At the death of the first spouse, the surviving spouse will lose a Social Security benefit, see a possible reduction in a pension, and likely an increase in tax brackets when going from joint returns to an individual return. Eighty percent of all men die married, while 80% of all women die single. Additionally, 75% of all women living in poverty were not poor before they were widowed. Early income and retirement planning decisions should be made with survivor benefits in mind to ensure that both husband and wife are protected.
Taxes saved today or in the future is additional money earned. Tax efficient withdrawal and investment strategies will enable you to withdrawal less assets and achieve a similar net income result, enabling unused assets to accumulate longer untouched. Which accounts you elect to withdraw first and the timing of those withdrawals (called the sequence of withdrawals), could make a tremendous difference in the amount of overall net income planning. While many consumers have been told to continue to defer their retirement assets as long as possible, doing so can create a tax planning “time bomb,” once required minimum distributions are triggered or when passing to beneficiaries. Advanced analysis of tax efficient sequence of withdrawals protect from rising tax rates in the future. Consider a proactive approach which may include paying more tax today at lower tax rates to avoid the erosion effects of rising tax rates in the future. Learn how Social Security payments are taxed and how to avoid “torpedo taxes” which can cause “stealth taxes,” where additional income is taxed at higher rates than an individual’s tax bracket. Keep tax planning in your overall financial planning.
Longevity risk, or living longer than expected, should be one of the biggest concerns of a family entering retirement. Statistically, married couples age 65 and older should be planning for the probability that at least one of them will celebrate their 92nd birthday. Failing to plan for the effects of inflation on a retirement income and investment portfolio can be disastrous. Be cautious when electing fixed payment lifetime income streams that do not adjust for inflation or by not allowing for enough growth in your overall portfolio by leaving too much in CDs.
Retirees should consider reviewing their Medicare plans the same that they review their portfolios, on an annual basis. Prescriptions change, plans change, and an annual analysis of which is the best plan for them can create valuable premium savings. Also, consider the impact that a chronic illness or long-term care expenses would have on your portfolio. The national average cost of nursing home care is $200 per day or $6,000 per month. Not having a plan in place that can provide the necessary income to replace these costs can prove disastrous.
Often, I’ll hear clients say that they have a high risk tolerance, so want to take more risk in their portfolios. The truth, however, is that risk tolerance is only one of three risks that should be considered in retirement planning. One must also consider the risk required, or the amount of risk needed to combat future inflation in the portfolio. The third and final point to consider is risk capacity, or how much of the assets can be lost before retirement security is jeopardized. All three of these risks need to be considered when building a stable retirement plan.
Hypothetical returns are often used when evaluating financial plan assumptions. Financial plans and financial calculators often illustrate a flat assumed rate of return, not one that fluctuates like expected market returns. Using more realistic returns that fluctuate in value and illustrate losses is important to show, because level rates of return are not realistic and can create false levels of confidence. Moreover, they can lead to misinformed decisions using unrealistic averages. A focus on volatility is likely more important than average rates of return. In other words, given two portfolios with the same average return, the one that experiences lower volatility outperforms over time.
Comprehensive financial planning is more than just maximizing investments. It’s coordinating your investment portfolio with other important factors, such as your overall income plan and your tax plan which will ultimately decide your benefits.