The Gift Is In The Shift
As we near shifting from one year to the next, you may want to consider some shifts to optimize your retirement plans. We can start with shifting our paradigm, our approach and our strategies with respect to retirement planning. These shifts can help mitigate or eliminate many of the risks we may face in retirement, including Tax Rate Risk, Income Risk, Longevity Risk, Inflation Risk, Sequence of Returns Risk, Market Risk, and Long-Term Care Risk.
We may want to consider the following shifts:
Tax Planning Shift – All tax planning begins with a simple question. Do you believe taxes will be higher in the future? If you do, then you need to consider making shifts from tax deferred accounts like 401k’s, 403b’s, and IRA’s to tax free accounts like 401k Roth’s, 403b Roth’s, and Roth IRA’s. Tax deferred accounts in a rising tax environment are a ticking tax time bombs and can substantially reduce the amount of retirement savings you get to keep. These balances can be shifted using Roth Conversions. A Roth Conversion allows you to convert some or all your tax deferred funds to tax free funds. There are no limitations on the amount you can convert each year nor any income limitations for those wanting to convert. The only catch is you must pay taxes on the amount you convert in any year. We recommend two guiderails when completing Roth Conversions: don’t push yourself into a tax bracket that gives you heartburn (not beyond the 24% bracket) and have a clear plan on where you will get the funds to pay the taxes. Likewise, you should most likely be contributing to 401k Roth’s, 403b Roth’s, and Roth IRA’s. Another potential critical shift would involve moving funds from your taxable investments, such as bank accounts, brokerage accounts and mutual funds, to tax free investments like properly structured cash value life insurance contracts. When properly structured, these contracts can provide tax deferred growth, tax free and cost-free loans, and a tax-free death benefit that can double for long term care.
Purpose Planning Shift – We recommend you shift your paradigm to include a Purpose Driven Portfolio. There are several purposes for your retirement savings including growth, income, future income, liquidity, legacy, charity, and protection. For most baby boomers, your retirement savings is focused almost exclusively on growth. And that growth comes with risk. As you enter the Retirement Red Zone, the five years prior to retirement and the first five years after retirement, you should consider shifting from at risk growth only to safe growth with future guaranteed income, or safe growth with protection, or just safe growth. The next sections will highlight some of these potential shifts in purpose.
Income Planning Shift – During our working years, we measure our wealth in the value of our assets. When you enter retirement, you measure your wealth in guaranteed income. The biggest concern of most baby boomers entering retirement is running out of money before they run out of life! There are three types of income you would potentially plan for: Supplemental, Replacement, and Bridge. Supplemental would be the income desired to complement Social Security, pensions, and other guaranteed sources of lifetime income. We can each decide how much guaranteed income is appropriate for our circumstances. Importantly, there have been numerous studies that yield two key conclusions for those who have sources of guaranteed income; they are happier in retirement, and they live longer. We have the opportunity today to select guaranteed lifetime increasing income from a variety of financial products. Replacement would be the income required to offset the loss in income when the first spouse (or partner) passes away. At a minimum two facts detrimental to the surviving spouse’s financial situation occur: they lose one Social Security check, and they move their tax filing status from Married Filing Jointly to Single. This reduces their standard deduction as well as lowers the income ranges for each bracket. A surviving spouse could be in a higher tax bracket after the loss of their partner. Bridge would provide income from the day you stop working to the day you elect to begin receiving your Social Security, pensions, and potential guaranteed income products. Whichever type of income we are planning for, we want that income stream to have the following characteristics: guaranteed for life for both spouses, increasing to keep up with inflation, and tax free.
Protection Planning Shift – Long Term Care is the number one overlooked planning shift for most baby boomers. Long Term Care risk has a high probability of impacting us and can be extremely expensive, potentially sabotaging the best of retirement plans. Even with this high probability and expense, most of us have passed on purchasing traditional Long Term Care insurance. While the traditional coverage can be expensive and some of us may not qualify medically for the protection, the number one reason we don’t purchase a traditional policy is we don’t want to pay a premium for something we may never use. Traditional Long-Term Care is use it or lose! Fortunately, there are many hybrid life insurance and annuity policies that can provide coverage and eliminate this concern. For example, we can purchase a life insurance policy with a long-term care rider. The rider allows us to advance the death benefit to pay for long term care. The qualification to receive benefits is identical to those of a traditional long term care policy: unable to perform 2 of 6 activities of daily living or cognitive impairment. The policy pays tax free cash benefits directly to the insured to spend any way they choose. You do not need to go to a facility or hire licensed providers; you can pay a family member or friend to take care of you. Additionally, there are hybrid annuity contracts that can provide a pool of funds that can be paid to the insured in the event they need long term care. Unlike the life insurance option, there is no medical underwriting required. As long as you are not already confined to a nursing home and you can perform the 6 activities of daily living, you will qualify for the policy. Bottom line: you should be investigating these new options to eliminate your biggest health related risk.
Risk Planning Shift – When we are younger, we have time and earnings from work to replace any losses in our retirement savings. Time to allow the market to recover. As we get closer to needing these dollars to fund our retirement, our risk capacity declines. The Rule of 100 can provide a starting point for the discussion on how to balance the amount of “At Risk” funds with our “Safe” funds. The Rule of 100 states that to determine the maximum amount of retirement savings to have at risk you simply subtract your age from 100. For example, is you are 60 years old, the maximum amount funds you want at risk would be 40% (100 – 60 = 40), Other factors like guaranteed sources of income like Social Security, pensions, guaranteed income annuities as well as total investment portfolio size may lead you to adjust the percentage up or down. Sequence of Returns risk also contributes to the need to get the balance between at risk and safe funds right for your circumstances. Sequence of Returns Risk recognizes that the order of returns can have a big impact on your retirement success. For example, if you have too much at risk and receive several negative annual returns early in your retirement, it may cannibalize away your savings quicker leading to you running out of money. Establishing a Principal Protection Plan (PPP) or Volatility Shield for the “Safe” portion of your Retirement Savings can help mitigate and potentially eliminate Sequence of Returns Risk. A PPP is invested in a product that does not experience losses when the market declines while providing a safe and productive rate of growth. By having both types of accounts (“At Risk” and “PPP”), you can withdraw funds from the At-Risk account when the market is up and then shift to withdrawing from the PPP when the market is down. This can allow your At-Risk account to completely recover prior to resuming withdrawals thus making your retirement savings last longer.
If you would like to review your retirement plans to identify any potential shifts, please click here to schedule a complimentary strategy session.
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