The following is a guest post by Jeannette Bajalia who is the author of Planning A Purposeful Life: Secrets of Longevity, Retirement Done Right and Wi$e Up Women and president and principal advisor of Petros Estate & Retirement Planning. If you’d like to submit a guest post to Money Q&A, be sure to check out Money Q&A’s Guest Posting Guidelines.
After 38 years at my first career, I retired at 55. Recently I celebrated the 10th anniversary of my second career, or the second chapter of my professional life as a retirement income planner.
I became a retirement income planner because, after retiring from my first career, I knew I was headed out of the savings mode – which we refer to as the accumulation phase of our lives – and into the distribution phase, meaning I now needed to use my savings as income.
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Talk about a huge psychological shift!
I was an expert at savings, now I needed to learn the most efficient way to use my savings to produce predictable income streams that would last a lifetime.
On my quest to get help, I interviewed five financial advisors with one goal: To get a solid retirement plan that would ensure I didn’t run out of money before I ran out of life.
Much to my surprise, I realized that the financial industry was a sales industry promoting one size fits all approaches to investing my-earned capital.
It became clear that while we’re working, the financial industry offers great financial tools to accumulate and grow money, but when it comes to planning for retirement income distribution, they simply don’t have the knowledge or the skills. Distributing money and turning it into income is a planning discipline, not an investing discipline. This confusion provoked me to write a book called “Retirement Done Right: Don’t Just Invest…..Plan!”.
As you begin thinking about your own retirement, you need to shift your mindset to income planning and not simply think of growing your retirement nest egg. Your money at this life stage has a much broader purpose than growth – it needs to produce a lifestyle.
As we say in the retirement planning world: “the advisor that got you TO retirement, is most likely not the advisor that can get you THROUGH retirement.”
Here’s what I consider to be some wisdom tips for retirement income planning:
1. Don’t’ retire with the majority of your assets in tax deferred accounts
Don’t’ retire with the majority of your assets in tax-deferred accounts such as IRAs, 401ks, 403bs, 457 deferred compensation plans, etc. You need to make sure you embark on your retirement with the types of money buckets that give you tax efficiency.
This means you’ll need a bucket of assets that are tax-deferred, a bucket that is tax-free (like Roth IRA accounts) and a bucket with taxable assets (like those where only the growth is taxed but taxes have already been paid on the principal). Tax efficiency is critical in retirement because the more money you use out of your tax-deferred accounts, the more of your social security you pay taxes on. You could pay more for your Medicare premiums and potentially lose some IRS deductions.
2. Create a retirement income plan at least five years before you retire.
This type of plan should project the cost of your retirement and stress test your savings to see if you have enough money to live your desired lifestyle until you die. It should include your tax obligations, core lifestyle costs, healthcare needs, inflation and home maintenance.
Once you understand the cost of your retirement, it becomes obvious how you position your money to achieve your lifestyle costs the first five years of retirement, the next 10 years then look at the rest of your life in 10-year increments. The money you need for your income the first 10 years should be positioned differently than the money you need the next 30 years. Consider income allocation strategies as laddering strategies so all of your money is not in the same investment strategy but diversified for each life stage.
3. Don’t put all of your eggs in one basket.
Don’t invest all of your retirement savings in the same investment strategy. You need guarantees for income in retirement, especially if you don’t have a monthly pension. This is where fixed annuities with income riders have a very important role in retirement planning.
Having the right laddered income annuities that give you guarantees for income for your core lifestyle costs can add significant value by providing your income guarantees regardless of market performance. NOTE the key word here: The right income annuities. Not all annuities are created equal. Talk to a trusted expert in this area because you should not be sold an annuity for the sake of buying a financial product.
4. Plan for Lost Income.
You really want to make sure that if you’re dependent on another source of income during retirement, you make plans for income replacements if you should lose your spouse, partner or significant other. Don’t wait for the life event to rear its ugly head.
5. Plan for unanticipated healthcare expenses.
Plan for out of pocket expenses that are not going to be paid for by your health insurance. Also, consider dental, vision and hearing issues as routine expenses. These costs are typically not utilized monthly but they need to be funded in your retirement income plan. And, don’t forget long-term care costs.
Do you want insurance protection should you or your spouse/partner experience a debilitating health condition? How will you pay for it if you need skilled nursing care beyond what Medicare covers?
While the tips are important, the golden nugget is to create a plan that considers all retirement lifestyle needs as mentioned above. It’s the plan that gives you the predictable retirement income and provides you with the blueprint to retirement success.
Jeannette Bajalia, author of Planning A Purposeful Life: Secrets of Longevity, Retirement Done Right and Wi$e Up Women, is president and principal advisor of Petros Estate & Retirement Planning, where she has designed and implemented innovative estate-planning solutions for clients and their families. She also is founder and president of Woman’s Worth®, which specializes in the unique needs facing women as they plan for their retirement.