Retirement Income Blog

If you’re retired, you want a retirement planning consultant who is skilled and knowledgeable in the financial issues of retirees. Many retirement planning consultants won’t do because most financial advisors are trained to help investors accumulate assets. But if you are retired, then your interest is motivated to preserve and distribute financial assets. Here are five things that can go wrong if you select an improperly trained advisor:

The advisor takes too much risk with your assets as he has an accumulation orientation from working with mostly younger clients. Your portfolio becomes too volatile and you are consistently nervous.

The retirement planning consultant takes too little risk. Some retirement advisors that deal with mostly younger people are under the misconception that once retired, your financial assets should be mostly in bonds and fixed annuities. In fact, research shows that retirees should maintain 50% of their financial assets in equities to last a lifetime.

The retirement planing consultant may have a biased education or orientation either toward insurance or investments. If your advisor started in the business at Merrill Lynch, you likely have an investment-oriented advisor how is light on insurance knowledge and how to protect your net worth. Alternatively, if your advisor started out at New York Life, he may be oriented toward insurance products, thinking these will work in place of investments. You want a balanced advisor who does not have a bias.

Does your retirement advisor have knowledge in areas where he won’t make any money from you: understanding Social Security, Medicare coverage and Medicaid eligibility? If they don’t have knowledge about these social programs, you cannot get a well crafted plan that accounts for these sources of income or protection.

Does your retirement planning consultant employ sensitivity analysis? Tools like Monte Carlo simulation or other ways to consider various scenarios or outcomes are critical. To create a plan based on a static assumption (e.g. you will earn 7.5% annually) can be disastrous when the single assumption does not pan out.
Learn more and view our list of eight certified retirement planner qualifying questions you should ask to properly screen financial planning candidates.

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You must have sufficient capital, mathematically determined before you can pursue early retirement. If you don’t have the knowledge to make use of a financial calculator or financial software and factor in the impact of inflation, your current expenses, changes in future income, a safe withdrawal rate from your portfolio and use Monte Carlo simulation or other tool to estimate the probability of success, then hire a retirement planner. Too many people pursue early retirement with the notion, “I think I have enough.” The lack of planning to retire early leaves people in their 80s eating dog food wishing they had invested a couple thousand dollars for a sound financial plan with an experienced retirement financial planner.

Retention of Capital
Assuming you retire early with sufficient capital, you must have a method to retain it—to limit draw downs that can be caused by a falling stock market and oversight to limit taxation and fees and expenses. If you don’t feel you have sufficient personal knowledge of retirement income planning and how to retire early, then get help. For a few hundred dollars a year you can get a retirement planner to help monitor your results and give you direction, stay on course and make early retirement a success. Alternatively, hire a fee-based money manager and pay 1% of your portfolio (a typical fee) to have it managed full time.

Expense Control
You must have a budget that you will not violate. As a retirement planner, I placed a retired couple on a budget. But the wife always had reasons for “special withdrawals” from the portfolio such as unexpected dental work and three plane trips to visit her dying brother. Even after my explanation that the couple could not afford these unplanned expenses, they continued and I resigned as their retirement planner. The couple was headed for the poor house because of their inability to understand that capital in retirement is limited and hard choices must be made and budgets adhered to. Their knowledge of how to retire early may have been sufficient, but their implementation and discipline was not.

Additionally, you must know enough about tax planning, tax minimization and minimzation of brokerage costs, investments fees and insurance costs. Many of these costs are hidden so if you don’t know where to look, get a fee based planner to help you.

Health Insurance
Anyone could go bankrupt from a single major illness without proper insurance. Make sure you have permanent coverage (i.e. non-cancellable) that you can renew for a lifetime. Note that many health insurance plans are regional and not national so before you retire, be sure you are content to remain living in the area in which you retire. Your health plan may not be portable. With these few areas being welled planned beforehand, your ability to retire early and successfully is enhanced.

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There are three big areas on which to focus your attention in your pre-retirement years.

Sufficient Retirement Capital
You likely need more than you think to provide sufficient retirement income. There are lots of “rules of thumb” you may hear like “you need 70% of your pre-retirement income.
Don’t rely on these simplistic rules. If you want to do it right, get a copy of J&L Retirement Planner software (about $100) and go through the painstaking task of entering all of the numbers permitted. This robust software allows you to enter year by year events such as the world cruise for your 65th birthday, or the fact that your deferred compensation starts when you reach age 67.5 or that you plan to move to a condo at age 72 and thereby free up $300,000 for investments and eliminate your mortgage payment. Take the time to get your pre-retirement planning done with as much precision as possible (or hire a retirement planning professional). If it’s too much of a bother, then don’t complain if you run out of money at age 85 and live on food stamps for 15 more years.

If you start your calculations and you don’t have enough for your targeted retirement date, you will find that tightening your belt pre-retirement to save and invest more has a much smaller impact than working another one or two years. During that extra work time, your retirement investments continue to grow rather than be consumed. This additional growth is likely to be much more money than you can put away in additional savings. Don’t worry about retirement investing at this point. Get to the retirement “starting line” before reallocating your portfolio to live in retirement.

