By: Kaleb Robuck
It's never too early to start planning or saving for retirement. But if you're within 5-10 years of retiring, you're in a critical period because the decisions you make now may define what your lifestyle will look like and your ability to retire successfully.
There are 3 pillars of successful retirement plans, a few critical questions to ask yourself, and some commonly overlooked "blind spots" in retirement plans for federal employees. The 3 pillars are important strategies to use when planning retirement: a holistic income strategy, a market readiness strategy. and a forward-thinking tax strategy. There is a lot that goes into each one of these approaches and it's important to include all of them when thinking about your retirement plan, not just one or two of them.
1. Holistic Income Strategy
A holistic income strategy means planning based on your personal values and goals for all parts of your financial life. This might be buying a new home, traveling, leaving a legacy, or just maintaining your current lifestyle.
The term holistic is defined as "all encompassing" or taking all aspects of your entire life and goals into consideration when designing a future income plan.
Some specific questions you should be asking yourself are:
- Do you know how much you will need to cover all your expenses each month in retirement?
- For many this is usually equal to about 80% of your current monthly budget.
- What are your estimates to how much extra you will spend each year on travel, home improvements, gifts, medical care, and other one-off expenses?
- What will your guaranteed income be from sources such as Social Security, federal pensions, annuities, or other sources?
- Are you under Civil Service Retirement System (CSRS) or Federal Employees' Retirement System (FERS)? The benefits you receive will also depend on this.
- Are you accounting for inflation over the course of your retirement?
- Do you have cost-of-living adjustments in any of your investments?
- Do you know how to maximize your Social Security and understand all your options?
- Are you coordinating your claiming strategies with your spouse?
- Do you have a strategy to protect a surviving spouse from loss of income?
- AND do you have an adequate liquid emergency fund so you don't have to dip into investments if you don't have to?
2. Market Readiness Strategy
Market Readiness is having a plan in place that can adapt and adjust to the uncertainties in the financial markets. No one can predict or control the market and what it does, so it’s important as you get closer to retirement to make sure your investments and assets are allocated properly.
Do you understand the risks you are taking with your retirement savings? A good starting point for this is by utilizing a risk questionnaire. In our firm we utilize an AI based risk analytic tool called RISKALYZE. RISKALYZE has the ability to measure both the risk of your current portfolio and analyze an investors personal appetite for risk. You can access this tool here.
Another thing to remember is that your investing strategy may need to change in retirement, so you don’t run out of money later in life.
Ask yourself these questions:
- Does your income strategy include guaranteed income to protect your lifestyle from market volatility?
- Do you understand sequence of returns risk? Withdrawing too much when your portfolio has lost value can have a lasting negative impact on your retirement.
- Have you run multiple portfolio scenarios with different growth and inflation assumptions and are confident that your money will last?
- Is your income and investment plan flexible, considering inevitable ups and downs in the stock market?
3. Forward-Thinking Tax Strategy
We know taxes are never the most fun to talk or think about, but it is important to coordinate your income sources, so you don’t end up paying more in taxes than necessary.
Ask yourself these questions:
- Have you reviewed your strategies in light of recent tax changes? Or have a plan to review them because the proposed changes?
- Being proactive in your tax and income planning may help you to be sure you’re using every opportunity to potentially lower the taxes you pay now and in the future.
- Do you understand how taxable, tax-deferred, and tax-free wealth buckets work?
- Have you thought out your drawdown strategy to help maximize after-tax income?
- Another thing that is hard to think about is that future tax rates could potentially increase while the US debt is rising.
It’s important to stay up to date with changing tax rules and planning how that could affect your nest egg and future taxes.
All this information might sound a little overwhelming, but there are many transitions in life, and some, including retirement, are not as easy to navigate as others. Many people end up making rash decisions simply because they are unclear about the options available to them. It’s okay to not have all the answers to the questions presented right now. Remember, often the hardest part is taking the first step.
If you’re a federal employee nearing retirement looking for a financial planner in Iowa or Nebraska, I suggest talking to us here at Miller Financial Group, Inc. or another trusted financial professional to make sure you have a plan in place. If you would like a checklist of some important things to consider when nearing retirement, give us a call or email us here.