There is a plethoria of information and financial planning aimed at helping people prepare for retirement. In industry lingo, this is the accumulation stage. Max your 401(k) contributions. Consider a Roth conversion. Use tax deferred investment vehicles.
However, there is also important planning that needs to be done for the “distribution stage” of retirement, the period when you must manage both the investment of your assets and also the distribution/use of your the assets. Planning that needs to be done well before you reach this stage. To help your advisor plan appropriately, there are some topics you should consider first.
First, you need to evaluate your priorities and goals as these will greatly impact the planning approach. Some example questions to ask yourself:
- Legacy or self-sufficiency. Is an inhertiance for the next generation or the support of a favorite charity important to you? Or is ensuring your financial independent and removing the burden of care from your family more important?
- Short term vs. long term tax benefits. Deferring taxes is a common objective. However, if you have a pension, deferred compensation plan or other retirement income, this added to your required distributions and social security could put you in a higher tax bracket at retirement. Roth accounts mean you pay taxes now, but any growth is tax free, including income tax free to your heirs. Is tax deferral the best solution?
- Spending Habits. How much of your budget is devote to essential expenses like food, healthcare and housing? How much is discretionary (travel, entertainment, Christmas gifts)? And how much are you willing to cut back if necessary?
Second, you need to prepare your investments. Simplifying is a high priority for us. We hear from a surprisingly large number of retirees who say they are busier now than when they were working. Rollover and consolidate your accounts into as few as possible so they are easier to manage. This also makes it easier to re-allocate your portfolio.
Third, consider your risk tolerance. This is an important step in all stages of life but is particularly relevant to retirees. Risk tolerance is more than just a question of how much stocks verses bonds. It is also a measure of how much volality you are able to withstand. If the market swings make you actually lose sleep at night, then a more conservative portfolio may be more beneficial to you. There’s not a price you can put on peace of mind.
These decisions should help guide your discussion with your financial advisor so that the most appropriate planning techniques and tools can be implemented for your specific financial situation.