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Spring 2020  Volume 13, Number 1        

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Retirement Financial Planning: How to Set Realistic Goals

As you get close to retirement, it makes sense to switch your mindset from saving for retirement to creating a financial plan that coordinates your spending and saving habits to achieve your retirement goals.

Prudential's Retirement Preparedness Survey indicates that many retirees' and pre-retirees' goals include traveling; spending more time on leisure activities; starting a business or career; volunteering; or going back to school. A retirement financial plan can help you reach your goal.

The difference between financial planning and retirement planning is the difference between saving and spending. A financial plan focuses on making sure you have a realistic target of how much you'll need after you stop working. It also helps ensure you're investing properly. By comparison, a retirement financial plan focuses, in detail, on your expenses and how to generate an income stream to cover those costs.

Prioritizing Living Expenses/Goals

Be honest about what constitutes a basic living need and what your "dreams" are. You also should factor in inflation and possible health care costs as you grow older.

Once you have an idea of how much money you need for your expenses, there are several tactics you can use to help you stay on track. Here are a few:

Tactic: Get an Adviser

You can build a concise financial plan on your own — or you can enlist the help of a professional, licensed financial adviser. If you use a fee-only adviser, you may pay around $1,500 to $2,000 for a retirement plan. However, for many retirees, hiring an adviser often saves money or makes them more in the long run.

Your financial adviser will ask you to gather information about your assets (savings, investments, income) and expenses (typically divided between essential and discretionary). With this information, your adviser will try to project how well you will be able to meet your expected lifetime needs based on your assets and income. Often advisors do what is called a "Monte Carlo projection" to determine the likelihood you will have enough money based on your retirement date and expected lifetime. The program also lets you play with "what if" scenarios to give you an idea of your options.

It's always a good idea to revisit your plan annually when you are in your 70s and older to make sure the plan is still meeting your needs. For instance, you may decide as you get older that you want to provide for your grandchildren or donate to a worthy cause. Legacy planning and charitable giving goals often are priorities for people in this age range.

Tactic: Plan Your Withdrawals

Once you stop receiving a paycheck, you can start withdrawing money from your retirement accounts. Those accounts generally include Social Security, pensions and investment portfolios. To maximize income and minimize tax impact, financial planning experts recommend withdrawing from taxable accounts first, then tax-deferred, then tax-free. This allows your tax-deferred and tax-free assets to grow sheltered from taxes for a longer period. This isn't a "one size fits all" plan, but just a general rule of thumb.

Tactic: Take the Bucket Approach

One way to set a budget for your retirement years is to use the Bucket Approach and split your assets into short, medium, and long-term accounts. The idea behind this technique is to safeguard your portfolio from market fluctuations.

If you are living off your investments and the stock market plummets, you will have a lot less to live on. Instead, you can keep two to three years' worth of living expenses — reduced by your guaranteed income — in cash or cash equivalents. The rest can be invested in riskier assets, such as 100 percent stocks. For instance,

  • First bucket: Include cash or very short-term bond investments for two to three years' living expenses.
  • Second bucket: Make investments that need three to six years to mature, such as a portfolio with a 50/50 split between stocks and bonds. The assets in this bucket will be used to periodically replenish the short-term cash bucket. This bucket can fund lifestyle goals such as traveling.
  • Third bucket: This is your long-term bucket, which may have more investments in stocks, allowing for more growth. Use these funds for your biggest retirement expenses, such as health care.

Tactic: Understand and Plan for RMD

RMD stands for Required Minimum Distributions. If you have qualified retirement accounts such as IRAs, 401(k)s, 457 plans and other tax-deferred retirement savings plans like a TSP, 403(b), TSA, SEP, or SIMPLE IRA plan, you are required to withdraw a specific minimum amount of funds at age 72. Previously it was age 70½, but beginning in 2020, it’s 72.

The penalty for not withdrawing a required minimum distribution from an IRA by age 72 is 50 percent. For example, if you are supposed to withdraw at least $4,000 and didn’t, you would owe the Internal Revenue Service (IRS) $2,000. Obviously the penalty is severe, so be careful.

Please contact us if you have questions.


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In this issue:

This Just In...

How Life Insurance Works in Divorce Settlements

Life Insurance and the High Cost of Vaping

Retirement Financial Planning: How to Set Realistic Goals

How Accident and Disability Insurance Differ


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