Face it, we all have fears that seep into our daily routine, or our nightly reverie, and most of them involve money. Here we are at the pinnacle of our life’s ambition, perfectly coiffed, kicking butt and taking names at work, at parenting, at yoga — and then we wake up in a cold sweat and panicked. If you’re like most other high net worth individuals, then your fears usually revolve around losing everything in a freakstock market crash, or a random lawsuit that leaves you destitute and somehow toothless, right back at square one on theme board of life. Hey y’all, there’s an easy way to avoid these all too common and crippling phobias. The most important thing you can do right now is make sure you have a smart, resourceful, detailed and up to date financial plan for your future. There are a myriad of possibilities you can take advantage of to help to provide a stress-free retirement. Retirement planning is a road map for helping to create future income to sustain your lifestyle and help you reach your financial goals. Let’s walk through the basics of income creation, shall we?
Put down your smartphone (helpful tip: unless you’re currently reading on one) and sear this into your brain: the main goal of retirement planning is to recreate your paycheck while you’re living the life that you’ve been dreaming of all these years. Do not be a statistic: shockingly, only 18% of retirement age women passed a recent quiz on how to make money last (link: . Considering that women generally live longer than men, it is especially important that you review your budget NOW so that you can plan ahead for the future. Your mother was right: later is not the best time to do anything, so let’s start planning.
The B Word: Budget
If the goal is to recreate your paycheck by making passive income choices, first we must take a hard look at your current expenses and separate them into helpful categories. The most critical expenses fall under the category of the basic barebones needed to keep the lights on, such as rent, mortgage or food; these expenses depend on a reliable, predictable, and sustainable stream of income. Next, we flesh out all the lifestyle expenses that keep you living comfortably: dinners out,clothing, furniture etc.; the income for this will be derived from conservative investments. Finally, we have the secret slush fund expenses, the splurges that allow you to enjoy life; only you can explain what this means to your future happiness. Tallying and labeling these three types of expenses allows us to plan how to tackle your future lifestyle needs and to allocate for your retirement growth plan accordingly. Everyone’s needs differ, but taking a hard look at your unique vision for your golden years will help guide and inform the process immensely. Using your budget as a launch pad, we will then look to how you feel about risk, and whether you want to take on an aggressive or conservative approach. Risk aversion is typically a smart play, but there is also room for some strategic flirtation with chance. Having a coherent sense of your budget requirements allows financial professionals to craft a bespoke income generation approach that will help provide you with peace of mind.
Income as Stable as a Mahogany Table
Is there such a thing as guaranteed income? Here we start to dive into the weeds, and while the journey can be plodding, never fear, for it is my job to get excited about these things so you don’t have to worry. The goal of recreating income is to help you come up with the most foolproof plan. I have several ideas of how to plunder the available sources to your advantage. Wouldn’t it be sweet to all serve on illustrious boards, or receive mailbox money from blue-chip family trusts on the regular? If you’ve got it, more power to you, no haters here. For the rest of us mere mortals, here’s a brief list of potential tasty income producers that can be utilized in our golden years.
1) Social Security
The goal here is to maximize your benefit and to be smart about when to tap into your share of the pie. In 2016, over 36% of women tapped their SS benefits at the early age of 62. Unless your circumstances require early access, this approach is usually not the first to be recommended since you won’t be able to take advantage of the annual delayed retirement credits. This is worth 8% per year you delay, which means early access can potentially leave a lot of free money off the table. Where else can you get 8% at such low risk? You should alsonote that SS is not just for retired workers, but can also be for spouses, children and people with disabilities. There’s room to play here and guaranteed SS income is nothing overlook.
2) Taxes – Diversification
Diversification comes to mind when investors think of their investments, but another huge diversification play can be with taxes. Wouldn’t it be a dream to decide for yourself what bracket you are in? The norm for many high earners has been to wake up with a hopefully substantial 401(k) or IRA when you are 65 and then start withdrawing as taxation income at your retired income tax bracket. Some believe that they will be in a lower tax bracket when retired however, you may be in the same high tax bracket as you were in peak earning years because you are tapping that 401k/IRA taxation bucket.
Designing your tax bracket is possible with tax diversification strategies. Possible mediums are: Roth IRAs, Roth 401(k) at employer (how do you know if you should do this or max out your current tax benefit with the regular 401k?) and lastly, possibly permanent life insurance.
