations Versus Reality

August 29, 2019

When expectation and reality differ, the results can be tough to take — especially when the subject is retirement. There are some key considerations that do-it-yourselfers can miss when planning for retirement that may give them an unpleasant dose of reality. 

While professional retirement plans can range from basic to complex depending on assets, business interests and amount of wealth to transfer, at a minimum the following items should be considered when planning for retirement.

When, Where, How Much:

When to retire, how much income will be needed and from what source. While we often joke about wanting to retire tomorrow it’s important to plan for a realistic date that you can pull the plug. Of importance is how will your health benefits be covered if you want to retire before you are eligible for Medicare at age 65. There are several insurance options if you will not have a working spouse that can carry family insurance but do the research and get the numbers early before you sail into the sunset. In addition, the report shows that retirement health expenses are projected to rise at an average annual rate of 4.22% for the foreseeable future, compared to 5.47% in last year’s report*.  

Where is what source do you pull money from when you need income. One source discussed below is Social Security, but how are you going to pay property taxes, the cable bill, vacations etc.? Is the account you access your money from the most tax efficient? If most of your assets are in a pre-tax IRA or Qualified Retirement Plan like a 401k, the money you remove is subject to ordinary income tax. If you were making $100,000 a year gross pre-retirement and in retirement rely primarily on a pre-tax IRA, and you decide to pull more than that in any year, you may incur more taxes and therefore have less to spend. Even if you are removing money from a taxable or TOD account where you are only subject to capital gains, do you know which investments to pull from?

How much refers to your household “operating budget” which is what you need to live on and discretionary expenses for how you want to live outside of the necessities. These expenses should be trackable via paper or online banking resources and/or credit card statements. This is important as unexpected life events can mandate you cut spending for a time and how will you know where to cut? You can’t cut property taxes, but you can cut dining out. It’s also imperative to apply inflation to all expenses to see how that stacks up against a reasonable return rate on your investments pursuant to your risk tolerance and time horizon.

Social Security -- On Time, Early, or Late:

The timing of Social Security is something people think about often and unfortunately many seem to believe that earlier is better. Don’t dismiss taking full advantage of the program by delaying your claim until you are able to receive the highest possible benefit. In addition, if you work past your full retirement age, today between 66 and 67 for most, why not let that benefit grow until you need the money due to no longer earning a paycheck? Age 70 is the age at which the Government stops increasing your monthly benefit and you can earn as much as you like after your full retirement age without having to pay a portion of your Social Security benefits back.

Investment Allocation:

It may feel safe to park your funds in a stable value fund or money market account to protect your profits, but is that going to provide the growth you need to outpace inflation and grow your money to last until you pass away? From an investment perspective, that magic retirement number might be the end of your 9-to-5 career, but your investments don’t get a day off. They need to keep working for you.

Is the allocation of your funds in bonds, stocks and cash still appropriate? It may have been a great year for small cap equities before you retired, but how is that sector doing now that you are three years into your golden years? Is that investment adding to unnecessary losses to your portfolio and if so, should you keep some for when the sector performs positively again?

Regardless of your age, if you are thinking of retirement or have a number and “day in the life” in mind, work with a professional. The considerations above just scratch the surface of what you may need to know. And remember, earlier is better so don’t wait until you’re 50 to plan.

*Sourced from HealthView services. LPL Financial and Athene Wealth Management, LLC and their affiliates, nor their representatives provide legal, tax, or accounting advice. You are urged to consult your own legal and tax advisors for advice before implementing any plan. Securities offered through LPL Financial, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Asset allocation does not ensure a profit or protect against a loss.