Retirement plan Options
Prior to retirement, you will be asked by your employer to make choices about how to distribute your 401k or receive pension payments. This area is so fraught with rules you are unlikely to know, get the help of a retirement professional. IRS has constructed a minefield of rules and waits for you to step in the wrong place and blow up.

Health Insurance and Health Care
You may feel great now but it is naive to assume everyone else becomes an old codger but not you. You too may be shuffling across the intersection trying to beat the countdown before the traffic light changes color. Therefore, take the probability of illness and aging seriously. Not only do you need comprehensive health insurance but also long term care insurance, both of which you want to get pre-retirement. Many health insurance plans are regional and not national so before you retire, be sure you are content to remain living in the area in which you retire. Your health plan may not be portable. Buy long term health care coverage. If you don’t know anything about long term care insurance, talk to your retirement planner or do your Internet research.

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This is not an article to tell you what investments to make. Rather, it explains retirement strategies on how to invest. Here are the concepts often mistaken:

1. Don’t put all of your assets into fixed income investments. Of all retirement strategies, this one is often violated due to bad advice from untrained financial “advisors.” In fact, data shows that at least 50% of your funds should always be kept in equities. Not only do the equities grow in value over time, so do their dividends.
2. It’s far more important to get your investment allocation correct than to focus on specific investment choices. For example, the percentages of your portfolio that you have in domestic stocks, domestic bonds, foreign stocks, foreign bonds, real estate securities, commodities, venture capital, emerging economies, etc. have a much bigger impact on how well your portfolio will do over time than whether you choose to own shares of Nestle of Cadbury.
3. There is no “set it and forget” it retirement strategy to investing. The world changes too much and you will need to make adjustments. However, those adjustments in your allocation should be infrequent—maybe every 3-5 years.
4. When you do adjust your allocation, your allocation should be adjusted by purchasing more of what is doing poorly and selling what is doing well (i.e. buy low and sell high). Of course, most investors get this backwards out of fear and have less than satisfactory investment results.# Don’t watch the Nightly Business Report or CNBC or read the Wall Street Journal. And especially don’t watch “Kramer.” The hype that the media creates around investing makes you feel that you should buy and sell every day. In fact, several research studies show that the more you trade, the worse your investments perform. Sound retirement strategies call for changes that depend on large secular movement in the financial markets. The famous trader, Jesse Livermore said, “the money’s made in the sittin’.” You will be better off going to Europe for 5 years, not reading the US business news or watching it on TV and returning after your hiatus to decide if any changes are needed.
5. Everyone involved with Wall Street will tell you that number 5 above is wrong and will offer you many investment ideas, financial retirement startegies and reasons to make changes in your portfolio (more of these ideas flow around Christmas time when additional commissions are needed for holiday presents).
6. Always working at least some hours, having a business, being a partner in a business are all great retirement startegies to generate supplemental retirement income . More importantly, they give you a feeling of control. When all of your income is passive (coming from social security, dividends, interest and other sources you cannot control), you feel more uneasy about your financial situation.
7. Don’t guess. If you don’t like using retirement calculators, then hire someone to do the math. A successful financial retirement is about projections, percentages, gains and losses and if you shy away from this (or don’t hire help), the math issues won’t go away.

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Under the Pension Protection Act of 2006, there are some new items beneficial to IRA owners that the average IRA owner will miss:

First, if you leave your employer and you had a tax sheltered annuity (typically the type of plan at school districts and governments), you can roll both the pre-tax and after-tax amounts to an IRA. That way, the whole account can continue to grow tax deferred.

Next, the silly requirement to first roll your company account into a regular IRA and then into a Roth IRA has been dropped. Under the new rule, when you retiree, you can roll your company account directly into a Roth IRA (of course, you pay the income tax due and then the Roth will grow tax free). This is effective January 1, 2008.

The nonsensical prior rule that a non-spouse beneficiary of a company plan could not roll over the money had been dropped. Here’s an example. Dad worked for Chevron. He listed his son as beneficiary on his 401k. If Dad dies, the son can now do a trustee-to trustee transfer of Dad?s account into an inherited IRA. Previously, only a spouse could move money from a deceased’s 401k into an inherited IRA or their own IRA. The non-spouse beneficiary still cannot take possession of the money or else it will be taxed–there is no 60 day rollover provision.

There’s more good news about the above. Let’s say Dad died in 2003 and the son was subject to the 5 year rule which required that the IRA be emptied by 2008. Now, the son can just do the rollover in 2007 (the rule is effective January 1, 2007) and take advantage of the new rule even though Dad dies a while back.

Last, good for seniors, starting in 2010, the $100,000 MAGI limitation on Roth conversion is repealed. Therefore, retirees, for whom Roth conversions are most appealing, will be able to do a Roth conversion without limitation and also spread the tax so that half is paid in 2011 and half in 2012.

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