Don’t be shy about learning how permanent life insurance policies can create tax favored retirement income. This may not be for everyone, as it does have associated risks, but I’m happy to review more with you personally.
Do you currently maximize all you can in 401(k) and employer benefits? Going with the flow of several holistic financial planners , there are many approaches and strategies here that are specific to your personal income and circumstances. Having foresight to this tax diversification piece, especially when you are younger can increase your opportunity with tax control and help you grow that tax favored bucket. I wish there was an ice cream flavor called Tax Free.
3) Pension Plans
Guaranteed income from a pension plan was common with my grandparent’s generation but, we aren’t driving his Oldsmobile anymore (I still miss the ole girl, we called her “The Landlord”.) If you are among the very few left whose employer provides you with a pension plan, then you’re a lucky one. Make sure you are optimizing it though! There are some strategies here that can maximize what the company provides but we must plan on this – ideally a few years in advance of retirement.
If you are like the majority of people that do not have pension plans, that’s just fine because you can create something similar through an annuity. A pension plan and an annuity function very similarly in that money is put aside, and it can provide a steady stream of income when ready to access. Think of this as the elusive mailbox money. After an initial investment to an insurance company into a contract of your choice, annuities provide a steady source of low maintenance income. Think of an annuity as the opposite of life insurance. The annuity is you betting you are living a long life. Whereas, the life insurance is the opposite side of the bet. This is why life insurance companies are in this business. People often rollover their 401(k) into an annuity, but I wouldn’t advise you to invest all of it, the downsides can be too high as there are fees and charges that a 401(k) may not have. Annuities and Social Security are reliable, predictable and sustainable income sources that can cover essential expenses. There are many kinds of annuities and annuities can mean many things. Saying the word annuity to me is like saying the word restaurant – it conjures up in my mind anything from a white linen tablecloth restaurant to a roadside barbecue stand — so you should have a good conversation about how which type of annuity might be most advantageous to you.
5) The Wealth Building Account
There are many opportunities for investments that produce a steady stream of income, but it’s important to weigh their pros and cons. An investment account inside or outside an IRA can be another source of income during retirement and can be comprised of stocks with dividends, bonds, index funds, and/or mutual funds. So, what should you invest in for that wealth building account? We believe there are merits to different management accounts, so each of these options must be explored and evaluated as they relate to your budgetary, risk, and income goals. There is further diversification to be explored here. Please know there is more than one way to diversify and owning 1,000+ stocks in a fund is only one type of investment diversification strategy. There are other ways to skin a cat that can complement one another. Oh, the ways you can grow!
6) Long Term Care Insurance (LTCI)
What if you have well-structured, tax efficient income during retirement, but then get set back due to a stint in an assistant living home, or an unforeseen need for home health care? Life events may occur that can become disruptive to income plans during retirement.
According to the U.S. Department of Health and Human Services, 70% of people over 65 will need long-term care at some point in their lives. The goal of long term care insurance is to give people support if they happen to become critically ill by planning for what statistically is a likely scenario. What a relief it can be to not burden yourself or your family in times of illness or injury. Unfortunately, LTCI has come under attack lately because costs have grown higher than anticipated in the maelstrom of recent healthcare woes in this country. Premiums have gone up and some current subscribers are ticked off. This doesn’t change my view one bit because there have been innovations and improvements in this type of insurance. You should always hope for the best, but plan for the worst. The more current policies have a more realistic approach and are still valuable tools to make your retirement years more comfortable and carefree. Win win. You may wonder if you need Long Term Care insurance if you have a substantial net worth. That is a conversation worth having with your advisor.
What Are You Waiting For, Boss?
And there you have it, a down and dirty primer to retirement income creation. These snapshots should give you an idea as to how to ditch money fears and how to fund your retirement years, or even enhance your current plan. No article can completely simplify and distill the complicated task of planning your financial future, but this should give you some food for thought and a cheat sheet if you’re feeling overwhelmed. The bottom line is that it’s way past time to quit your excuses and meet with your financial planner to get your retirement plan sorted. In the words of Tina Fey, financial guru by way of 30 Rock, you need to live every week like it’s shark week — plan your movements now to avoid getting swallowed up by the bigger fish. In other words, be quick, be smart and dive in — the water’s warm.