Retirement planning is the process of evaluating your current financial standing and creating a strategy to help ensure you achieve your desired retirement lifestyle. It is about matching goals with financial realities, and the focus is generally on providing a lifetime of income after your last paycheck. Because an individual's retirement years can span decades, retirement planning generally dominates other financial goals. A successful plan put in place during your working years should address ways to help maximize growth and prepare for tax-efficient distributions.
As mentioned above, planning for retirement requires us to devise simultaneously a plan for growing your wealth and a plan for drawing on your wealth: accumulating and distributing. It also involves risk management. Other subjects, such as IRA rollovers, employer-sponsored plans, and executive compensation are also appropriate retirement planning topics.
Retirement planning is a critical component to wealth management, and a good retirement plan will be well-coordinated with your overall plans for investments, insurance, business, estate, and taxation.
For years, you have tucked away a portion of your income, saving and investing along the way. But now that you've grown your assets, it's time to start drawing on your accounts. While this may appear to be a simple matter of selling a particular stock, there is something of an art to taking distributions. Determining which assets to liquidate, and when to do so, requires careful analysis of projected returns, income streams, and taxable consequences.
Generating stable monthly income for the remainder of your life is no easy task. The first step will be to assess your sources of income:
- Social Security payments
- Required minimum distributions from IRAs
- Dividend income from equities
- Bond yields and due dates
- Payments from annuities
- Income from a pension plan
- Rental income
- Additional sources
Next, we'll evaluate your needs, determining a minimum monthly cash flow that incorporates the effects of anticipated life events, such as buying a new home or giving your nephew a new car. And then we'll do the math, figuring projected investment growth, anticipated retirement requirements, and factoring inflation into the mix.
As medical and technological advances improve the lives and extend the longevities of Americans, it's becoming increasingly difficult to live off of interest alone. At some point, you'll probably have to tap into principal and liquidate some of your assets. This part of the process requires someone with complete knowledge of your goals, needs, assets, and life expectancy. What it requires, in other words, is a distribution expert.
In many cases, it makes sense to sell your worst-performing assets first. But there are no hard-and-fast rules. Any action will depend on the cost basis, whether the assets are in qualified or nonqualified accounts, and personal circumstances. Often, we will try to hold on to the investments with the highest projected rates of return, relying on their growth to bolster your account in the coming years. Any action that we take will be carefully evaluated with regard for current tax law. We will also pay particular attention to estate planning issues and spend time grappling with taxable consequences for your beneficiaries.
Distribution may seem simple, but it could be the most overlooked aspect of financial planning. If you need cash during retirement, some people just think that you should sell whatever is most convenient or whatever you can take a loss on. But your longevity requires more delicacy and foresight. It requires a process. Distribution is an art, and it requires a wealth manager.