As one approaches their retirement years, a lot of questions arise and important decisions need to be made. One common assumption is that the advisor who has been helping grow your 401(k) or other retirement accounts will be able to properly direct you into and through your retirement. However, this could be an incorrect assumption.
What most people do not realize is that the financial strategies utilized during your working years are often drastically different than what is needed to provide sustainable, maximized income with minimal taxes during retirement. While you are working, the two main objectives are to consistently contribute to your retirement and make sure that your accounts are growing – that’s it. Typically, these accounts are invested nearly 100% in investments that have market risk such as stocks, bonds, mutual funds, ETFs, etc. During this time, while losses are never the goal, you are better able to ride out a market correction or bear market with time for your account to recover while you are not taking income from these accounts.
Once you reach the 7- to 15-year window prior to retirement, new strategies should likely be taken into consideration. As we saw in 2008, it took years for investors to recoup the losses they experienced. Many people who were planning to retire in the few years following 2008 had to dramatically adjust their retirement goals by reducing expenses in retirement or delaying their retirement date. The reason for this delay is sequence of return risk.
What exactly is a “sequence of returns” risk, and why is that important in retirement planning? It is the risk of significant market losses early on in retirement. If one experiences losses early in their retirement, these losses have a significant impact on how long one’s money will last and could increase the risk of running out of money. Once you are retired, you no longer have the same income stream to pay expenses. Therefore, if the market drops, your portfolio gets hit twice – once with the market loss and again when you make an income withdrawal to pay expenses. This is the opposite of the “buy low, sell high” recommendation for investors. Unfortunately, there is no crystal ball and no such thing as “timing the market.”
Back to whether you may need a new financial professional as you transition into retirement. Here’s the deal: There are a lot of great advisors whose expertise is helping their clients save and grow their assets during their working years. Although there are no guarantees and their clients’ portfolios may lose value due to the ups and downs of the market, over time they are able to help their clients build their savings. They know that when the account is down, they can utilize the “buy and hold” strategy as their clients do not yet need the income.
Some advisors are not aware of the best strategies to help transition their clients from the accumulation phase into the income phase of retirement. They can often believe that the same strategy that helped their clients during their working years is sufficient for retirement and simply advise their clients to withdraw a certain percentage each year during retirement. Unfortunately, in some cases, this can be very unhelpful. Once a person enters their “pre-retirement” years, it’s usually best that the strategies shift to additional areas that some advisors are not familiar with.
First and foremost, your advisor is likely more helpful for this transition when he or she is well-versed in Social Security, as this is pivotal to a properly structured retirement income plan. Understanding the implications of proper timing for electing Social Security benefits is paramount. Retirees have been losing a portion of their paychecks in the way of Social Security taxes their entire working lives. Therefore, maximizing Social Security income should be a high priority, yet some advisors leave this up to their clients. This could result in lost lifetime benefits. As Social Security typically makes up over 30% of one’s retirement income, claiming errors can have significant financial consequences.
Second, most people going into retirement today do not have pension plans from their employer. Even if one has a pension, it may not be fully funded by their company or the benefits to a surviving spouse may be reduced significantly. A knowledgeable retirement professional will analyze your pension options if you have one, or help you create an income plan if you are not fortunate enough to have a company pension. This strategy is even more critical due to today’s increased life expectancy. It is possible for some retirees today to spend as many years in retirement as they did during their working years. Because of these factors, having a guaranteed income stream that you cannot outlive is a crucial piece to one’s overall retirement plan.
A third consideration is how to reduce or potentially eliminate taxes during your retirement, including tax on Social Security benefits. Tax planning is most effective when done prior to retirement as there may need to be a shift in one’s current savings strategy leading up to retirement. However, many advisors who have helped their clients grow their assets during their working years may not be aware of strategies that help minimize taxes during retirement. This is due to the fact that taxes may not have been as much of a concern during the accumulation phase, simply because no income was being withdrawn.
To answer the question of this article – yes, it may make sense or even be critical to consider a new financial professional as you near or enter retirement. A professional who focuses on the income phase of retirement will help ensure that the proper strategies are put into place for the 20- to 30-plus years of retirement. Helping to minimize sequence of returns risk, maximizing Social Security, creating an income stream you can’t outlive, and reducing tax risks are crucial pieces that are very different than simply growing assets while you are still working. Preparing for retirement is one of the most important decisions someone will make over the course of their lifetime, and we only get one chance to get it right. Be sure that you have the right financial professional on your side.
This content was brought to you by Impact PartnersVoice. Advisory services offered through Foundations Investment Advisors, an SEC Registered Investment Adviser. Annuity guarantees are backed by the claims-paying ability of the issuing insurance company. Insurance and annuities offered through Shawna McKinney Moore. Licensed in CA, FL, NV, OH, and WA. CA Insurance License #0I20236. DT #872305-0620.
