Start with these three areas
The words “retirement planning” are enough to make most people shift uncomfortably in their seats. This is perhaps due to the confusing terminology and mathematics that surround the topic. Many people feel that they aren’t ready to retire—no matter how much they’ve saved or invested. Regardless, I encourage my clients to start with the tangible facts and work their way up. Getting ahold of the variables can be incredibly empowering. To begin, I urge clients to initially focus on three key themes.
First, an evaluation of income sources is crucial to the process. Income can come from different places: Social Security, pensions, annuities, dividends from investments or part-time work. Each income stream comes with its own set of questions and decisions. When should I begin collecting benefits? Does my income increase with inflation? Is this income taxable? A slew of cost/benefit considerations normally unfold. Married couples face further intricacy as they evaluate spousal benefits and survivor options. Try to nail down the amount, reliability, tax treatment and timing of your different sources of income, and use this as a base.
Next, it helps to take an inventory of your savings/assets: current value, overall investment mix, individual holdings, expected growth and liquidity. Develop an overarching investment policy, making sure your allocation of holdings is consistent with your time horizon and tolerance for risk. Plan for the order in which you’ll tap accounts and withdraw assets. Some accounts are tax-deferred (like a 401k or an IRA) while others are after-tax (like a brokerage account); this can have a bearing on the timing and source of withdrawals.
Finally, an identification of spending needs (or “goals”) is required. Begin with the basics—figure out how much it takes to keep the lights on. From there, try to identify the one-time or recurring expenses that fill out your life—both mundane (car repairs) and fun (a trip to the Grand Canyon). If you’re at a loss as to where to start, look online. There are a lot of great tools to help identify expenses, build a budget and track ongoing progress. This can be a good starting point.
Once you have a handle on income, assets and goals, try to pull the threads together into a central cable. Determine what portion of your expenses can be covered by ongoing income. If there is a gap between income and expenses, figure out what accounts to use and when. Revisit your asset allocation to determine whether the mix is also appropriate for the needs you’ve outlined, being mindful of tax consequences throughout.
Develop a system of accounts/bill paying that works for you. You’ll want something that allows you to easily identify how much you’re spending and where the money is coming from. Pinning down your total gross expenditure each year will help you to evaluate your ongoing spending in the context of future years. Again, technology can help; many apps and websites offer tools to track, categorize and budget your spending.
If this makes your head spin, you aren’t alone. There are other considerations as well: insurance needs, estate planning, health and longevity factors and tax analysis. It can be a lot to digest. Working with your fee-only financial planner, attorney and accountant can be a good way to piece the puzzle together. Many professionals offer tools, technology and expertise that are custom built for the processes outlined above. At the end of the day, a firm grasp on these variables will set you on the right path towards greater confidence and a more coherent retirement plan.
Scott Mazuzan is a certified financial planner for F.L. Putnam Investment Management Company, an independent firm that provides investment management and financial planning services. Mazuzan grew up in the Portland area, studied at the University of New Hampshire, and traveled the world with his wife Eliza before returning home to Maine in 2011.
Mazuzan enjoys educating and empowering his clients through thoughtful financial planning and collaboration. He is the father of two boys, an avid runner and enjoys the occasional show tune. You can follow his blog at http://www.flpfinancialplanning.com/planning-blog/.
The retirement planning landscape is littered with ages and acronyms. Here are a few to keep in mind as you look ahead.
FRA: Full Retirement Age is the benchmark age at which individuals can file for their full retirement benefit. This is between ages 65-67, depending on your year of birth.
RMD: A Required Minimum Distribution is an IRS mandated annual withdrawal from a retirement account. The amount is calculated annually based on actuarial tables. RMDs commence once a taxpayer reaches the age of 70.5.
62: The earliest age at which individuals can file for reduced Social Security Retirement Benefits.
70: The latest age at which individuals can file for Social Security Retirement benefits. By delaying their benefits beyond FRA, individuals can secure higher monthly benefits.
59.5: The age after which most retirement plan withdrawals are exempt from 10 percent early withdrawal penalties.