We spend a lot of time helping clients address retirement planning issues. Sometimes that means planning for a retirement that is many years away, while other times it means planning with a 5-10 year window or even sooner. We also help clients as they transition into retirement, which for many is now simply transitioning to another phase of their lives and perhaps a new career. Retirement planning is a complex area that weaves together many elements of cash flow, investments, tax planning and estate planning.
I have always felt that it is important to apply the best thinking of the leaders in the CPA Financial Planning Profession as we work with clients in retirement planning and all other areas of our practice. In January, I had the opportunity to organize, develop, and lead a discussion among a group of 15 of the leaders in our profession on this topic. I thought it might be worthwhile to share with you some of the key points that came out of that discussion:
Cash flow is key – As you can imagine, what you will spend each year in retirement drives a lot of the asset sufficiency planning that we do. However, it is not just a single number – annual expenses – but more importantly it is understanding what makes up that number. Truly the devil is often in the details. What expenses are fixed vs. variable? How might these expenses change over time – as kids finish school and move out, or as aging parents pass away? What inflation rate is appropriate for which expenses? These are all critical questions as we think about retirement planning for our clients.
Asset sufficiency – Having enough money to last your lifetime is the number one concern among our clients. We believe that doing a detailed analysis around this is aspect is a critical component of good retirement planning, but there are many variables that will certainly change over time. As a result, we view this analysis as a compass not a GPS. While we focus on your probability of success, it is also probably even more important to consider the consequences of failure (running out of money). What alternatives to change your direction mid-stream do you have from a planning standpoint?
Integrating income tax planning – This has become much more important since the changes in the tax law in 2012 in the American Taxpayer Relief Act (ATRA). Doing multi year tax planning as you approach retirement and looking for opportunities to “fill up lower brackets” before you start taking your Required Minimum Distributions from retirement accounts is key. Roth conversions can play an important role in this regard. Tying your tax planning in with your cash flow needs will help you to determine where to take cash from.
Align your investment strategy with your retirement planning – Too often, people will develop their asset allocation without thinking about their return requirements and risk tolerance. These key issues must be addressed first, then you have a foundation on which to build your investments. Monitoring and periodically rebalancing to these targets is then rooted in your overall planning.
Health issues and healthcare costs are an unknown – We can only plan for what we know and we increasingly see dementia and diminished capacity as important elements of our clients’ planning. Identifying issues early and having a solid estate plan in place is ultimately the most important thing you can do in advance of such problems. Thinking about the potential costs of care and looking at how you will fund it is also important (LTC insurance, self-fund, etc.). Making sure your estate planning documents are up to date and you have named the correct beneficiaries, trustees, etc. is key.
Divorce can have a significant impact on retirement planning – Certainly an understatement, but with the divorce rate around 50% in our country, this cannot be overlooked. The incident of “gray divorce” is even higher at almost twice the overall rate. Anyone heading into a divorce or potential one needs to think about what impact it will have on their retirement plans.
We work very hard to stay on the cutting-edge of the best thinking in all areas of our practice. Based on the demographics of our clients and the country’s population, we believe that retirement planning is going to be a critical area over the next decade. We work to bring this thought leadership into every interaction with our clients in this area. If we have helped you in this area, let us know if you have any questions on these thoughts. If we have not yet worked with you on this, let us know how we can help.
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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