Five Truths of Retirement Planning

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Retirement is uniquely different for everyone. We all have individual financial aspirations and anxieties that influence our decisions with our money. 

However, when it comes to retirement planning, there are several truths that are applicable to everyone. 

Understanding the impact of these truths and making sure to avoid common planning mistakes can greatly enhance your ability to enjoy your money confidently in retirement. 

Never Rely on an Account That can Fluctuate in Value for Income in Retirement

This is the number one rule when it comes to properly creating income in retirement. 

If you are relying entirely on accounts that either gain or lose, otherwise known as market-based accounts, to provide income in retirement, it can introduce a host of risks, specifically the Sequence of Returns. 

Let’s examine this real-world danger. 

Imagine you retired in the year 2000. You had $500,000 in your IRA and you withdrew $30,000 per year from that account to supplement your lifestyle in addition to Social Security.

Best of all, you were fortunate to receive a 6.09% rate of return! Yet in this scenario, you exhausted your account in 13 short years. 

The reason the funds depleted rapidly is because of compounding losses, specifically at the beginning of the retirement period. Not only was the account dropping from market performance, but the withdrawals accelerated the issue. 

Think of it this way. If you had $500,000 and lost 20%, which could easily happen in any given year, your new balance is now $400,000.

Unfortunately, it would now require a 25% gain to return to the original balance. This is because you’re now working with a smaller principal, as 20% on $400,000 would only put you at $480,000. It requires a 25% gain to just get back to where you started. 

Then, if you withdrew $30,000 for income in addition to those market losses, it would require roughly a 35% gain to get back to the original balance of $500,000. You see how the account can fall too rapidly if this happens more than once?

Now, let’s do an experiment by simply flipping the rates of return upside down. That means the positive 29.96% will be at the top and the negative -10.60% will be at the bottom. 

Everything else will remain the same. You will have $500,000 in your IRA, withdraw $30,000 per year, and experience an identical 6.09% rate of return. 

In this example, instead of exhausting your account, you are left with $552,952 after 19 years. Then, considering the $69,434 of distributions that otherwise would not have been available in the previous example, that is a difference of $622,386 because in one scenario you were fortunate to experience positive returns at the start of your retirement rather than at the end. 

Market returns cannot be predicted or forecasted. This is why you need to have a plan that allows you to never rely on an account that can fluctuate in value for income. When you have a plan, there is no need to predict. 

We all Invest for the Same Three Reasons

It doesn’t matter how much money you’ve saved or what stage of life you’re currently in. We all invest for the same three reasons. 

We all strive to create protection, liquidity, and growth with our investment portfolios. 

The portfolio needs protection, or preservation of principal. We’ve worked way too hard for our money to leave our life’s work up to the flip of a coin.

The portfolio needs liquidity, or access. If we can’t use and enjoy our money, what’s the point of having it?

And the portfolio needs growth for three very specific reasons: luxury, legacy, and to keep pace with inflation.

The problem is there isn’t one investment that offers all three of those coveted features, so it requires mixing and matching until the right blend is created for your unique situation.

Let me explain. Excluding real estate (which has its own limitations) there really are only three places you can invest your money. 

At the bank, in the market, or with an insurance company. All three of those locations will provide you with two but not three of the coveted investment objectives. 

The bank will protect your money. It will allow you to access your money. Historically, however, it will not grow. 

The market can certainly grow your money, and its liquid. You simply need to sell your positions to gain access. But there is no guarantee of protection. You can lose money in the market. 

An insurance company will grow and protect your money, but it will be very limited in liquidity. You can only access a certain amount of your money each year, typically, in an insurance product. 

This is why a properly constructed portfolio within the confines of a holistic retirement plan should strive to create balance between funds located at the bank, in the market, or with an insurance company. 

It’s About How Much You Keep

Many people assume that they will be in a lower tax bracket in retirement because they aren’t going to work anymore. That logic makes sense at a surface level, but when you think about it, are you really going to reduce your lifestyle in retirement?

That means fewer vacations, less times eating out, not spoiling your grandchildren, or purchasing that RV or vacation home. 

Spending in retirement typically resembles a “U”. David Blanchett published an article that referred to this as the Retirement Spending Smile

The research illustrated retirees spend the most within the first 10 years of their retirement and that begins to slow down until it picks back up again later in life for healthcare expenses. 

In reality, our income typically remains the same for the aforementioned reasons, which means we maintain our position in the same tax bracket during our working years. 

And that’s not including if taxes increase in the future. 

Taxes can erode your retirement funds rapidly. This is why it is so important to incorporate tax planning into your retirement plans. 

You might be thinking, well I have a CPA. That is tax preparation, not tax planning. CPAs and accountants are more so historians. They record what has already occurred. Tax planning is the forward thinking about how to reduce your taxes over the course of your entire life.  

You Can’t Take It With You

Throughout your life, you’ve needed to sacrifice spending on yourself. That could be saving diligently for retirement or raising children, which means you needed to delay your own enjoyment of your money.

Perhaps the costliest mistake I’ve seen countless retirees make is waiting too long to spend and enjoy their money.

The truth is you’ve already waited long enough. Proper retirement planning should help motivate and encourage you to give yourself permission to spend your money before it’s too late. 

Money is simply a tool to help us create experiences and memories with the people we love. Quite frankly, you will never see a moving truck behind a hearse.  

What I mean by that is regardless of if you die with millions in the bank or a few dollars to your name, you can’t take that with you. Therefore, it’s not how much you have but what you do with what you have that matters most.

Peace of Mind in Retirement Comes from Having a Plan

There was a study published analyzing the physical and psychological influences of having a fence around a playground, and how it would impact preschool children. 

The children were reluctant to explore when there was no fence. They huddled around their teacher. However, when a fence was constructed, the kids covered every inch of the playground. 

This is because they knew how far they could go without putting themselves in danger. 

The same can be said about retirement planning. If you don’t know how much you can safely spend without running out of money, you won’t spend at all. 

If you’re unsure about why you are investing and what those investments are designed to do, this can create uneasiness anytime situations change. 

Having a plan that addresses all six of the retirement planning categories — income, expenses, investments, protection, taxes, and healthcare — is the first step to creating confidence, control, and clarity, which subsequently leads to financial peace of mind. 

MONEY IS MEANT TO BE ENJOYED

Ask us how we can help you worry less, spend more, and pay fewer taxes in retirement. 

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