Retirement & Decumulation Planning with Empowered Retirement
Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people are living longer. A person without a significant health issue, who turns 65 today could be expected to live as many as 20 years in retirement as compared to a retiree in 1950 who lived, on average, an additional 15 years. Longer life spans have created a number of new issues that need to be taken into consideration when planning for retirement.
The Decumulation Planning is one of the most valuable services that we provide our pre-retirees and retirees at Empowered Retirement, Inc.
Paying for Retirement
Retirees have historically relied upon three main sources of income: Social Security, Employer-Sponsored Defined Benefit Qualified Retirement Plans, and their own savings and investments.
With Social Security extending the age upon which a retiree would receive their full PIA, the timing of your receipt of your Social Security benefits requires expert discovery and analysis.
Additionally, with far fewer Employers offering Defined Benefit Pension Plans, replacing them instead with Defined Contribution 401(k) and 403(b) plans, retirees are facing the stark realization of a deficit in their monthly retirement income.
Both of these changes put undue financial pressure on individual’s personal savings and investments, which too often have been siphoned off paying exorbitant college tuition, parent caregiving or increased every day expenses.
Lifetime Income Needs
You’ve saved and invested your whole life; now may be the time to convert your nest egg into a sustainable lifetime income. That’s our specialty at Empowered Retirement, and we manage the Sequence of Return Risk to avert potentially significant portfolio erosion.
With advancements in science & medicine, women who are healthy at age 65 have a 50% chance of living beyond age 88, and a 25% chance of living beyond age 94. Are you confident your money will last that long; ie, as long as YOU do?
Your retire, your MONEY shouldn’t!
And with the prospect of increased inflation in the coming years, your purchasing power can easily be eroded without proper planning.
I remember nickel ice cream cones, 29 cent gas. I paid twice as much at age 24 for my CAR than my parents paid for their HOUSE!
We are attentive to PURCHASING POWER, at Empowered Retirement, Inc. The return on your investments is only accurately assessed in relation to what your money can DO for you; what your money can BUY.
We take great care in discerning what mix of stocks, bonds and alternative investments will both fit with your risk tolerance as well as provide the every increasing cash flow stream that will fund your lifestyle.
Health Care Needs
Longer life spans can also translate into more health issues that may rise in the process of your aging. While the federal government provides a safety net in the form of Medicare, it may not provide the coverage needed especially in chronic illness cases.
Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today. We discuss options of insuring the risk of your needing long-term care verses your deciding to self-insure; there’s no one right answer.
Planning for your transfer of assets at death is a critical element of retirement planning, especially if there are survivors who are dependent upon your assets for their financial security.
Estate planning can be as simple as drafting a will, which is essential to ensure that assets are directed to the people and charities of your choice, and ensuring your beneficiary designations are current, in order that those ‘qualified monies’; i.e., IRAs, 401(k)s, 403(b) assets, as well as annuities and life insurance pass to the exact people you intend to benefit. These assets pass OUTSIDE your will, so it’s imperative to dovetail these beneficiary designations and the percentages of assets to be inherited, with other estate assets that would otherwise pass according to one’s will OR the laws of the state in which you reside, if you may die intestate (without a will).
It is especially prudent to utilize sophisticated strategies to reduce inheritance and other death taxes, on larger estates. Additionally, effective planning will limit potentially exhaustive estate settlement costs.
The unusually high threshold for estate taxation currently has lulled some people into a false sense of security that no planning is necessary, as no estate tax would be due at their death.
We can assure you that the exercise of Estate Planning and effective wealth transfer is FAR more vast and wide-sweeping than any Federal (or State) Estate tax.
Social Security was established in the 1930’s as a safety net for people who, after paying into the system from their earnings, could rely upon a steady stream of income for the rest of their lives. The Normal Retirement Age; i.e., when a person could draw their maximum benefit, used to be age 65.
Now, for a person born after 1937, the normal retirement age is being increased gradually until it reaches age 67 for all people born in 1960 and beyond. The amount paid in benefits is based upon the earnings of an individual while working.
Some people have chosen to continue to work and otherwise delay receiving their Social Security benefits, building up a larger benefit. Other retirees plan on using other funds and delaying the receipt of their Social Security benefits until age 70, otherwise locking in an 8% annual increase from their NRA to age 70. Conversely, reduced level Social Security benefits are available, as early as age 62.
At Empowered Retirement, we determine all the possible SS benefits to which you are entitled. These include your record earnings, your current spouse’s earnings, any number of your divorced spouses’ earnings (so long as each marriage lasted 10 years) and/or your deceased spouse’s earnings.
Finally, we analyze the timing of your receipt of each benefit, in order to maximize your total eligible Social Security benefits. Without such analysis too many retirees leave groups of zeros in uncollected Social Security benefits.
Employer-Sponsored Qualified Plans
Most employer-sponsored plans today are established as “defined contribution” plans whereby an employee contributes a percentage of his earnings into an account that will accumulate until retirement. As a qualified plan, the contributions are deductible from the employee’s current income. The amount of income received at retirement is based on the total amount of contributions, the returns earned, and the employee’s retirement time horizon. As in all qualified plans, withdrawals made prior to age 59 ½ may be subject to a penalty of 10% on top of ordinary taxes that are due. (Certain exceptions apply however.)
Depending on the size and type of the organization, they may offer a 401(k) Plan, a Simplified Employee Pension Plan or, in the case of a non-profit organization, a 403(b) plan.
Traditional and Roth IRAS
Individual Retirement Accounts (IRA) are tax qualified retirement plans that were established as way for individuals to save for retirement with the benefit of tax favored treatment. The traditional IRA allows for contributions to be made on a tax deductible basis and to accumulate without current taxation of earnings inside the account. Distributions from a traditional IRA are taxable as ordinary income.
Some investors have adopted a strategy of not withdrawing from their IRAs until they are otherwise forced to, by the IRS, in the form of a Required Minimum Distribution at age 70.5. While we understand the desire to postpone income taxes and continue to enjoy the tax-deferred growth under the IRA umbrella, so to speak, we also know that this strategy is costly.
Instead, we take a pro-active approach to IRA Decumulation, planning years in advance of our clients’ age 70, in order to maximize IRA distributed income and minimize Income Taxes.
We also are skilled in reducing our clients’ RMD legally; it’s one of our special outside-the-box-thinking strategies.
A Roth IRA is different in that the contributions are not tax-deductible, however, the earnings growth is not currently taxable. To qualify for tax-free and penalty-free withdrawals of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching 59 ½, may be subject to an additional 10% federal tax penalty.
For more information on retirement income needs and income sources, please contact us today.