They say life happens to you when you’re busy making other plans. Many of us graduate high school, attend college, begin a career, get married, start a family, etc. When making plans for major life events, it’s easy to get lost in the hustle and bustle of everyday life.
That’s why it’s important to prepare a plan that provides peace of mind and security to enable us to retire when the time comes and live a life of purpose, not regret.
I hear many people share that the best piece of financial advice they’ve received is to start saving for retirement as soon as you receive your first paycheck. But what about those who got a late start?
The question then becomes, “If I did get a late start or suffered a setback in saving for retirement, what can I do now to enhance my situation so I do not have to work until the day I die?”
I’d also like to raise another question. What if you have indeed saved? How do you protect your investments against market downfalls? I believe there are three choices, and—much like a three-legged stool—it will take a combination of all three to provide a stable platform upon which to rest your financial future and, ultimately, your retirement lifestyle.
1. Increase income and savings
In order to continue an income stream to contribute to retirement savings, some adults may need to work longer in life. This may not be the preferred choice; however, there are many benefits to remaining in the workforce. These include continuing employer-provided health insurance, 401(k) plan contributions and deferring the need to live solely off of retirement savings.
While remaining in the workforce longer is not always ideal, there are additional ways to increase income and, in turn, contribute more to retirement savings.
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I also recommend a thorough and comprehensive Social Security review. It’s important to remain up to date with acceleration and deferral requirements.
There’s a reduced amount of Social Security for those who start collecting before normal retirement age and an augmented amount for starting after NRA. Also consider marital-claim status and payments determined by your own base or a spousal benefit base.
Example of claiming before NRA: We had a couple who became clients of our firm seven months after their Social Security payments began. The wife had started Social Security payments just one year before NRA, which reduced the monthly payment amount.
We reviewed paying back the Social Security amount received and determined it would be a strain with their current financial obligations. We also reviewed suspending payments within the first 12 months of commencing benefits, to increase the Social Security benefit amount by deferring the restart of payments until an older age.
Ultimately, this was the best decision for their situation. Payment amounts increased from the lower base incurred by starting payments prior to NRA, at a rate of 8 percent annually up to age 70. The couple, not needing the current Social Security payments, will likely be in a better long-term financial position based upon the increased monthly payments when the wife starts collecting Social Security payments.
Example of starting claim at NRA: We also have a client who is looking to retire at NRA. She has an annuity and a small pension and is currently receiving survivor benefit on her deceased husband’s pension.
She may draw upon her deceased spouse’s Social Security benefit while deferring her own benefit and, ultimately, receive an 8 percent higher Social Security payment for each year she waits to collect her benefit. She may also draw upon her individual retirement account savings to cover any current shortfall, although this is not likely unless an emergency arises.
In addition to Social Security review, there are options to explore for pension maximization, such as a lump-sum payout or lifetime payout period. Typically, pension payout is based upon single or joint life payment streams. Review your pension plan with your wealth advisor and discuss the optimal starting age to begin payouts along with specific retirement plan rules to maximize your pension payout.
Example of pension stream maximization: We had a couple who were clients of our firm and approached us to discuss how they could increase their income stream. The husband lost his job during the downturn of the market and the wife had health issues and was forced into early retirement. She had teacher’s retirement pension to fall back on but he did not have a defined benefit plan.
In order to increase their income and savings, he had to extend his time in the workforce. He ended up accepting a job earning significantly less than his previous position; however, taking a less stressful position has been a tremendous mental benefit to him and he is much happier.
By going through the planning process, we determined that he will work in this position longer than he would have worked in his former, higher-paying job, but he was happy that he was able to turn his hobby into an income stream.
We also identified his wife’s pension payment and how it should be set up in order to provide for him long-term. The pension payout was based upon “joint-life,” which reduces the pension holder’s monthly payment but continues payments for the surviving spouse at one-half the level of the pension holder, thereby providing ongoing payments for the surviving spouse.
Finally, what if you are somebody who has, in fact, saved and only utilizes Social Security as an added bonus or small piece of your retirement income? What is the biggest risk that you face in being forced to change your plans to dependent upon Social Security?
Concentration risk—or lack of diversification of assets—may be the biggest risk you face. When looking at your retirement accounts, 401(k) plans, savings and investments, does the company you work for, or your favorite stock, comprise the vast majority of your assets? We’ve seen firsthand the pitfalls one faces when a concentrated position negatively impacts their retirement planning.
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Example of diversification importance: One of our clients was an employee of Enron and all of her assets were concentrated at that company. After reviewing her portfolio, I made the recommendation that she diversify her assets and select investments outside of her Enron accounts. She has experienced the benefits of diversification firsthand while many of her colleagues did not diversify and those with concentrated portfolios were left with zero assets.
2. Manage spending
As retirement approaches and supplemental retirement savings is needed, it’s also important to consider managing one’s spending habits. This could simply include smarter consumption habits such as utilizing coupons, discounts or deals. In more extreme cases, some may choose to downsize their home.
By downsizing your home, you can convert partial home equity to income-producing assets, eliminate mortgage interest and reduce property taxes. Others may even sell their home and rent, allowing them to additionally eliminate home maintenance costs. Also consider relocating to jurisdictions with no personal state income tax and to lower cost of living expenses.
We frequently conduct valuations of owning multiple properties with our clients. If you aren’t spending a substantial amount of time at both homes, it can be very expensive to maintain multiple properties.
We recently did an analysis on a second home for one of our clients and determined that, based on the amount of time they spent there, they could stay at a 4-star hotel for 72 nights per year in various locations, eliminating expenditures to the fixed costs already being incurred to maintain a second home. Due to the substantial cost to maintain their second property, we repositioned the assets into income-producing investments.
Another thing to consider in managing expenses is whether to lease or buy a car. Again, auto equity can be converted into income-producing assets and non-tax deductible automobile debt can be eliminated. Alternatively, acquiring an older vehicle reduces equity dollars invested in transportation and lowers car insurance payments and licensing fees.
“By working with a team of professionals for advice, you can remove the emotion from the investment process and have full-time dedication to the portfolio management process.”
3. Increase investment return
Finally, those nearing retirement may also consider supplementing working capital resources. Engage a wealth advisor to review your resources and help you create a plan for retirement. By working with a team of professionals for advice, you can remove the emotion from the investment process and have full-time dedication to the portfolio management process. In addition, a wealth advisor may have access to additional resources for research and decision-making.
When working through the planning process with clients who had a late start on retirement savings, we’re able to identify the best course of action to reposition financial resources to increase potential income.
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Because of uncertainty in prognosticating, it’s important to analyze various scenarios and attempt to maximize the financial position of a surviving spouse or individual, while minimizing the current impact on the client.
Every situation is unique, which is why it is so crucial to implement and follow a plan, especially when one has started late or suffered a setback in saving for retirement. By following a plan, you can get to the end of your life and say, “I’m glad I did,” rather than, “I wish I had.”