The 7 essentials of retirement preparation

January 14, 2022

Allworth Co-CEO Scott Hanson outlines the seven key considerations of retirement planning.

Casablanca. The Godfather. Star Wars. E.T. King Kong. Jaws. It’s a Wonderful Life.

Do you enjoy classic movies?

When it comes to movies, these seven are on the list of essentials that critics believe every movie buff must experience.

So, what are the list of essentials for enjoying a better retirement life?

If I knew nothing else about your personal financial situation, except the fact that you are a conscientious saver, and you asked me how to prepare for your transition into retirement?

These are the seven essentials that I would encourage you to embrace.

Essential #1: Know your retirement income needs

I’ve met with people who have accrued millions of dollars, but who, due to large monthly expenses and excess debt, didn’t have enough money to feel confident about retirement.

Conversely, I’ve known people who have lived quite well on $400,000.

The basics of calculating your retirement income needs are to total all the monthly expenses you’ll have once you stop working. This includes your mortgage, food and clothing, unsecured debt and loans, car payments, and utilities.

Next, calculate income. If you’re nearing retirement, you should be honing-in on your strategy for when to apply for Social Security (there are 81 different filing strategies for married couples). Next, add up the money you’ve saved (or will have saved once you retire) and add to that any other income sources (pensions, rentals, inheritances, etc.) you expect to receive.

Then, calculate a reasonable rate of return on your investments.

Those two numbers (income and expenses) are the ballpark figures for your monthly inflow and outflow.

You should be concerned when the expected interest income on your savings and investments, combined with any other income, won’t be enough to entirely cover your monthly expenses, nor leave you enough in reserve for emergencies.

Remember, once you switch from using income to using principal to get by, the sand in the top of the hourglass that holds your life savings begins to drain.

Essential #2: Lower your expenses and manage debt

The next thing I’d tell you is to do everything in your power to retire debt free, and to work to lower and eliminate as many monthly expenses as you can.

Alternatively, in certain circumstances, if you simply can’t pay off your mortgage before you retire, you might want to refinance your home into a longer loan with smaller payments to increase your monthly cash flow.

Essential #3: Plan your taxes years in advance

This one confuses people. They wonder how they can complete their taxes years in advance (or even why they should).

But forward-thinking tax planning isn’t tax filing. And waiting until you are legally forced to take Required Minimum Distributions (RMDs) from large retirement accounts (such as IRAs and 401(k)s) can backfire when it comes to how much tax you’ll owe.

Work with your accountant and advisor years in advance to determine which retirement, savings, and investment accounts you will tap first, second, and third, and which you will leave alone, so that you can keep your tax burden as low as possible.

Essential #4: Make certain your investments are right for you

While specific investment management is too complex and personalized to cover here, the two essentials of this topic that everyone must account for are:

Risk tolerance
Time horizon

Knowing your risk tolerance (the amount of volatility you are comfortable with) and your time horizon (when you will need access to the money), should be at the foundation of virtually every investment decision you make.

Knowing where you stand on the risk spectrum will help keep you from making life altering behavioral finance mistakes. Knowing when you’ll need the money will help you choose investments that are both risk and time appropriate to your unique situation.

Essential #5: Determine how to protect your assets

Risk management is the process of identifying risk and either accepting it or mitigating it through planning, preparation, and management.

You and your advisor will work to mitigate your investment risk by allocating your money in such a way as to help shield you (as much as possible) from market and economic chaos.

Insurance can mitigate financial threats to you and your family from lawsuits, natural disasters, injury, or even loss of income because of death.

Remember, be it investments, or be it insurance, your needs and circumstances change over time.

Essential #6: If you have assets, you need an estate plan

The purpose of an estate plan is to make certain that your wishes are met in the transfer of your assets to your beneficiaries.

I understand that no one wants to think about death. But leaving loved ones to try and figure out what your wishes would’ve been can cause disagreements that permanently divide families. Also, because they generally supersede those in your will, make certain that your retirement account beneficiaries are up to date.

When it comes to an estate plan, first, almost any conscientiously devised plan is better than nothing, and second, it is an essential part of the retirement planning process.

Essential #7: Plan which retirement accounts you are going to use

What if the interest from your investments (and other income) doesn’t cover your expenses?

The proper “sequencing” of the accounts and monies you use to pay for retirement can help you preserve your savings and investments for as long as possible and potentially save you thousands of dollars over time.

Of course, your distribution and income sources also include the 800-pound gorilla in the room: Social Security.

Will Social Security (and its monthly payouts) eventually be reduced, taxed at a higher rate, or otherwise altered?

Depending upon your age, and whether you’ve saved exceptionally well, it could be prudent to plan for a benefit amount that is less than what you are expecting.

The seven retirement essentials: be ready when the time comes for what will undoubtedly be one of the biggest premieres of your life.

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