Retirement with dignity, part 1

Is it possible to increase security and peace of mind throughout our clients retirement years? We are not talking about investing in the latest get-rich-quick scheme or by having your clients thumb their nose at the IRS. Instead, we are going to look at a simple approach of mathematically allocating your client’s assets in an efficient manner to give your client a better chance of enjoying their retirement with the dignity they deserve.

This isn’t about a particular investment or product. They can use almost any product or investment in conjunction with the planning techniques discussed here. In fact, it is possible that your client will learn how to address a great many financial challenges without changing a single investment or account that they currently own.

Many of the requirements for enjoying a retirement with dignity revolve around money. This is not to suggest that a client can’t be happy without money, but having it can certainly make their life easier and more secure.

There are six important elements or requirements that give your client the best chance of having the money they will need throughout their retirement years.

1. Maximize current income.
2. Assure a lifetime income.
3. Defer income taxes – when possible.
4. Avoid tax on Social Security – if possible.
5. Inflation will be back…so we better prepare for it as best we can.
6. And last, they must protect their hard-earned savings from potential investment losses.

Prior to getting into the specifics of planning, let’s spend a minute or two looking at these six requirements.

First let’s look at income, both the importance of maximizing current income and assuring future lifetime income as well. Many of our clients would feel more secure and enjoy greater peace-of-mind if they could find a way to maximize the amount of income that they currently receive. But a secure retirement isn’t just about how much income they have each month. True financial security is only achieved when they have assurance that the income they need will be provided for the rest of their lives. To ensure they will sleep well at night, now and in the future, they need to be certain that they will have enough income to last their entire life. This makes planning more challenging because our clients don’t know how long they will live. Therefore, they don’t know how long their savings must last to support them. 

Later, when we get into some of the details of mathematically allocating assets to accomplish different objectives, we will see that most often the critical objective in planning is to preserve or grow principal, if possible, to give our clients the best chance of always having an available source of income no matter how long they might live. One of the most unique aspects of planning you can do is to attempt to develop “lifetime” plans for your clients, plans that balance the needs of today with the needs over a lifetime. 

Taxes are one of the biggest obstacles many of our clients face when they set out to achieve a worry-free retirement. The objective of a secure retirement would be much easier to accomplish if they didn’t have to worry about how the government will tax…

• The earnings from their CDs.
• The interest on their bonds.
• The dividends on their stocks.
• And the withdrawals from their IRAs and 401(k)s.

These taxes can have a tremendous impact on their ability to accumulate the assets they need to support their standard of living both today and for the rest of their life. Fortunately, there are ways to reduce the effect of these taxes. One of the most powerful and underutilized weapons your clients have is tax deferral, or their ability to plan the timing of when they pay these taxes.

Many people make the mistake of paying taxes on earnings that they leave in their accounts to accumulate. If your client’s plan is to defer the use of these earnings, they might want to consider a plan that will defer when they pay the taxes on these earnings. The ability to control when your clients pay taxes on their earnings is one of the most effective methods available for possibly reducing the amount of taxes they will ultimately pay.

In addition to deferring taxes, planning also can be used to reduce or eliminate a tax that clients might otherwise be forced to pay, for example, the tax on Social Security retirement income. How many of your clients or your clients’ parents currently pay tax on Social Security? Paying these taxes doesn’t make them feel very good does it? After all, they paid taxes during all of the years when they worked. And now when it’s time to start getting their Social Security benefit, they are required to pay taxes again.

Did you know that when Franklin Roosevelt signed the legislation for Social Security, he promised that the government would never tax those benefits? Well, it shouldn’t surprise us that in their never-ending search for things to tax, Congress passed legislation in 1984 directed at taxing your clients Social Security retirement income benefits. This legislation forced many recipients to count half of their Social Security retirement income as taxable income. It had the effect of not only taxing Social Security, but for some people it also increased their tax bracket and subsequently increased the tax they paid on all of their income.