November 7, 2016
The 4 When’s of Retirement Success
Retirement is supposed to be an exciting new chapter in our lives. We’d like to think we can live well within our means once we stop working. But when we hear that most Americans will never be able to retire, our alarm bells go off – even when the rational side of our brain tells us to stay calm, that things will work out. CNN Money recently reported that 76% of Americans are living paycheck to paycheck, so there is reason for concern.
It doesn’t help to realize how much of the situation is completely out of our hands: Ordinary individuals can’t change the direction of interest rates or stock prices. All the same, we have more control over how our retirement will play out than many people think, even as it’s about to start. Four decisions you make can have a huge impact on how comfortable you will be in this next chapter of your life.
Start by Taking Stock
If you really want to know how much you weigh, at some point, you have to step on a scale. It’s even more important to know the truth about how much your assets weigh – and how heavy your debt load is. How much do you have in your savings and investments? How much debt are you carrying?
Americans may be finding it a challenge to learn Donald Trump’s or Hilary Clinton’s real net worth, but for most of us, finding our own real net worth is much more simple. In the best case, you can subtract your total debts from your total assets. Negative numbers are not what we’re seeking.
The 4 Whens of Retirement Success
Knowing where you stand financially, then using that data as a starting point, will help you figure out when to trigger each of these four events. Timing is everything.
1) When to quit working – Work out the math, or consult a fiduciary financial advisor who specializes in retirement income planning, (obviously, we at Gainplan, have the resources to assist you) to determine if and when you can stop working. As we have discussed previously, work doesn’t have to be a grind if you do something you truly enjoy – nor does it always need to be full time. The longer you can bring in outside income, the longer you can leave your own savings alone to grow. Additionally, you should recognize this can be a dynamic situation. My own father retired and stopped working completely when he was 65, now at 83 he decided to do some consulting and keep his brain and his passion intact. Deciding to work an extra two or three years can add as much as 30% to your total income once you do stop working.
2)When to start tapping your nest egg – I’m guessing it’s probably a bit like trying to conduct an orchestra — there are a lot of moving pieces. Many factors come into play — some of which you are aware, some that you are not. Most retirees don’t know precisely when to start withdrawing from their savings and investments, but The Wall Street Journal reported in 2005 that many start withdrawing at the age of 62. For most people, in our view, that’s too early. We now use age 95 for financial forecasting purposes. It all depends on how much you have saved and what types of outside income sources you have, but even at age 65, most people probably have another 30 [years] to support themselves after they stop working.
3) When to start taking Social Security to get maximum benefits – Understanding how Social Security works before you’re eligible to start taking will help you make a good timing decision. Right now, the earliest age you can start taking Social Security is 62, but full retirement age usually varies. Every year you can hold off on taking benefits between the ages of 62 and 70 increases your monthly check. The Social Security Administration’s website explains how retirement ages work here, but if you have complicated financial family relationships – or you’ve lost a spouse or have remarried – it can be worthwhile to get some solid advice. We can run “what if” scenarios using sophisticated software that can pinpoint the optimal time to start taking your benefits.
4) When to start giving money away – Legacy planning is a key driver in determining much you can afford to spend during your later years. Much has been written about the huge sums of money future generations will receive from parents. We advise that you shouldn’t let the idea of leaving behind a big inheritance cloud your judgment on how much of your savings you will really need to support yourself. No one wants to become a financial burden on their own children, but it can happen when parents underestimate the real cost of retirement. If you’re certain you’ll have more than enough money to cover your own lifestyle, and healthcare, then consider giving some of it to your future heirs right now. This is beneficial to you and your heirs because it helps reduce the inheritance tax. In the U.S., the IRS allows you to give away up to $14,000 per year per person (as of 2016) before the gift tax kicks in. This amount changes every year, so if you’re going to do this, stay up to date on the amount of annual exclusion. Married couples can double their gifts, which means they can give up to $28,000 to each child per year before the gift tax is charged. Use the same kinds of considerations to decide about what you’ll have left for charitable giving.
When you’ve scheduled in these four events, you can estimate what you’ll have to live on and what kind of adventures that will buy you.
There’s one last step: Not keeping all this a secret.
Dividing Family Assets Without Dividing the Family
If you care enough about your family to include them in your will after you’ve passed away, include them in your planning process while you’re alive. Call a family meeting, but prepare your remarks first. Say something like, “We need to discuss how we plan to allocate our money to cover our retirement and then talk about whatever might be left.”
The goal here is to avoid a big family fight over what you leave behind by setting everyone’s expectations in advance and not leaving unanswered questions. Remember, when it comes to an inheritance, the kids may not work it out amongst themselves later.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Gainplan LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Gainplan LLC or performance returns of any Gainplan LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Gainplan LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.